Testimony of Roger Johnson
North Dakota Agriculture Commissioner
Senate Committee on Agriculture, Nutrition & Forestry
Subcommittee on Production and Price Competition
July 18, 2002
2:00 p.m.
SR-328A

Good morning. Chairman Conrad and members of the subcommittee, I am North Dakota Agriculture Commissioner Roger Johnson. I appreciate both the opportunity to offer testimony before you today and your willingness to hold this hearing to discuss pesticide price harmonization. I am here to testify in support of Senate Bill 532, which deals with pesticide price harmonization, a pressing issue in northern border states with nationwide impact.

Pesticide harmonization deals with two issues: product access and pricing. Senate Bill 532 addresses the pricing issue, which results when the same or similar pesticide is registered in both Canada and the United States but has been priced differently. The access issue is categorized into two different areas. The first is when there is a product available in one country but not in the other for the same use and the second area is making new chemistries available in both countries at the same time.

Disparate chemical pricing harms U.S. farmers

Every day, Canadian grain moves freely south across the U.S./Canada border to compete with domestic grain on the open market. Much of that Canadian grain has been produced using pesticides that are identical or substantially similar in chemical composition to pesticides registered for use in the U.S. but offered at a price substantially lower in Canada. However, barriers currently exist in federal statutes that prevent American growers or pesticide dealers from legally importing Canadian pesticides without the consent of the product registrant, even if the products are identical in composition to pesticides registered with EPA for the desired use. As a result, product registrants have been able to use the U.S./Canada border to create two separate pesticide markets.

U.S. farmers pay more for farm chemicals

This system of segmented pesticide markets has resulted in significant economic impacts to American farmers. Pesticide pricing studies have repeatedly shown that American producers pay significantly higher pesticide prices than do Canadian producers. For reference, I have included a copy of a May 2001 Northern Plains Trade Research Center report by Richard Taylor and Won Koo that determined North Dakota farmers would save approximately $24 million if they could purchase pesticides at Canadian prices (Attachment 1, page 8, table 6).

Internal estimates at the North Dakota Department of Agriculture this year (Table 1) show this cost disparity is similar to the results of the Taylor/Koo study. Conservative estimates, using only fifteen common herbicides, indicate that North Dakota farmers would save approximately $24 million per year if they could pay Canadian prices. Last year estimates by my department indicated a $33 million disparity (Table 2) in favor of Canadian farmers.

Table 1. Examples of pesticides that are substantially more
expensive in North Dakota than in Canada based on 2001 retail prices.

^a Reflects the increased cost per acre in U.S. dollars in North Dakota vs Canada. These figures are based on 2001 retail prices. North Dakota retail prices were derived from the publication "2002 North Dakota Weed Control Guide" prepared by NDSU Extension Service.
Canadian prices were derived from the publication "Guide to Crop Protection 2002" prepared by Saskatchewan Agriculture and Food. Price differences are based on the same rate of active ingredient per acre after converting all prices to U.S. dollars.

^b Product use numbers were obtained from a year 2000 pesticide use survey conducted by the North Dakota State University Extension Service.

a Reflects the increased cost per acre in U.S. dollars in North Dakota vs Canada. These figures are based on 2000 retail prices. North Dakota retail prices were derived from the publication "2001North Dakota Weed Control Guide" prepared by NDSU Extension Service.
Canadian prices were derived from the publication "Guide to Crop Protection 2001" prepared by Saskatchewan Agriculture and Food. Price differences are based on the same rate of active ingredient per acre.

^b Product use numbers were obtained from the 2000 pesticide use survey conducted by the North Dakota State University Extension Service.

These studies also indicated that there were products less expensive in the U.S. than in Canada. The price differences for these products were generally much smaller. However, a legal mechanism exists in Canada whereby Canadian farmers can gain access to the lower priced U.S. pesticides. This mechanism is called the "Own Use Import" permit.

Segmented markets and disparate pesticide prices have a direct effect on the economic viability of American farming operations. Pesticide costs are a major cash expense for producers and dramatically impact farm profitability.

For example, 452 non-Red River Valley farms from North Dakota enrolled in the year 2001 in the Farm Business Management Program sponsored by the North Dakota State Board for Vocational and Technical Education. These farms reported an average crop chemical expense of $18,772 in the year 2001. This figure represents 9.5 percent of a farm's average total reported cash expense. For these representative farms, a 10 percent decrease in chemical prices would have meant an increase of $1,877 or 3.6 percent in net farm income.

Comparatively, 475 non-Red River Valley farms from North Dakota enrolled in the year 2000 in the Farm Business Management Program sponsored by the North Dakota State Board for Vocational and Technical Education. These farms reported an average crop chemical expense of $17,480 in the year 2000. This figure represents 9.4 percent of a farm's average total reported cash expense. For these representative farms, a 10 percent decrease in chemical prices would have meant an increase of $1,748 or 3.2 percent in net farm income.

This direct link between pesticide prices and net farm income was further supported by the Taylor-Koo report mentioned previously. Taylor and Koo determined that net farm income for small size representative farms would increase 5.2 percent if American farmers could pay the same pesticide prices as their Canadian counterparts (Attachment 1- page 10). This puts American producers at an immediate competitive disadvantage, especially in the current agricultural economy. The report also concludes that the negative economic impact for North Dakota hard red spring wheat producers alone is $11.6 million (Attachment 1 - page 7).

Recent events in North Dakota illustrate the temptation these price differentials create for U.S. farmers struggling to remain economically viable. On June 15, 2002, NDDA was notified by representatives from Bayer Cropsciences that several North Dakota farmers were attempting to import and use Canadian Liberty^®, a broad-spectrum herbicide. Six farmers were erroneously allowed to import the product by EPA Region 8 and U.S. Customs. NDDA staff stopped the importation because the information on the approved "Notice of Arrival" form 3540-1 was incorrect and the product did not have an approved U.S. EPA label on the container. NDDA investigations determined that nine farmers attempted or succeeded to import approximately 8,000 gallons of Canadian Liberty^®. The price difference between the two products is $9.55/acre in Canada (U.S. dollars) versus $18.70/acre in the U.S. NDDA and EPA were forced to enforce the current law even though the Canadian version of Liberty is substantially similar to the U.S. version and the canola that it is applied to is allowed to come across the border to compete against canola raised in the U.S. (Table 1) using the higher priced version. The farmers involved in this incident told us they figured they would save approximately $9/acre using the Canadian version of Liberty^®.

Public concern

Pesticide harmonization is a pressing issue in North Dakota. In the 57^th North Dakota Legislative Assembly held in 2001, several bills and resolutions dealt directly with the issue of pesticide harmonization. An outcome of the session was the passage of North Dakota House Bill 1328, which created the Crop Protection Product Harmonization and Registration Board. This Board, chaired by the governor's office and including legislators, industry representatives, farmers, and myself, was formed to address and resolve pesticide harmonization issues. The 57^th Legislative Assembly also passed a resolution (Attachment 2) urging the U.S. Congress to adopt legislation granting states the authority to issue state registrations to parties who wish to import Canadian pesticides that are identical or substantially similar to pesticides registered for use in the United States. I have included a copy of this resolution with my written testimony.

This is a national problem

It should be noted that pesticide price harmonization is not solely a North Dakota issue. I have included a copy of a letter sent to the Environmental Protection Agency (EPA) and signed by agriculture commissioners and directors from 12 northern border states expressing the need to eliminate barriers that segment Canadian and American pesticide markets (Attachment 3). I have also included a copy of a letter sent by the National Association of State Departments of Agriculture to members of the U.S. Congress fully supporting this bill (Attachment 4). In addition, I have included copies of "Joint Communiqué(s)" from the Tenth, Eleventh and Twelfth Meetings of the States/Provinces Agricultural Accord (Attachment 5, Attachment 6, and Attachment 7). In the communiqué(s), senior agricultural officials from Canada and the United States agreed on the importance of allowing farmers to purchase pesticides from neighboring countries.

The "Pesticide Harmonization Act" would solve the problem

My staff and I have worked extensively with EPA to identify legal barriers that prevent parties from importing Canadian products for use in the United States without the consent of the product registrant. At the conclusion of that exercise, we worked collaboratively with North Dakota's congressional delegation, the North Dakota Office of the Attorney General, and EPA to draft this bill. If enacted, Senate Bill 532 would amend the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) to grant states the authority to issue state registrations to parties who wish to import Canadian pesticides that are identical or substantially similar to products registered with EPA for use in the United States. (Attachment 8 provides a section-by-section analysis of the bill).

This bill creates a system in which a party can serve as a state registrant for certain Canadian pesticides without the consent of the primary registrant. A state registrant for the Canadian product is necessary since it ensures that some party will assume responsibility for distributing and re-labeling the product to meet EPA requirements. To protect state registrants under this legislation, data compensation requirements are waived. The costs associated with data development would be waived because those costs should be included in the market pricing strategy used by the companies in a joint U.S./Canada market. In addition, the bill clearly states that state registrants would assume liability only for those parts of the product "production" (re-labeling and distribution) for which they had control and/or knowledge.

The ability to issue state registrations without the consent of primary registrants is a critical component of this bill. My staff and I have attempted repeatedly to work with product registrants to import Canadian pesticides for use in the U.S. For example, we sent letters to at least five different agricultural chemical companies in the fall of 1999 requesting their support to issue Section 24(c) Special Local Needs registrations for certain Canadian pesticides that were allegedly identical to more expensive products registered for use in the U.S. Not one of those companies granted their consent to allow access to their products at Canadian prices. Therefore, it is essential that a mechanism be created in which access to Canadian pesticides is not contingent upon primary registrant consent. This bill provides that mechanism.

Sustains high environmental standards

A second major issue addressed in this bill is access to proprietary chemical composition data. To prevent unreasonable adverse effects to man or the environment and to ensure a safe and high-quality food supply, state registrations under this bill are limited to Canadian products that are identical or substantially similar to products currently registered with EPA for the desired use. The bill creates a mechanism that allows state regulatory agencies to access the Confidential Statement of Formula (CSF) for both the Canadian and comparable domestic pesticide products. This access to proprietary chemical composition data is critical to ensure that the Canadian and U.S. products are identical or substantially similar, and that the Canadian products do not contain unregistered active or inert ingredients.

Chemical distribution system would be maintained

In many rural communities, the agricultural chemical dealer is a major part of the local economy. Therefore, we must ensure the economic viability of pesticide retailers and the contributions that they make to small towns across America. If this bill is enacted, I believe that the majority of registrants will be chemical distributors who will use the authority in the legislation to access Canadian pesticides from Canadian wholesale markets. Re-labeling for purposes of the bill will still be considered pesticide production, and it must be conducted at registered EPA establishments. Unlike farmers or commodity groups, distributors already have networks to accommodate product movement and registered establishments where re-labeling can occur. Therefore, the majority of Canadian pesticides imported under this bill will most likely move through the existing pesticide distributor/retail networks. The net effect will be a new, competitive market for these products, and manufacturers will be forced to discontinue segmenting U.S. and Canadian pesticide markets.

Recommendations for minor changes in bill draft

I would also like to suggest some minor changes to improve the bill. First, Sections 3(B)(ii), 4(D), and 6(D) of the bill all discuss labels "approved by the Administrator". However, the label referenced in Section 3(B)(ii) is the Section 3 label of the comparable domestic pesticide, while the label referenced in Sections 4(D) and 6(D) is an approved state-specific label for a registration granted under this bill. References to a "label" throughout the bill should clearly make this distinction.

Second, I recommend adding definitions or changing the language throughout the bill to differentiate more clearly primary registrants (holders of the Section 3 registration of the comparable domestic pesticide) from state registrants of a Canadian product for purposes of this bill.

American farmers have proven repeatedly that they can produce the safest, highest quality food in the world. However, in order to survive economically and compete in today's markets, they need to be able to operate on a level playing field with their competitors. Unfortunately, American farmers are not competing on a level playing field for pesticides. Instead, they compete in a free market with their outputs, while being forced to purchase pesticide inputs in a segmented, unfair and often higher-priced market. This bill provides an avenue for American farmers to purchase pesticides at prices now only available to their Canadian counterparts. Therefore, I would urge you to pass Senate Bill 532.