September 18, 1999

Mr. Chairman and members of the Committee, I thank you for inviting the Department to discuss the economic issues affecting producers, including the outlook for major commodities and the financial condition of the farm sector. I will describe the factors contributing to the decline in farm prices and incomes, the effects low prices and incomes are having on the financial well-being of farmers and the prospects for economic recovery over the next several months. While economic conditions in agriculture are now generally weak, weather events, a second consecutive year of Federal assistance, and improvements in the global economy could alter the income prospects for farmers and ranchers as the next 12 months unfold. Most can probably remember well that just 2 years ago U.S. agriculture had strong exports, above-average prices, and near-record net cash farm income (table 1).

Current Problems in Agriculture

There are no generally accepted criteria that define a "recession" in a particular industry such as agriculture. Relative to history, the current drop in farm markets is severe enough to merit the term recession. As the figure indicates, there have been only four periods since 1915 when farm cash receipts have fallen below the previous 5-year average: (1) after World War I, (2) in the great depression of the 1930's, (3) in the 1950's, and (4) in 1986. Since 1957, farm cash receipts have fallen below the previous 5-year average only once: in 1986. However, based on our current forecasts, farm cash receipts will again be below the previous 5-year average in 1999. Of course, large government payments in the 1980's and now helped offset the decline in receipts.

Farm prices for many agricultural commodities are at lows unseen in more than a decade. For the 1999/2000 marketing year, USDA forecasts the average price of soybeans to be the lowest since 1986/87, the prices of corn and wheat the lowest since 1987/88 and the price of rice the lowest since 1992/93. Cotton and hog prices are also down sharply and have fallen to levels unseen since the early 1970's, and cattle prices, while showing some improvement, remain at relatively low levels.

In addition to historically low farm prices, many producers are being adversely affected by drought, excessive heat, pests, flooding and wind which have lowered crop yields and quality, reduced weight gains for livestock and poultry, increased animal mortality rates and lowered milk production. All of Connecticut, Delaware, Kentucky, Massachusetts, New Jersey, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee and West Virginia, large sections of Arizona, Maryland, New Mexico, New York, Ohio and Virginia and contiguous counties in California, Colorado, Georgia, Illinois, Indiana, Maine, Michigan, Missouri, Nevada, New Hampshire, Vermont and Utah have been declared farm emergency areas, making producers there eligible for low-interest government loans. USDA is continuing to assess drought damage in other states seeking disaster declaration, including Alabama, Missouri, Montana, Oregon, Utah and Washington.

USDA's crop condition survey as of August 29 indicated that fifty percent or more of pastures were rated poor or very poor in New England, Arkansas, Kentucky, Indiana, Maryland, Missouri, New Jersey, New York, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, Washington and West Virginia; one-quarter or more of the corn crop in Georgia, Indiana, Kentucky, Missouri, Ohio and Pennsylvania was rated poor or very poor; over one-quarter of the soybean crop in Alabama, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, South Carolina and Tennessee was rated poor or very poor; one-third or more of the barley crop in Montana and Washington was rated poor or very poor; one-fifth or more of the spring wheat crop in Minnesota and Montana was rated poor or very poor; and one-third or more of the cotton crop in Alabama, Louisiana, South Carolina, Tennessee and Texas and nearly one-third in Georgia and Missouri and was rated poor or very poor.

Economic Forces Contributing to the Farm Crisis

There are two fundamental causes for the weakness in the farm economy. First, farmers in many areas suffered crop production losses last year and will again this year due to disease, drought, pests, and excessive moisture. Second, there are imbalances in commodity markets brought about by several years of large U.S. production--despite production problems in many areas--and by lower exports.

FY 1999 Exports. The value of U.S. agricultural exports is estimated to fall to $49 billion this fiscal year, after reaching a record high of $60 billion in fiscal year 1996. Asia accounts for a large portion of the drop in exports of both bulk and high-value agricultural products. In FY 1996, $26 billion in U.S. agricultural products were exported to Asia, compared with an estimated $18 billion this fiscal year, a drop of $8 billion. The value of U.S. exports of agricultural products to Asia is now back to where it was a decade ago.

As for total bulk products, such as feed grains, wheat, soybeans, cotton and rice, export value is down nearly 40 percent since 1996. Declines in tonnage account for about one-fifth of the drop in export value of bulk agricultural products, and declines in export prices account for four-fifths of the drop. The export value of high-value agricultural products has changed little since FY 1996, remaining steady at about $32 billion, with decreases in the value of livestock and poultry products being offset by increases in the export value of horticultural products and other high-value products. The value of livestock product exports is down about 8 percent and the value of poultry product exports is off about one-quarter in FY 1999, compared with 3 years ago. However, the volume of livestock and poultry products exported has increased since 1996.

Within this weak export picture, there has been some positive news. In volume terms, from October through June, U.S. corn exports are up 35 percent compared with the same period last year. With Argentina and China limiting their exports, we have expanded exports to Japan, South Korea, Egypt, Mexico and South America. Wheat and wheat flour exports are up 13 percent over that period, as exports to Egypt, South Korea, Mexico and the European Union (EU) have improved.

FY 2000 Exports. For FY 2000, increased global economic growth, especially in Asia, reduced export competition for some commodities and a weaker dollar is expected to raise export volume to near the 1993-1997 average, although value is expected to rise only to $50 billion. Now that several key variables appear to be turning around, how quickly will U.S. exports respond? Recall that U.S. agricultural exports fell sharply between 1981 and 1986, when some of these same factors were negatively affecting U.S. exports. The 1981 peak was only reached again in 1992. Although a quick, one- or two-year expansion in U.S. exports to 1996 levels is not expected, the apparent turnaround in several key macroeconomic and other indicators, and with more price-responsive U.S. agricultural policies than existed in the 1980's, the outlook for higher exports is more positive than it has been in a couple of years.

Although not out of the woods yet, economic growth appears to be returning to many of the Asian economies, especially South Korea and Thailand. Serious questions remain about Japan's economic recovery, which is reflected in a wide range of Gross Domestic Product (GDP) projections from barely positive to continued negative. With economic weakness still prevalent in other parts of the world such as Russia and Brazil, world GDP remains sluggish in 1999 but most forecasters expect higher growth in 2000.

Another key factor for U.S. exports is the U.S. exchange rate. The U.S. dollar has been declining in value against several key currencies this year. On a trade-weighted basis, so far in 1999 the value of the dollar is lower than in 1998, although still stronger than in the mid-1990s. A decline in the value of the dollar will make made U.S. commodity prices more attractive to foreign buyers. Although changes in the value of the dollar do not generally translate into one-to-one changes in import prices because various factors can impede the price transmission--government intervention, rigidities in commodity markets, trade barriers, etc.--the lower dollar is expected to be positive for U.S. agricultural exports.

The volume of bulk product exports is expected to be up about 5 percent in FY 2000, with soybean exports up 15 percent and cotton exports up over 40 percent. However, lower prices are forecast to lead to much more modest increases in the value of soybean and cotton exports in FY 2000. Livestock and poultry product exports are projected to rise 4 percent in FY 2000 to nearly $10 billion, but remain below FY 1998's $10.3 billion.

Large Global Crop Production and Stocks. Despite some weather problems, global crop production has exceeded consumption each of the past 3 years leading to rising U.S. and world stocks of grains and oilseeds. Global stocks of grains at the end of the 1998/99 marketing year reached 339 million tons, up from 255 million tons at the end of 1995/96 marketing year. The growth in global carryover of grains is almost entirely due to increased yields per acre, as grain planted area over the past three years is about unchanged relative to the average of the early to mid-1990s. In 1999/00, global consumption is expected to exceed production causing global ending stocks of grain to drop to 317 million tons.

Global stocks of oilseeds have risen by 66 percent since 1996/97, increasing from 17.1 to 28.5 million tons at the end of the 1998/99 marketing year. Unlike grains, much of the increase in oilseed carryover can be attributed to increased plantings. World oilseed area has expanded sharply over the past two seasons, increasing 8 percent from 1996 to 1998. In 1999/2000, record global oilseed production for the third consecutive year is expected to cause global ending stocks of oilseeds to reach 29 million tons.

While adverse weather has reduced crop yields in many areas of the United States over the past two years, these production declines generally have been offset by good yields in other sections of the country. In 1998/99, the U.S. corn and rice crops were the second highest on record, soybean production was record high and the wheat crop was the largest since 1990. Only cotton production was down appreciably in 1998, as severe weather problems in much of the cotton belt resulted in the smallest crop in nearly 10 years. With the exception of cotton, these large crops caused production to exceed total use pushing up 1998/99 U.S. ending stocks of corn, wheat, rice and soybeans. Stocks of wheat at the end of the 1998/99 marketing year as a percentage of total use were the highest since 1987/88, corn stocks the highest since 1992/93 and soybean stocks the highest since 1990/91.

Implications of the Farm Crisis-Aggregate Indicators

Cash Flow. For 1999, farm cash receipts are forecast to fall to $192.5 billion, or $15.1 billion below just 2 years ago. Lower receipts mean lower net cash farm income, which for 1999 is forecast at the lowest level since 1995 and more than $5 billion less than in 1997, but only 3 percent below 1998. Cash receipts for wheat, feed grains, soybeans, cotton and rice are forecast to decline from a record $56.8 billion in 1997 to $42.5 billion in 1999, a 25-percent drop. Cash receipts for hogs are forecast to drop 32 percent in 1999 from 1997's $13.1 billion to $8.9 billion.

Government payments have helped to offset the decline in cash receipts for major crops, thereby helping to maintain producers' cash flow. Total government payments increased from $7.5 billion in 1997 to over $12 billion last year. In calendar 1999, government payments could reach $15.5 billion under existing program authorities, the second highest ever. The aid package included in the Senate-passed Agriculture Appropriations bill could add another $6 billion in direct payments in 1999, causing government payments this year to exceed the previous calendar year record of $16.7 billion in 1987.

Balance sheet. Farm business balance sheets have shown considerable improvement since the mid-1980s. This year's overall farm debt levels are about 10 percent below the peak levels of the 1980s and asset values are substantially higher. The debt-to-asset ratio for farm operators has risen a little the past two years, but it is still expected to remain below 17 percent by the end of 1999, compared with the low 20's during the mid-1980s.

Debt repayment capacity utilization measures the extent to which farmers are using their available lines of credit. In 1999, farmers are expected to use 60 percent of the debt that could be supported by current income. This figure has been increasing in recent years but is substantially down from over 100 percent in 1981 and more than 70 percent during 1979-86.

While the balance sheet for agriculture in the aggregate looks reasonably sound, that could change if farmland values fall sharply. Land values depend on two key factors: expected farm income and interest rates. In the 1980s, farm income dropped and interest rates soared causing a collapse in land prices. Today, the decline in cash receipts is being cushioned by government payments, and interest rates are increasing, albeit slowly, and they remain well below rates of the last decade.

Farm real estate values, which showed strong increases through much of the 1990s, started to level off last year. Cropland values declined in 5 states in 1998, and in 1999, cash rents declined in 9 states, although the declines were small. Farmland value data comes with a lag, and thus far, the data show the drop in farmland values to have been fairly modest. Recent Federal Reserve Bank data show that for certain parts of the country, such as the central portions of Iowa, Illinois and Indiana, land prices declined 8-11 percent between July 1, 1998, and July 1, 1999. Given current production and price prospects, we can expect further pressure on land prices in the months ahead, particularly in the Corn Belt, Plains States, and Mid-south. A key to how land values will fare will be when cash rents for the 2000 crops are negotiated. Big drops then could lead to sharp land value declines.

Commercial banks are the largest source of farm credit, accounting for over 40 percent of agricultural loan volume. Commercial lenders report declining farm loan repayment rates, increasing numbers of farm loan extensions and renewals and more stringent collateral requirements. While a growing number of farm borrowers are having difficulty cash flowing loans and obtaining credit from commercial sources, there was no substantial deterioration in the performance of banks' farm loan portfolio through the first quarter of 1999, although farm bank profits were down and past-due loan levels are up from a year earlier. In the first quarter of 1999, commercial banks indicated that farm borrowers were delinquent on about 3 percent of non-real estate farm loans, compared with a delinquency rate of more than 10 percent in the mid-1980s.

Over the past year, the amount of credit provided to farmers and ranchers by USDA directly or through credit guarantees to commercial banks has increased sharply. The total value of loans provided to farm borrowers through direct and loan guarantees is up 69 percent, compared with 1 year ago. The continuation of low prices and reduced crop production in some areas of the country could further increase the demand for USDA credit assistance. USDA's total credit assistance for FY 1999 is expected to be over 75 percent more than last year's $2.2 billion loan level.

Implications of the Farm Crisis-Farm Level Indicators

On January 1, 1999, USDA classified 64 percent of commercial farm businesses as being in a favorable financial position--positive cash flow and low debt compared with assets. The remaining farms had a debt- to-asset ratio above 0.4, 11 percent of farms; or negative farm income, 20 percent of farms; or both, 5 percent of farms. In 1998, 25 percent of all commercial farm businesses had negative net farm income, and nearly one-third of commercial farm businesses in the Northern Plains, Delta and Mountain States had negative net farm income. Forty percent of hog farms had negative farm income in 1998. As the cash flow problems continue, we would expect to see more producers have balance sheet or solvency problems. When a producer has both cash flow and balance sheet problems, it becomes very hard to turn that operation around, even with asset sales, and the risk of going out of business becomes high.

For producers of hogs, cattle and field crops who are already highly leveraged, continued low prices of these commodities and weather-reduced production will increase their financial vulnerability. The areas of the country that specialize in the production of these commodities, such as the Corn Belt, Plains States, Delta, Southeast and areas affected by adverse weather, such as the Northeast and mid-South, will likely see more of an increase in farm financial stress than other areas of country. The extent farm financial stress increases in the coming months will also depend on whether the Congress passes an emergency aid package and the size of that package.

Looking ahead at the 1999/2000 marketing year, income prospects from a crop sector perspective suggests sharp declines in income. The net income--cash receipts plus government payments less cash production expenses--for wheat, feed grains, upland cotton, rice and soybeans could fall to the lowest level in the 1990s to less than $16 billion for the 1999/2000 marketing year, compared with $19.3 billion for 1998/99 and the 1993-97 average of $23.4 billion. The Senate-passed aid package would provide nearly $6 billion in payments to wheat, feed grain, upland cotton, rice and soybean producers and bring net income for these crops in 1999/2000 up to 90-95 percent of the 1993-97 average. More details on expected market developments follow.

Market Prospects for 1999/2000

Crops. USDA currently expects the 1999 U.S. corn crop to be the fourth largest on record and the U.S. rice and soybean crops to be record large. In addition, increased plantings and improved yields are expected to lead to a sharp increase in U.S. cotton production, while U.S. wheat production is expected to drop about 10 percent in 1999. The large corn, cotton, rice and soybean crops coupled with more than ample stocks of these crops and wheat going into 1999/2000 marketing year are expected to continue to pressure grain, oilseed, cotton and rice prices through the most of the 1999/2000 marketing year.

In 1999, U.S. producers planted the lowest wheat acreage since 1972, and wheat production in the EU is expected to be down. But, wheat prices in 1999/ 2000 have shown little improvement over last year, as winter wheat yields were record-high in 13 states, exports have started out weak, projected carryover stocks are large at 900 million bushels, and producers appear to be taking loan deficiency payments (LDPs) and marketing their crop early. The usual seasonal price weakness occurs in August and September, and in August, the U.S. farm price for wheat averaged $2.43 per bushel, up only $0.05 from last August's $2.38. USDA forecasts a season-average farm price of wheat for the 1999/2000 marketing year of $2.45-$2.75 per bushel, compared with last year's $2.65 per bushel.

In September, USDA forecast a corn crop of 9.38 billion bushels and a season-average farm price of $1.70-$2.10 per bushel, compared with last year's $1.95 per bushel. Total corn supplies are expected to be about the same as last year as increased carryin stocks offsets lower year-over-year production. While corn supplies are forecast to stabilize in 1999/2000, total use could decline, leading to another year of increased carryover. Corn exports are expected to drop off from last year's high pace due to increased competition from China, and feed use may level off as pork and beef production turns down late this year.

Record-high soybean acreage, combined with reasonably good growing conditions, continues to weigh heavily on the price outlook for soybeans. Record soybean supplies for the 1999/2000 marketing year are expected to lead to another large increase in carryover stocks. Soybean prices for 1999/2000 are currently projected to average $4.80 per bushel, the lowest since 1986/87. Soybean exports are forecast to increase as South America cuts back production, and the EU boosts meal use as they ban other high protein feeds such as bone meal, meat tankage and dioxin contaminated feeds.

The 1999 cotton crop is forecast to reach 17.54 million bales, up 26 percent from last year's weather-reduced crop of 13.92 million bales, pushing 1999/2000 carryover stocks up nearly 40 percent from last year's 3.9 million bales. Despite the abundant supplies, U.S. cotton mill use is projected to remain unchanged from last season's 10.4 million bales, reflecting slow growth in the Asian economies and further increases in textile imports. Assuming no new step 2 funds, U.S. cotton exports are forecast at 5.7 million bales during 1999/2000, up 1.4 million bales from last year but more than 2 million bales below the 1994-97 average. China could remain a net exporter of cotton for the second consecutive year in 1999/2000, dampening U.S. export prospects.

All six rice producing States are expected to produce larger crops this year, with records projected for Arkansas, California, Louisiana and Missouri. In contrast, total use could fall from last season's high level, causing a sharp increase in carryover stocks. Rice exports are projected to be about flat in 1999/2000, as larger crops in several South American countries reduce their imports of rough rice. Milled rice exports are forecast to increase based on expectations of lower U.S. prices and larger food aid shipments.

Livestock. Record-high per capita meat production continues to pressure livestock and broiler prices. In 1999, total red meat and poultry production is forecast to increase by over 3 percent. While beef and pork production are forecast to increase by slightly more than 1 percent in 1999, broiler production could be up nearly 7 percent. In 2000, higher poultry production is expected to about offset declines in beef and pork production keeping per capita meat production near this year's record level and limiting gains in livestock and hog prices.

After dropping to below $10 per cwt. during last December, hog prices rebounded to an average of $36 in August. For all of 1999, hog prices are forecast to average $32.50 per cwt., down 7 percent from last year. Although the Russian tender and hot weather has recently given hog prices a boost, the prospects for much recovery during the remainder of 1999 are limited, as marketings this fall will be very large and could average 2 million head per week during the fourth quarter. Although pork supplies are expected to decline about 3 percent next year as some producers cut back due to low prices, large pork stocks and record poultry supplies could keep hog prices from averaging more than the mid-$30 per cwt. level in 2000.

Cattle prices are projected to average about 5 percent higher this year, as the liquidation of the nation's cattle completes its fourth consecutive year. The USDA's July 1 inventory of cattle and calves on farms showed 107 million head, down from 113 million head on July 1, 1995. However, this reduction has not translated into less beef production nor much improved cattle prices, as producers are still reducing herds. In 2000, cattle prices should show significant improvement as beef production moderates. Following feedlot placement increases of 20 and 6 percent in the first and second quarters of 1999, placements are expected to decline fairly sharply from a year earlier in the second half of the year, with larger drops next year. Steer and heifer slaughter could decline by nearly 6 percent in 2000, which contrasts with a 2-percent increase this year.

Broiler prices in 1999 are projected to be off about 7 percent from last year and, in the face of rising production, could decline further in 2000. Despite the price drop, producer net returns continue positive as lower feed costs more than offset the drop in broiler prices. In response, broiler production is expected to increase by 5 percent in 2000.

Cheese prices rose steadily in late July and by mid-August broke last year's record. Since mid-August, cheese prices have dropped sharply in the face of large inventories and rising milk production. For all of 1999, milk prices are projected to average about $0.50 per cwt. below last year's record of $15.42 per cwt. but well above the average of the previous 5 years. In 2000, rising milk production could lead to further pressure on milk prices.

Things to Watch

There is no doubt the farm economy is weak and many producers are having serious cash-flow problems. A number of key factors that will determine the financial fate of U.S. agriculture over the coming year are as yet unknown. A few key things to watch:

Weather around the world. Because ample production is the primary reason for the low farm prices, which is the primary reason for the farm problems, as always, adverse or exceptionally good weather around the world is likely to be the most important factor affecting future crop food, feed and fiber prices. At this point, the only major trouble spots are drought in North Africa and the Middle East, which will increase world wheat import demand, and dry weather in India.

Economic recovery. Faster-than-expected growth in Asia and South America would help boost U.S. agricultural product exports. Alternatively, if economic problems in South America spread to other Latin American countries, which account for one-fifth of U.S. agricultural exports, U.S. agricultural exports could fall below expectations, placing additional pressure on farm prices in 2000. Over the next year or so, improved global economic growth may not be enough by itself to alter appreciably the price and income outlook.

Market access. There is continuing concern by producers over the acceptance of genetically enhanced crops and the economic returns to producing them. Consumer and government reaction to these crops in overseas markets could affect prices received during 1999/2000 and what is planted by U.S. producers in 2000.

China. China will continue to be a potentially major factor in world agricultural markets in 1999/2000 for several reasons. First, China's domestic macroeconomic policy is a factor in Asian trade patterns and exchange rates. Second, China has large stocks of cotton and corn and is expected to be a net exporter of each. China's exports may turn out to be price responsive, that is, as world prices rise, they export more, thereby limiting the upward movement in world prices that otherwise take place.

A longer term issue is the ongoing World Trade Organization (WTO) accession talks with China. In early September, the International Trade Commission (ITC) released the executive summary of an analysis of the effect on the United States of China's accession. In general, the estimated effects on U.S. trade and the U.S. economy are small and consistent with the magnitude of U.S.-China trade, which accounts for less than one percent of U.S. GDP. However, the impacts on agriculture are among the most significant. Significant increases in U.S. exports are estimated for cotton, beverages and tobacco, and vegetable oils. Smaller increases are estimated for wheat and corn, and a negligible change for U.S. rice exports.

Emergency assistance legislation. The Senate passed amendments to the Agriculture Appropriations bill that would provide some $7.4 billion in emergency assistance to producers. The Administration supports an emergency assistance package, and the President recently announced measures that should be included in such a package. The Administration is committed to working with the Congress on the details of an emergency assistance package that meets the needs of all farmers and ranchers, including those that have been adversely affected by drought and other weather-related adversities in 1999.

That concludes my remarks and I will be happy to respond to any questions. Thank you.
1996 1997 1998 1999E 2000F
Cash receipts ($bil) 199.1 207.6 196.8 192.5 NA
Government payments ($bil.) 7.3 7.5 12.2 15.5 NA
Cash expenses ($bil.) 159.9 169.0 167.8 168.9 NA
Net cash farm income ($bil.) 57.5 58.5 55.0 53.3 NA
Net farm income ($bil.) 54.9 48.6 44.1 43.5 NA
Farm debt ($bil.) 156.1 165.4 172.0 171.0 NA
Farm assets ($bil.) 980.7 1022.7 1027.4 1035.5 NA
Debt-to-assets (%) 15.9 16.2 16.8 16.7 NA
Agricultural exports ($bil.) 59.8 57.3 53.6 49.0 50.0
Agricultural imports ($bil.) 32.6 35.8 37.0 37.5 38.0
Value of the dollar 1/ 100.8 111.9 115.1 109.3 NA
Farm production (mmt) 2/ 410 417  432  426  NA
Farm prices received 3/ 112  107 101  98  NA
Grain stocks-to-use (%)  4/4.4 16.0 17.8 17.1 17.0
CPI-food (%)  3.3 2.6 2.2 2.0 1.6
E=estimate; F=forecast; 1/ real agricultural trade weighted, 1995=100; 2/ U.S. production of grains and oilseeds; 3/ index of prices received by producers for all farm products, 1990-92=100, data for 1999 is for the month of August, 1999; 4/ marketing year world ending stocks in the year indicated;