ND Department of Agriculture Comments, Speeches and Testimony

Written Testimony of Roger Johnson, North Dakota Commissioner of Agriculture

April 8, 1998

Good morning, my name is Roger Johnson, North Dakota Commissioner of Agriculture. I want to thank Secretary Glickman for hosting this farm forum and for coming to South Dakota to hear from producers about the impacts of the 1996 farm bill.

North Dakota Situation
Ninety percent of North Dakota's land (over 40.2 million acres) is in farms, making the state fourth in the nation in the percentage of total acres devoted to agriculture. North Dakota also ranks fourth in the nation in the percentage of economic base derived from agriculture. At 38% of the total, agriculture is the largest sector of the state's economic base and generated more than $3 billion in 1997 (Exhibit A). North Dakota ranks tenth in agricultural exports, earning $1.7 billion in fiscal year 1996.

North Dakota's principal agricultural products are wheat and cattle. The combination of wheat at 41.4% and cattle at 9.2% made up over one-half of the state's total agricultural receipts in 1996 (Exhibit A). These two enterprises were also among the hardest hit by recent weather disasters. 1997 wheat production was down 33% from 1996. Disease and insect problems, coupled with poor prices, have led to a predicted decline of between a million and a million and a half acres in 1998 wheat plantings. Total cattle inventories have dropped 8% from a year ago, due largely to record winter-related losses and economic factors. As a percent of total inventory, the total cattle death loss in 1997 is the highest on record.

Mother Nature's effect on agriculture is not the only negative variable facing wheat producers and cattlemen. Adverse trade agreements, a woefully inadequate crop insurance program and the recent farm bill absent any price protective safety net are other major factors clearly affecting the bottom line of our family farmers and ranchers. Net returns per acre of wheat in North Dakota turned negative in 1997, with an average statewide loss of $16.00 per acre (Exhibit A). Similarly, returns for beef cattle were net losses for many cattle producers during 1995 and 1996.

Low and non-existent net returns on wheat and cattle have led to downward spiraling numbers in net cash farm income. Net cash farm income has fallen from a per farm average of $50,091 in 1993 to just $15,310 in 1997 (Exhibit A). Profitability for producers is virtually impossible in this situation, with family living expenses now exceeding average net cash farm income (Exhibit A).

North Dakota producers are struggling to recover through short-term survival methods as well as looking to enterprise diversification and innovative value-added projects as ways to help manage risk and improve future profitability.

1996 Farm Bill
Secretary Glickman is to be commended for the initiatives announced last week aimed at strengthening the safety net for producers. Improvements must be made to crop insurance programs and added flexibility must be made to commodity marketing loans, including extending the loan period rate and removing the loan cap.

The bottom line for our nation's food supply and for Rural America is the family farmers' bottom line. We must address the lack of profitability family farmers face today. Our family farmers and ranchers are some of the best money managers around. Unfortunately, they are continually faced with high input costs, high machinery costs and low prices for their products. Family farmers will not be able or willing to continue to produce the nation's food supply without the ability to make a profit that provides enough money to pay for family living expenses.

The 1996 farm bill promised producers the benefits of planting flexibility, expanded crop insurance coverage and freer markets for their products. Many farmers feel as though those promises haven't been kept. Farmers have enjoyed planting flexibility and have diversified their production under the new farm bill; however, there haven't been risk management tools available to support the production of new and emerging crops.

Further, the various trade agreements seem to permit competing commodities to freely flow into our country in direct competition with our own farmers, while too often preventing the free flow of cheaper inputs from other countries to come into our country. As a result, our producers face stiff competition on the price side for our commodities and are unable to competitively produce our commodities due to the unavailability of favorably priced inputs.

Marketing loans continue to be an issue. Marketing loan caps for wheat and feed grains should be removed to allow greater flexibility for producers in times of depressed prices. The previous farm bill provided artificial incentives to raise wheat and feed grains at the expense of oilseeds, while the 1996 farm bill now provides artificial disincentives in exactly the opposite direction. Loan rates for wheat and feed grains are a comparatively lower percentage of the current market dollar than loan rates for other crops, such as oilseeds. We need to maintain equilibrium in commodity loan rates in order to provide balanced opportunity for commodity production. Removing the loan rate caps on wheat and feed grains would help alleviate this problem, although it would still do nothing to directly increase farm income.

Federal Crop Insurance
The intent of expanding federal crop insurance was to provide better insurance coverage. This was promised to be the producer "safety net" as part of the Federal Agricultural Improvement and Reform Act's transition from direct price deficiency payments to a market-oriented farm program. Shortfalls in basic coverage are becoming clearly evident, however, as North Dakota tests the federal crop insurance program under prolonged disaster conditions and successive years of poor production yields. As a farmer told me recently at a public forum, "A banker would tell you that you were crazy if you went in to get a loan for a new $30,000 car and could only get insurance coverage for $20,000."

The following recommendations are made to identify the shortfalls in current risk management programs and suggest ideas that might be considered in response to these problems. These recommendations are supported by the National Association of State Departments of Agriculture (Exhibit F).

Actual Production History
Extended periods of reduced yields are resulting in lowered Actual Production History (APH) guarantees rendering the coverage essentially worthless. This phenomenon has become widespread in North Dakota because of ongoing disease, insects, flooding, and other weather-related production problems. In some cases, the Nonstandard Underwriting Classification System (NCS) is also causing an inordinate hardship for producers impacted by adverse growing conditions. Recent actions by your office have recognized this problem and should go a long way toward resolving this issue.

To illustrate the effect of falling APH yields, five random spring wheat APH yields were received from two different insurance providers. In all five examples, the yield guarantee was higher in 1992 than 1996 (Exhibit B). Calculating the same five APH examples at a sixty-five percent coverage level and applicable price elections ($3.00 in '92 and $3.55 in '96) translates the yields to per acre dollar coverage. The five-year change in dollar coverage ranges from a gain of four dollars to a loss of ten dollars (Exhibit C). Comparing the average of the five per acre dollar guarantees to cash wheat production costs reveals a disparity between per acre dollar coverage and cash production expenses that has grown from fifteen dollars in 1992 to forty-nine dollars in 1996 (Exhibit D). This growing gap between insurance coverage versus actual cash production costs is creating serious financial vulnerability.

It is not unreasonable to penalize producers who abuse the system or fail to employ production practices that can be realistically expected to produce normal crop yields. On the other hand, producers with indemnified losses due to reasons beyond their control should not be penalized simply for using the insurance program within its intended purpose.

It is recommended that the Risk Management Agency implement provisions to protect APH yield guarantees from diminishing to unacceptable levels. The basis of APH yield guarantees should be redeveloped to include a greater number of production years and/or utilize historical production trend lines to establish realistic substitute yields for disaster years. An option of dropping declared disaster year yields from APH guarantees should also be considered.

The current method of calculating APH guarantees is leaving countless producers in precarious financial positions attributable to insufficient insurance coverage. Ironically, it is when the protection of insurance is needed most that the available level of protection disintegrates.

Insurable Crops
The present farm program encourages producers to plant crops for current market demand and/or market development potential. However, many specialty crops are not insurable since they are considered either economically insignificant or lacking in sufficient production data. Lack of available insurance has hindered the potential establishment and growth of what might otherwise be viable alternatives to the traditional crops of North Dakota.

The development cycle for new and specialty crop insurance begs for a system of interim coverage, thus affording producers the ability to diversify their cropping practices. Without insurability, producers are reluctant, if not financially unable, to explore the emerging opportunities in new crops and markets.

Some uninsurable crops already have substantial production and price histories that can be used to shorten the development cycle. In many cases, our land grant institutions have been experimenting with these new crops, and their data may be able to be used for expected production purposes. For crops that lack sufficient historical data, interim coverage should be offered on a cost-of-production basis, and pilot programs should be instituted to establish the required production and market experience for actuarial development.

Gross Farm Revenue
The Risk Management Agency has developed and continues to develop a variety of insurance and risk management products. Each of these products serves a specific purpose. Even so, comprehensive revenue type insurance with a safety-net design is lacking.

The Risk Management Agency should develop a "Gross Farm Revenue Program" to be offered as a base insurance program. Coverage and premiums could be established on a crop-by-crop yield and price basis with a total whole-farm dollar guarantee or could encompass livestock as well as crops and be based on whole-farm historical and/or projected gross revenue.

Such a program could be administered in a variety of ways, but several small and varied pilot programs would help identify strengths and weaknesses of this concept.

A gross farm revenue insurance has the potential of replacing several existing programs, resulting in less producer confusion, less provider confusion, an ability to insure all crops, and the reduced risk of fraud. A minimum mandatory coverage could replace the Catastrophic Risk Protection Program (CAT) and Non-insured Crop Disaster Assistance Program (NAP) with tiered premiums charged for optional buy-up coverage. Under this proposal, producers would select the percentage of coverage that best fits their needs. A conceptual Gross Farm Revenue Program example is attached (Exhibit E).

Conclusion
Successive years of poor crop yields, low prices, high input costs, and the inability to purchase adequate crop insurance are forcing many producers into a crisis situation. USDA and Congress should make changes to the 1996 farm bill to address the needs of producers. Marketing loan periods should be extended and loan cap rates should be lifted on wheat and feed grains. These additional marketing tools will increase the ability of the farmer to receive a fair commodity price.

Additionally, risk management issues must be addressed. As direct government payments diminish and the risk associated with production agriculture shifts to producers, the congressional responsibility for delivering a substantive insurance program increases accordingly. An acceptable "safety net" must be developed and be readily available as transition payments are phased out.