Release No. 003.99
of
Secretary of Agriculture Dan Glickman
Before the House Agriculture Committee
United States House of Representatives June 16, 1999
Introduction:
“Mr. Chairman and members of the Committee, I am pleased to appear before you to discuss our proposal to institute uniform national loan deficiency payment (LDP) rates for wheat, feed grains, and oilseeds. This would be a significant change from the previous procedures that used county-specific posted county prices (PCPs) for determining county LDP and loan repayment rates. The Administration is continuing to examine this and other reforms as well as the process for handling the potential program changes.
“My testimony begins with a brief summary of the background of the program and issues we have considered including a discussion of specific problems associated with the previous system, the proposal for changing the calculation of LDP rates, and major concerns that have been expressed relative to national LDP rates. I will then conclude with some additional statements on the changes being considered.
Decision on Need for Uniform National LDP Rates:
“The marketing assistance loan programs have become increasingly important under the provisions under the Federal Agriculture Improvement and Reform Act of 1996. At the time of enactment, little LDP or marketing loan gain activity was expected to occur during the 1996- 2002 period. However, record harvests here and abroad, a strong dollar, and a significant downturn in export markets resulted in U.S. farmers suddenly facing unexpected and sharp declines in major crop prices. LDP and marketing loan gain outlays have exceeded $3 billion for the 1998 crops and are projected to exceed $5 billion for the 1999 crops.
“The current LDP/marketing loan gain system can be improved. Without change, complaints about inequitably disparate LDP rates across State and county lines and about producers delivering their commodities to counties outside normal marketing channels just to get higher Government payments would justifiably continue.
“USDA has received continual comments on the manner in which marketing loan repayment and LDP rates are established when the first flood of complaints began to come from farmers, elevator operators, our county and State office personnel, some State Secretaries of Agriculture, some State Governors, and many of your colleagues regarding inequitable LDP rates across county and State lines. Our proposal to institute uniform LDP rates is in direct response to these comments.
“Let me explain to you what I mean with a couple of examples from the many across the country:
“Consider the LDP rates from Texas for soft red winter wheat on June 1, just two weeks ago. In a circle of about 75 miles around Dallas, LDP rates varied from a low of 47 cents to a high of 95 cents, with rates of 59 cents, 79 cents, and 80 cents in counties in between. This area is served by good interstate highways, making it clearly beneficial to the farmer to haul the grain to another county to get a rate that is as much as 48 cents a bushel above the LDP rate esablished for the county where the producer harvested the crop.
“Along the Minnesota-Iowa border last fall during the harvest, LDP rates for corn in Minnesota were regularly 6-8 cents higher. When we adjusted the formula to equalize this difference, there was a collective howl from folks in Minnesota, who were flabbergasted that we would take this step, even though our formula for PCPs in Minnesota had been running consistently below local market prices. In the Pacific Northwest, LDP rates for soft white wheat in Washington regularly exceeded those in neighboring counties in Oregon by 10-15 cents per bushel.
“If a uniform national LDP rate had been in place for the 1998 crops, USDA analysis shows that forfeitures would have been lower. Complaints about inequitable LDP rates and market distortions would likely have dropped. However, for these improvements to appeal to many producers, there would have been a projected cost of an additional $400 million for the wheat, corn, and soybean loan programs. The higher cost is largely a result of slightly higher average LDP rates under the national rate procedure.
“The $400 million cost significantly exceeds the $60 million collateral value of the 18 million to 26 million bushels of 1998 crop forfeitures that the Department’s (USDA’s) analysis indicates could have been avoided if the national LDP rate had been in place last year. However, simply minimizing potential forfeitures is not the major focus of a national LDP rate approach. Rather, a national LDP rate might provide a more equitable and transparent program to producers and will reduce market distortions that are prevalent under current procedures.
“The “problems” with the current system for determining LDP rates are admittedly exacerbated by the current system of county loan rates. The county loan rates in place for the 1998 and 1999 crops of wheat and feed grains are essentially the same as those in place for the 1995 crops, which were at that time deemed to be in need of substantial revision to better reflect local market prices. In fact, this problem of county loan rates being misaligned relative to local market prices has at least a 30-year history.
“Regardless, I do not believe that wheat and feed grain county loan rates should be adjusted downward during the current farm crisis. To adjust these loan rates to fully reflect recent local market price information would have resulted in lower loan rates in 69 percent of the wheat producing counties, with a maximum decrease of $0.68 per bushel. For corn, loan rates would decrease in 35 percent of the corn producing counties, with a maximum decrease of $0.25 per bushel. Also, a review of the soybean maps that you were provided easily shows that the misalignment of county loan rates is hardly the source of all the complaints. (This is also evident from the maps for the other commodities.)
“The disparity in county LDP rates also results from: (1) county loan rates that are fixed and static (once announced) for an entire year’s crop, but loan repayment rates that are subject to change, based on dynamic market price relationships as reflected in the daily (or weekly) PCPs, and (2) in the case of wheat, county loan rates that are determined on an all-wheat basis, but loan repayment rates that are announced for each of five classes of wheat.
“The PCPs also pose problems at times for wheat, corn, and soybeans. First, the PCP system was designed to reflect the average annual basis between a major market and a county. Thus, over the year, the PCPs generally tend to do well in capturing annual average price levels in local markets. However, they weren’t designed to ensure perfectly accurate price estimates on any particular day because PCPs follow the market by a day. During the year, local changes occur reflecting regional supply and demand pressures and changes in transportation costs. This can cause PCPs to rise above local market prices, leading to forfeitures, fall PCPs below local market prices resulting in unnecessary outlays. Second, because local PCPs tend to reflect price trends in just two major terminal markets, the system provides price estimates related to regions of the Nation. Where two regions meet (usually on State borders), LDP rates can be significantly different across some of these State lines.
“There are a number of examples that show the disparity in LDP rates is not just linked to differences in loan rates. Consider the case of soybeans, where county loan rates have not been restricted. The senior senator from Mississippi contacted us last year very concerned that LDP rates for soybeans in Arkansas were regularly exceeding those in Mississippi by about 6 cents, and his producers were hauling their beans across the river. An adjustment of PCPs here would have caused the dividing line to move to the center of the State of Mississippi, which would have resulted in even greater producer anguish.
“A final example involves my home State of Kansas. In Morton County, in the far southwest corner of the State, the loan rate for corn is $2.15 per bushel. Across the border in Baca County, Colorado, the loan rate is two cents higher, $2.17 per bushel, yet on January 4 of this year, the LDP rate in Baca County was 27 cents higher than in Morton County, 39 cents in Baca, 12 cents in Morton, with similar rates also in the counties of New Mexico, Oklahoma, and Kansas that border this one Colorado county.
How do we explain theses disparities to farmers in neighboring counties?
“The truth is it is difficult. That’s why we need to simplify this very popular feature of the safety net. Our single rate plan would cover what I call the 4 Es. – Equity, Efficiency, Ease of Understanding and Enhanced Income.
Equity
“For the 1998 crop year, LDP rates were set on a county by county basis. So while one farmer got one rate, another farmer 5 miles down the road, growing the same crop, would qualify for another. As I just described, sometimes these differences were substantial, thus the Government made one producer’s crop a lot more valuable than another’s when, in reality, they were essentially the same. A uniform LDP rate would provide equity to all producers.
Efficiency
“The second E is efficiency. Because we pay benefits according to where the grains are stored, and with varying rates from county to county in effect, the resulting system caused inefficiencies. Farmers would ship or drive their crops to wherever they got the higher rate. That resulted in a multitude of transportation efficiencies.
“The system diverted grain from warehouses farmers would normally do business with, further upsetting the apple cart. And, because of the luck of the draw – a sort of geographic lottery – one farmer might be able to travel a short distance to get a better rate while a farmer living in another part of the State wouldn’t be so fortunate.
“Under a uniform national rate plan, the Government won’t be providing the incentive to transport crops in this manner, thus returning to a more efficient use of transportation and warehousing.
Ease of Understanding
“The third E is Ease of Understanding. Under our new, simplified single rate plan, farmers will no longer be perplexed by the LDP formula. A simplified plan mean they can focus their energies on what they know best, farming, leaving the LDP process to take care of itself.
Enhanced Income
“The final E is Enhanced income. Depending on budget considerations, the new plan with its increased efficiencies would have the side effect of pumping more dollars into the farm economy at a time that they are sorely needed. In order for the plan to work USDA expects it would cost at least an additional $400 million or more for the 1999 crops.
Calculation of Uniform National LDP Rates:
“Similar to previous procedures, national LDP rates would apply to each class of wheat, each feed grain, soybeans, and each minor oilseed. Rates will vary daily for wheat, feed grains, and soybeans, and weekly for minor oilseeds.
“The national LDP rates will be based off the major terminals used under the previous procedure. The rates will simply reflect an average for all major terminals of the difference between the “adjusted” terminal price for the preceding day and the loan rate in the county in which the terminal is located. (“Adjusted” terminal price means the terminal’s price quote less any within-county differential and less any temporary adjustment.) The resulting average equals the national LDP rate and applies to all counties equally.
Major Concerns Expressed Relative to National LDP Rates:
“The biggest concern seems to be who are the winners and losers under the national LDP rate approach. Most importantly, everyone will continue to be assured of at least receiving their loan rate amount if the commodity is pledged as collateral for a loan. Let me remind everyone here today of exactly what the targeted level of benefits is under the marketing assistance loan program, because it seems many people have forgotten. It is the loan rate, and I repeat, that level will continue to be assured under the national LDP rate approach.
“That said, I do understand the anxiety that results from this change in a few areas of the country, where the national rate would have been somewhat lower more times than higher over the past year. However, our analysis shows that even in these few areas, there will be periods when the uniform LDP exceeds the LDP generated by the current program. In addition, under the national LDP rate approach, the Credit Corporation (CCC) retains the authority to make additional adjustments to the LDP rate.
“Second, some concern has been expressed that a national LDP rate has the potential to further depress harvest-time prices. This issue is very important and, therefore, must be carefully considered. Only in areas in which there are few local merchants (i.e., few competitors) has CCC occasionally encountered a situation in which cash prices “chased down” the PCP. For example, CCC lowered the PCP to reflect the local market price, and the local merchant simply lowered the local cash price further. This situation appeared to occur for corn in some Plains States. However, in most cases, no such influence has been observed by USDA.
“The set of maps that you were provided shows ample evidence that LDP rates in many parts of the country under the previous program were often significantly higher than necessary to encourage marketings. The addition of LDP rates to local market prices well exceeded respective county loan rates in those areas. This is also easily seen in the soybean maps, but it’s evident for all the commodities. Thus, for anyone concerned that a national LDP rate will result in LDP’s higher than necessary in certain areas, they should recognize that is a characteristic of the current program.
“Third, there is no reason to expect increased forfeitures with a national LDP rate. USDA’s analysis showed that, if a national LDP rate approach had been used last year, forfeitures would have been slightly lower.
“Fourth, I believe that a national LDP is consistent with the original purpose of LDPs. The LDP was originally called a production option payment (POPs). They applied to cotton and rice beginning in 1986 and were derived by subtracting an adjusted world price estimate from the national average loan rate. The resulting POP payment was equally available to all producers across the country. When cotton and rice POP payments have been available, respective domestic market prices have generally been well above the loan levels. Thus, a uniform LDP rate for wheat, feed grains, and oilseeds more resembles the original POP payment approach for cotton and rice than does the current procedure for grains and oilseeds.
“In fact, the original purpose of the marketing loan program was to help ensure the orderly flow of loan commodities into the market. Current statutory authority simply states that repayment rates shall be set at the lesser of loan principal and interest or a level that essentially minimizes potential forfeitures and encourages marketings. Price levels are not even mentioned.
Conclusion
“In deciding how to operate for the 1999-crop wheat, feed grain, and oilseed loan programs, we have encountered difficult tradeoffs. First, 1999-crop wheat and corn county loan rates will continue at 1998-crop levels. Oilseed county loan rates will continue to be updated to reflect the latest local market price information available, i.e., they are unrestricted.
“The decision not set wheat and feed grain county loans rates on an unrestricted basis was confronted by two significant concerns. First, 69 percent of the wheat producing counties would have experienced a decrease in county loan rates; for corn, 35 percent. Second, not updating the county loan rates would continue to significantly contribute to disparate LDP rates across counties under the PCP system for determining loan repayment rates. Regardless, I still do not believe that there should be wide-scale reductions in county loan rates during the current farm financial crisis.
“Based on the past year’s experience with all the problems encountered in administering a loan program with rigid loan rates and dynamic PCP-determined loan repayment rates, we are considering using national LDP rates using the 1999 crops of wheat, feed grains, and oilseeds. This would be similar to the procedure that has worked well for the rice and cotton loan programs since 1986. In any reform effort we decide I’m sure we share common goals, including putting more equity and transparency back into the program and reduce market distortions and improve efficiency, make for an easier to understand program and enhance income at a time when that is sorely needed.
“Mr. Chairman, that concludes my statement. I will be glad to address any questions that you may have.”