PROBLEMS CAUSED BY THE DROUGHT SITUATION WEDNESDAY, SEPTEMBER 21, 1983 HOUSE OF REPRESENTATIVES, The committee met, pursuant to call, at 10:10 a.m., in room 1300, Longworth House Office Building, Hon. E (Kika) de la Garza (chairman of the committee) presiding. Present: Representatives Jones of Tennessee, Brown, Weaver, Harkin, Bedell, English, Panetta, Huckaby, Glickman, Whitley, Daschle, Stenholm, Volkmer, Hatcher, Staggers, Durbin, Evans of Illinois, Thomas, Olin, Penny, Madigan, Coleman, Marlenee, Hopkins, Stangeland, Roberts, Emerson, Skeen, Morrison, Gunderson, Evans of Iowa, Chappie, and Franklin. Also present: Representative Smith of Iowa. Staff present: Robert M. Bor, chief counsel; Robert T. Lowerre, associate counsel; Charles Hilty; John E. Hogan, minority counsel; Mark Dungan, minority associate counsel; Peggy L. Pecore and Christine D. Abram, clerks; Steven McCoy, Bernard Brenner, Robert A. Cashdollar, William E. O'Conner, Jr., Steve Kerr, and David A. Ebersole. OPENING STATEMENT OF HON. E (KIKA) de la GARZA, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS The CHAIRMAN. The committee will be in order. I will ask the clerk to record all the members that are present or have recorded their presence at this time and then to note the members as they arrive, in the order of arrival. Before proceeding, I would like to inform the committee that we have the honor of being joined today by a delegation of members of the Swedish Parliament, their Committee on Agriculture, who are seated off to our left in the rear. On behalf of the Agriculture Committee, please allow me to welcome you to this country and to express our hope that your trip will be very fruitful. I know these types of visits are good to allow us, the Parliamentarians, to better inform ourselves of what other countries and trading partners are doing in agriculture. Hopefully, it will be to the benefit of both peoples when we have visits such as yours. Let me repeat, as I mentioned to you privately, "god morgon" and "welkommen" to Washington. That's the extent of my Swedish. (1) We want to welcome Secretary Block and his associates to the committee. We have called this hearing because we want to review with him and his associates the impact of this year's drought and the problems it has caused. We want to look at what the Government is doing within its very broad existing authority to help farmers whose crops have been destroyed and we want to get the administration's view on whether any further action by Congress is needed, as well as to allow members to visit with the Secretary about the issue. [The prepared statement of Mr. de la Garza follows:] PREPARED STATEMENT OF HON. E (KIKA) DE LA GARZA, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS I want to welcome Secretary Block and his associates to the Committee. We have called this hearing because we want to review with him the impact of this year's drought and the problems it has caused. We want to look at what the government is doing within its very broad existing authority to help farmers whose crops have been destroyed. And we want to get the administration's view on whether any further action by Congress is needed. I have been glad to see that the Agriculture Department has been making a sizable number of counties eligible for disaster emergency loans. But I know that a number of Members of Congress and many other people around the country feel that there are other steps which could and should be taken. The point I hope everyone keeps in mind is the fact that this drought came at a time when much of American agriculture was in an economic depression. We have come through years of surpluses, low prices, and low farm income. We have been forced to watch good farmers and their families driven off the land by foreclosures. We have been trying to turn the economy around, and we are all glad that net farm income is apparently going to show some recovery this year. But it would be a great mistake to assume that because the prices of some crops have risen this year, American agriculture is out of the woods and the government can wash its hands of the farmers' problems. Certainly we are glad that some farmers whose crops were destroyed by the drought will have Payment in Kind grain to market. They will not have a normal crop, of course, but at least they will be helped to some degree by the improvement in feed grain prices. There are other farmers, however, who lost crops which were not covered by the P-I-K program, or who did not enroll in the program. And we know that while the increase in feed grain prices has been helpful for some producers, the sudden change has produced a severe squeeze for many livestock farmers. In looking at what should be done to cope with the impact of the drought, we know that Congress has already provided a broad list of authorities which can be used by the Department of Agriculture. Some of the programs which we have made available by law are being used. But some of those programs, such as the CCC emergency feed programs, are not being used. In this situation, we need to know two things: First, how is the administration planning to help farmers cope with the immediate problems caused by the drought, and what's going to be done about the continuing need to help efficient producers who need more time to pay the Farmers Home Administration debts they have piled up in recent years. Second, how is the administration planning to deal with the 1984 feed grain crops. Right now, supplies look tight and prices have advanced. But if the government makes the wrong decisions this fall, and if we get good weather next year, we could be right back on the treadmill of surpluses and low prices. These are the issues we hope the Secretary will help us review today. The CHAIRMAN. Mr. Madigan. Mr. MADIGAN. I have no statement. The CHAIRMAN. With that, we welcome you, Mr. Secretary. We appreciate hearing from you at this time. If you will inform us which of your colleagues will cover what section of the discussion, you may proceed. STATEMENT OF JOHN R. BLOCK, SECRETARY, U.S. DEPARTMENT OF AGRICULTURE Secretary BLOCK. Thank you very much, Mr. Chairman. We appreciate the chance to review the drought situation with you today. I want to also say that I'm very happy that some of the members who are here also attended our drought meeting in Chicago. I thank you for the effort that you made to attend that meeting, and your interest in the drought problems that we face in this country. The proceedings here are going to be made by Assistant Secretary Bill Lesher, Economics; Under Secretary Frank Naylor, Rural Development; and ASCS Administrator, Everett Rank. I'm going to just say a few opening comments, as it relates to the drought situation. I've recently been in several States, and seen firsthand the drought conditions. My evaluation is that it probably is the most severe drought we've had in the last 50 years. The drought of the 1930's may well have been worse, but I'm not convinced necessarily that is the case. I was 1 year old when that drought took place. The drought this time is different, I feel, from the drought of 1980 because it has been more devastating and wider spread. You can find drought problems in States as far west as Nebraska, South Dakota in some places, but not as widespread. It has affected States all up and down the east coast, down into Southeastern United States. Texas and New Mexico have some problems, with the midsection of the country probably receiving the worst part of this drought. When we go through the slides here, you will have a better understanding of what we're talking about. As to the impact of the drought on individual farmers, depending who they are and where they are, it can be devastating. There will be some big winners and some big losers this year in agriculture as a result of this drought. For those who have products to sell, the recent rise in grain prices is going to help them in meeting some of their financial problems that they may have faced last year, or the year before. For those with limited quantities to sell, unless they were protected with the payment-in-kind program or protected with Federal crop insurance or had some other kind of diversification in their operation, it doesn't make very much difference what the price is for commodities. So they're going to be in a difficult situation. As far as available grain supplies are concerned, we do not have a serious shortage; we do have some serious problems that are going to face individual producers. So I would encourage the committee that you stress that we do have adequate supplies to satisfy the needs of our foreign customers. I don't want other countries to start looking to make their purchases from our competitors. I want them to come into our markets to buy our products because, in fact, we are going to have enough grain to sell and I think you can have a positive impact there. At this time, I would like to call on Assistant Secretary Lesher to begin the presentation. The CHAIRMAN. Dr. Lesher. STATEMENT OF WILLIAM G. LESHER, ASSISTANT SECRETARY, ECONOMICS, U.S. DEPARTMENT OF AGRICULTURE Mr. LESHER. Thank you, Mr. Secretary. It's always a pleasure to be here, Mr. Chairman. I will take just a few minutes to put the economic impacts of the drought in perspective. Before I begin, I would like to reiterate that from an aggregate sense, the drought is not that severe. The level of supplies will be adequate. From an individual perspective, it depends on whether you got rain or not, and to what extent, if any you participated in the payment-in-kind program, Federal crop insurance. So while I'm going to go over the effects of the drought in a aggregate sense, keep in mind that on an individual basis it can vary quite dramatically. The first chart, Mr. Chairman, is the world total grain production. The world, less the United States, is increasing in grain production. The world plus the United States, the top line, is decreasing due to the significant reduction in U.S. production because of the severe drought. I think it is important to note that even with the drought that we're experiencing in the United States, when you add production to the level of carry-in the world is going to have stocks that are the second highest on record. The second chart depects the U.S. total supply of wheat and feed grains. As you can see, there is a precipitous drop in supply this year. However, if you compare it to the level of supplies during the 1970's, it is not that serious. When you add the carry-in stocks to wheat and feed grain production, total estimated, 1983-84 grain supplies would be the fourth largest on record. The third chart looks specifically at corn which has been severely impacted by the drought, which can have impacts on livestock. The September 12 production forecast is 4.4 billion bushels, down from last year's level of 8.4 billion bushels. We're looking at available supplies of 7.8 billion bushels. The significant point is, we're carrying in 3.4 billion bushels, about one-half of our total needs. Ending stocks are forecast at about 900 billions bushels. While that's approaching the low end of the acceptable range, the stocksto-use ratio is about 13 percent, not much different than we had in 1980-81. Proceeding on to soybeans production forecast is slightly more than of about 1.5 billion bushels down from last year's level of about 2.28 billion bushels. Earlier estimates of carry in stocks were 455 million bushels, a record level. However, yesterday's grain stocks report it may be down to around 387 million bushels still a record level. I think what this means is that ending stocks of soybeans are going to be low. Of all the crops affected by the drought, it happens to be the crop that we didn't have a PIK program for it will probably end up in the shortest supply situation. Now, what does this mean? There has been much interest about food prices and prices in general. The major impacts of the reduced corn and soybean crops will be on meat production and meat prices. In 1983, we will have record supplies of red meat and poultry totaling about 54 billion pounds. In 1984, because of the drought, we estimate that meat supplies will total about 1 to 2 percent below the record 1983 levels. Ironically, meat prices will probably go down in the next 2 or 3 months because supplies will rise with increased liquidation, because of higher feed prices. However, as supplies decline meat prices are going to move up, especially in the second half of 1984. What does that mean in terms of meat prices? Food prices in general? This year, food prices are going to increase less than 3 percent. That's lower than the inflation rate. That's been true for the last 5 years. Food has been a bargain for the last 5 years and will continue to be a bargain in the future. Prior to the onset of the drought, food prices were expected to increase 4 to 5 percent in 1984. The impacts of the drought may add about 1 percent to 12 percent to that rate of increase. Nonetheless we're not going to have runaway food prices and food is still going to be one of the best buys that you can find in America. Why is that? The next chart shows what $1 spent on food paid for 1982. Of the food dollar spent in the supermarket-about 28 cents of it goes to the farmer and the other goes for transportation, marketing, labor, and related costs. Thus, you can have an increase in the farm price of commodities prices and not affect food prices that much. For instance, looking at the processed grain side, with an increase in the price of corn of $1 a bushel, the price of cornflakes goes up about 2 cents a box. It's just not that significant. Now, let's look at the effects of the drought on the individual farmer. This chart depicts a producer's net returns under alternative levels of participation in the PIK program. No land costs are included and there may be some disagreement as to the absolute level of the net returns. However, the important point is not the aggregate level but what happens between the participant in the PIK program and the nonparticipant. Without the drought, the level of net returns on 100 acres of corn for the nonparticipant is about $15,000; the 50-percent participant in the PIK program, more than $16,000, and the whole base participant, almost $17,500. While there is some difference, it is not significant. However with the drought and a 50-percent reduction in yields, the differences widen. The nonparticipant's net returns drop significantly, from almost $15,000 for that 100 acres to about $4,000. The participant in the payment-in-kind program at the 50-percent level will have a drop in net return of about $5,000, significant, but probably enough to stay in business. But look what happens to a whole-base participant in the payment-in-kind program; his returns actually go up. The reason is that PIK is drought resistant, because produces are guaranteed to receive a specified amount of grain whose value has increased. Mr. Chairman, the final chart, grain simply shows that we did have widespread participation in the payment-in-kind program in many States. This map shows the most severely impacted drought |