[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
COMMODITY IN FOCUS: STRESS IN COTTON COUNTRY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
GENERAL FARM COMMODITIES
AND RISK MANAGEMENT
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
DECEMBER 9, 2015
__________
Serial No. 114-36
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Printed for the use of the Committee on Agriculture
agriculture.house.gov
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COMMITTEE ON AGRICULTURE
K. MICHAEL CONAWAY, Texas, Chairman
RANDY NEUGEBAUER, Texas, COLLIN C. PETERSON, Minnesota,
Vice Chairman Ranking Minority Member
BOB GOODLATTE, Virginia DAVID SCOTT, Georgia
FRANK D. LUCAS, Oklahoma JIM COSTA, California
STEVE KING, Iowa TIMOTHY J. WALZ, Minnesota
MIKE ROGERS, Alabama MARCIA L. FUDGE, Ohio
GLENN THOMPSON, Pennsylvania JAMES P. McGOVERN, Massachusetts
BOB GIBBS, Ohio SUZAN K. DelBENE, Washington
AUSTIN SCOTT, Georgia FILEMON VELA, Texas
ERIC A. ``RICK'' CRAWFORD, Arkansas MICHELLE LUJAN GRISHAM, New Mexico
SCOTT DesJARLAIS, Tennessee ANN M. KUSTER, New Hampshire
CHRISTOPHER P. GIBSON, New York RICHARD M. NOLAN, Minnesota
VICKY HARTZLER, Missouri CHERI BUSTOS, Illinois
DAN BENISHEK, Michigan SEAN PATRICK MALONEY, New York
JEFF DENHAM, California ANN KIRKPATRICK, Arizona
DOUG LaMALFA, California PETE AGUILAR, California
RODNEY DAVIS, Illinois STACEY E. PLASKETT, Virgin Islands
TED S. YOHO, Florida ALMA S. ADAMS, North Carolina
JACKIE WALORSKI, Indiana GWEN GRAHAM, Florida
RICK W. ALLEN, Georgia BRAD ASHFORD, Nebraska
MIKE BOST, Illinois
DAVID ROUZER, North Carolina
RALPH LEE ABRAHAM, Louisiana
JOHN R. MOOLENAAR, Michigan
DAN NEWHOUSE, Washington
TRENT KELLY, Mississippi
______
Scott C. Graves, Staff Director
Robert L. Larew, Minority Staff Director
______
Subcommittee on General Farm Commodities and Risk Management
ERIC A. ``RICK'' CRAWFORD, Arkansas, Chairman
FRANK D. LUCAS, Oklahoma TIMOTHY J. WALZ, Minnesota,
RANDY NEUGEBAUER, Texas Ranking Minority Member
MIKE ROGERS, Alabama CHERI BUSTOS, Illinois
BOB GIBBS, Ohio GWEN GRAHAM, Florida
AUSTIN SCOTT, Georgia BRAD ASHFORD, Nebraska
JEFF DENHAM, California DAVID SCOTT, Georgia
DOUG LaMALFA, California JIM COSTA, California
JACKIE WALORSKI, Indiana SEAN PATRICK MALONEY, New York
RICK W. ALLEN, Georgia ANN KIRKPATRICK, Arizona
MIKE BOST, Illinois
RALPH LEE ABRAHAM, Louisiana
(ii)
C O N T E N T S
----------
Page
Conaway, Hon. K. Michael, a Representative in Congress from
Texas, opening statement....................................... 4
Crawford, Hon. Eric A. ``Rick'', a Representative in Congress
from Arkansas, opening statement............................... 1
Prepared statement........................................... 2
Walz, Hon. Timothy J., a Representative in Congress from
Minnesota, opening statement................................... 3
Witnesses
Stephens, Shane, Vice Chairman, National Cotton Council,
Greenwood, MS.................................................. 5
Prepared statement........................................... 6
Submitted question........................................... 54
Reed, J.D., Nathan B., Arkansas State Chairman, American Cotton
Producers, Marianna, AR........................................ 10
Prepared statement........................................... 12
Submitted question........................................... 54
Holladay, Shawn L., Producer Board Member, National Cotton
Council, Lubbock, TX........................................... 15
Prepared statement........................................... 17
Submitted questions.......................................... 54
Wannamaker, Kendall ``Kent'' W., President, Southern Cotton
Growers, Saint Matthews, SC.................................... 20
Prepared statement........................................... 21
Submitted question........................................... 55
Michael, Cannon, Producer Board Member, National Cotton Council,
Los Banos, CA.................................................. 25
Prepared statement........................................... 27
Submitted question........................................... 55
Wright, Mike, Executive Vice President, City Bank Texas, Lubbock,
TX............................................................. 33
Prepared statement........................................... 34
Submitted questions.......................................... 56
Submitted Material
Smith, Dan, Member, Board of Directors, Texas Farm Bureau,
submitted statement............................................ 53
COMMODITY IN FOCUS: STRESS IN COTTON COUNTRY
----------
WEDNESDAY, DECEMBER 9, 2015
House of Representatives,
Subcommittee on General Farm Commodities and Risk
Management,
Committee on Agriculture,
Washington, D.C.
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 1300 of the Longworth House Office Building, Hon. Eric A.
``Rick'' Crawford [Chairman of the Subcommittee] presiding.
Members present: Representatives Crawford, Lucas,
Neugebauer, Austin Scott of Georgia, Allen, Abraham, Conaway
(ex officio), Walz, Bustos, Graham, Ashford, David Scott of
Georgia, Costa, Kirkpatrick, and Vela.
Staff present: Bart Fischer, Callie McAdams, Haley Graves,
Matt Schertz, Mollie Wilken, Skylar Sowder, Anne Simmons,
Matthew MacKenzie, Mike Stranz, Nicole Scott, and Carly
Reedholm.
OPENING STATEMENT OF HON. ERIC A. ``RICK'' CRAWFORD, A
REPRESENTATIVE IN CONGRESS FROM ARKANSAS
The Chairman. This hearing of the Subcommittee on General
Farm Commodities and Risk Management, entitled, Commodity in
Focus: Stress in Cotton Country, will come to order.
As most of you are aware, we have a very serious situation
unfolding in the Cotton Belt right now. The purpose of this
hearing is to hear from the folks who are directly affected on
the frontlines.
I think it is important that we hear from the folks on this
panel as they articulate how difficult the circumstances are
right now and what may lie in store if mitigating action is not
taken soon.
Whether you hail from cotton country or not, each Member of
this Committee can relate to what is unfolding in the Cotton
Belt by imagining the exact same conditions unfolding with
respect to the major crop grown in your part of the country,
the economic lifeblood of your communities.
In the not too distant past, we lost to China most of what
was once the largest manufacturing sector in America, our
textile industry. Now, I believe we are in grave danger of
losing the vast majority of our production to China, India, and
other countries that are employing anti-competitive trade
practices that no American farmer can match.
Every farmer in America deals in varying degrees with high
and rising foreign subsidies and tariffs. Every farmer in
America is struggling with low prices and rising inputs. And,
every farmer in America has at one time or another been dealt a
blow by Mother Nature. Some farmers, including many in the
Cotton Belt, have suffered blow after blow for several years in
a row now.
But what distinguishes the cotton farmer right now from his
brethren who grow other staple crops is the fact that the
cotton farmer is trying to weather all of these things at once,
most in their severest form, and without the benefit of an
effective farm safety net.
I greatly appreciate the efforts of cotton farmers to put
together a policy for cotton lint that would end the WTO
litigation instigated by Brazil. Unfortunately, the current
cotton policy that was put in place last year was entirely
predicated on a functioning world cotton market. But, a
functioning world market is hardly what we have going on today.
I am going to allow our witnesses to describe more fully
what China, India, and other countries are doing and how these
actions are destroying the cotton market and harming U.S.
cotton farmers.
Today, I implore the Secretary to use the authorities that
we have given him in the farm bill to provide critical and
urgent relief by designating cottonseed as an oilseed for
purposes of Price Loss Coverage and Agricultural Risk Coverage.
While I do not believe that this action is a cure for all
that ails, it is still meaningful help that is within the
Secretary's power to provide.
I am very grateful to Secretary Vilsack for taking
administrative actions in many instances in the past in order
to head off a crisis in other parts of farm country. I believe
that the Secretary cares about our nation's farmers and
ranchers, and so I am very hopeful that he and his team will
take action on this important matter.
I know that my friend, Mr. Walz, and Ranking Member
Peterson, do not have a direct dog in this fight. After all,
there is not a lot of cotton grown in Minnesota. But, I know
Mr. Walz believes as I do that agriculture must hang together
or we will certainly hang separately.
So, Mr. Walz, please accept my sincerest gratitude for your
friendship and your help.
[The prepared statement of Mr. Crawford follows:]
Prepared Statement of Hon. Eric A. ``Rick'' Crawford, a Representative
in Congress from Arkansas
As most of you are aware, we have a very serious situation
unfolding in the Cotton Belt right now. The purpose of this hearing is
to hear from the folks who are directly affected on the front lines.
I think it is important that we hear from the folks on this panel
as they articulate how difficult the circumstances are right now and
what may lie in store if mitigating action is not taken soon.
Whether you hail from cotton country or not, each Member of this
Committee can relate to what is unfolding in the Cotton Belt by
imagining that the exact same conditions were unfolding with respect to
the major crop grown in your part of the country, the economic
lifeblood of your communities.
In the not too distant past, we lost to China most of what was once
the largest manufacturing sector in America, our textile industry. Now,
I believe we are in grave danger of losing the vast majority of our
production to China, India, and other countries that are employing
anti-competitive trade practices that no American farmer can match.
Every farmer in America deals in varying degrees with high and
rising foreign subsidies and tariffs. Every farmer in America is
struggling with low prices and rising inputs. And, every farmer in
America has at one time or another been dealt a blow by Mother Nature.
Some farmers, including many in the Cotton Belt, have suffered blow
after blow for several years in a row now.
But what distinguishes the cotton farmer right now from his
brethren who grow other staple crops is the fact that the cotton farmer
is trying to weather all of these things at once, most in their
severest form, and without the benefit of an effective farm safety net.
I greatly appreciate the efforts of cotton farmers to put together
a policy for cotton lint that would end the WTO litigation instigated
by Brazil. Unfortunately, the current cotton policy that was put in
place last year was entirely predicated on a functioning world cotton
market. But, a functioning world market is hardly what we have going on
today.
I will allow our witnesses to describe more fully what China,
India, and other countries are doing and how these actions are
destroying the cotton market and harming U.S. cotton farmers.
Today, I implore the Secretary to use the authorities that we have
given him in the farm bill to provide critical and urgent relief by
designating cottonseed as an oilseed for purposes of Price Loss
Coverage and Agricultural Risk Coverage.
While I do not believe that this action is a cure for all that
ails, it is still meaningful help that is within the Secretary's power
to provide.
I am very grateful to Secretary Vilsack for taking administrative
actions in many instances in the past in order to head off a crisis in
other parts of farm country. I believe that the Secretary cares about
our nation's farmers and ranchers. And, so I am very hopeful that he
and his team will take action on this important matter.
I know that my friend, Mr. Walz, and Ranking Member Peterson, do
not have a direct dog in this fight. After all, there is not a lot of
cotton grown in Minnesota. But, I know Mr. Walz believes as I do that
agriculture must hang together or hang separate.
So, Mr. Walz, please accept my sincerest gratitude for your
friendship and your help.
I would now recognize my good friend, Mr. Walz, for his opening
statement.
The Chairman. And I would now like to recognize my good
friend from Minnesota, Mr. Walz, for his opening statement.
OPENING STATEMENT OF HON. TIMOTHY J. WALZ, A REPRESENTATIVE IN
CONGRESS FROM MINNESOTA
Mr. Walz. Well, thank you, Chairman Crawford. And I think
it is obvious to all of you, you have no better friend and
advocate than the Chairman on this issue, and he has been a
champion of making sure we are educated, and this is another
step of putting the experts in front of us.
I appreciate the hearing. It is another example that the
Chairman of the full Committee, Mr. Conaway, is here, another
example this is a bipartisan Committee that actually is
interested in moving things forward, and that is the nature of
how we get together here. The Chairman has mentioned it, not a
lot of cotton in southern Minnesota, but as a kid who grew up
chocking cockleburs in cornfields, there is probably not a lot
of difference between chocking pigweed and cotton. We all have
those common interests, and we have proven this, that it has
become more and more difficult to hold together this coalition
to get things done. The Chairman on this Committee did that in
a--what I considered an assault towards one of the basic safety
net features in crop insurance, and did a masterful job of
making sure we keep that important program intact.
So again, I appreciate it. You being here is critically
important because this is about education. This is the way that
Congress is supposed to work. I look forward to hearing from
you when these issues come up, whether it is cottonseed oil or
those things, a lot of us, even Members of Congress, certainly
producers up in my neck of the woods might not understand what
you are going through, but at one time or another, we will all
go through it. And as these market fluctuations, these things
that are happening, the practical things that we can do need to
be implemented.
So thank you all for taking the time. I am really looking
forward for your testimony, and please know it does make a big
difference.
I yield back.
The Chairman. I thank the gentleman. The chair would
request that other Members submit their opening statements for
the record so the witnesses may begin their testimony, and to
ensure that there is ample time for questions.
The chair would like to remind Members that they will be
recognized for questioning in order of seniority for Members
who were present at the start of the hearing. After that,
Members will be recognized in order of their arrival. I
appreciate the Members' understanding.
Witnesses are reminded to limit their oral presentations to
5 minutes. All written statements will be included in the
record.
I want to thank all of you for being here. I will introduce
you individually here in just a minute, but just in reference
to my comments about your 5 minute testimony, in the interest
of our six panelists, look at the traffic light in front of
you. When it is green, you are good to go. When it is yellow,
put your foot on the gas. And when it is red, you are going to
need to stop, because we want to make sure that we do get an
opportunity to address each of you and give our Members ample
opportunity. So be looking at the traffic light.
Again, I want to thank our witnesses at the table, Mr.
Shane Stephens who is the Vice Chairman of the National Cotton
Council of Greenwood, Mississippi; Mr. Nathan Reed who is the
Arkansas State Chairman for American Cotton Producers,
Marianna, Arkansas; Mr. Shawn Holladay, Producer Board Member,
National Cotton Council, from Lubbock, Texas; Mr. Kendall
Wannamaker, President, Southern Cotton Growers, from Saint
Matthews, South Carolina; and as Mr. Costa hasn't made it in
yet, I will introduce Mr. Cannon Michael, Producer Board
Member, National Cotton Council, Los Banos, California; and Mr.
Mike Wright, Executive Vice President, City Bank Texas,
Lubbock, Texas.
And before I introduce the individual panelists, I would
defer to the Chairman of the full Committee, if he has any
statement he would like to make at this time.
OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE
IN CONGRESS FROM TEXAS
Mr. Conaway. Well, I thank you, Chairman.
No statement, other than to welcome our witnesses, and
particularly Shawn Holladay and his wife, Julie, from Lamesa,
Texas, and who I ask to vote for me every 2 years. I have to be
particularly nice to them.
I look forward to our witnesses' testimony, and I yield
back.
The Chairman. Thank you, Mr. Chairman.
I would like to welcome our witnesses to the table. Mr.
Shane Stephens, you are recognized for 5 minutes.
STATEMENT OF SHANE STEPHENS, VICE CHAIRMAN, NATIONAL COTTON
COUNCIL, GREENWOOD, MS
Mr. Stephens. Thank you. I would like to thank Chairman
Crawford, Ranking Member Walz, and the Members of the
Subcommittee for the opportunity to present the views of the
National Cotton Council regarding the current economic
situation in the U.S. cotton industry.
Cotton is a cornerstone of the rural economy in the 17
cotton-producing states, stretching from Virginia to
California. Unfortunately, the current economic situation is
chipping away at that cornerstone, and threatening to cause
long-term and potentially irreversible damage to the industry
and the associated infrastructure.
Acreage is down in all regions, and total U.S. plantings
are the lowest since 1983. Losses in cotton area translate into
pressure on associated businesses, infrastructure, and rural
economies. Research has affirmed the multiplier effects on
rural economies when cotton acres decline.
A thriving cotton industry is critical to the success of
many local economies. World cotton demand remains ten percent
below the peak observed in 2006. Reduced consumption is largely
the result of the tremendous increase in polyester use. Excess
production capacity, in many cases fueled by foreign government
support, is contributing to polyester prices below 50 per
pound in key Asian markets.
The prospect of higher cotton prices is further challenged
by world stocks-to-use ratio hovering at 100 percent. The
increase in stocks was the direct result of policies in place
in China from 2011 through 2013. During those years, China
supported its cotton farmers by purchasing vast amounts of its
production into government reserves at prices well above the
world market. Realizing that continually building stocks was
not a long-term solution, China instituted a target price
program in 2014 at roughly $1.45 per pound.
Certainly, China is not the only country to support cotton
production with government programs. Recent testimony presented
by the National Cotton Council to the House Agriculture
Committee provides a more exhaustive review of policies in
place in other countries. According to a 2014 ICAC report,
international cotton production is supported at a level almost
four times the level provided U.S. cotton farmers. With the
lowest U.S. acreage in more than 30 years, the smallest exports
in 15 years, and cotton prices at their lowest level since the
2009 recession, economic pressure is mounting, with revenue
down 34 percent from the average levels of 2010 through 2013.
Given the cumulative impacts of the past 2 years, producers
are increasingly concerned about securing financing for the
2016 crop.
Commodity markets are cyclical and low prices are the cure
for low prices. However, in the current cycle, the cure may not
come in time to sustain many producers' businesses and local
economies relying on cotton.
Futures markets suggest that a relatively flat price
situation is likely at least through the 2017 crop, if not
longer. To provide much-needed relief, the industry is asking
USDA to designate cottonseed as an other oilseed for the
purpose of the Price Loss Coverage and Agricultural Risk
Coverage Programs.
The 2014 Farm Bill includes statutory authority for the
USDA to designate other oilseeds for inclusion in farm bill
programs. The infrastructure for the cotton industry will
continue to shrink unless there is a stabilizing policy for
cotton to help sustain the industry in periods of financial
pressures such as currently exist.
In order to provide timely relief, the Secretary is
requested to implement the program for the 2015 crop.
Streamlined implementation can be achieved by offering the
option to receive cottonseed PLC/ARC payments on generic base
attributed to cottonseed, without penalizing producers who made
other program planning decisions. For 2016 and beyond, the U.S.
cotton industry will work with the Secretary to develop
comprehensive provisions of the PLC/ARC Programs.
Numerous lending institutions have expressed their support
for the proposal through letters to the Secretary. There is a
similar letter being circulated among Members of the House, and
we thank those of you who have signed, and encourage those who
have not yet signed to please do so. The cotton industry
generates annual economic activity in excess of $100 billion.
Implementation of the cottonseed proposal will play a critical
role in protecting that economic activity.
We understand the significant request represented by the
proposal, but we believe the current economic condition
requires immediate action. Support provided by cottonseed
programs should be viewed in the same manner as other farm
program spending, which is an investment in not only production
agriculture, but the rural economy.
Thank you, and I would be happy to answer questions at the
appropriate time.
[The prepared statement of Mr. Stephens follows:]
Prepared Statement of Shane Stephens, Vice Chairman, National Cotton
Council, Greenwood, MS
I would like to thank Chairman Crawford, Ranking Member Walz, and
the Members of the Subcommittee for the opportunity to present the
views of the National Cotton Council regarding the current economic
situation in the U.S. cotton industry. My name is Shane Stephens, and I
am the Vice President of Cotton Services and Warehousing for Staplcotn
Cooperative in Greenwood, Mississippi. I currently serve as Vice
Chairman of the National Cotton Council.
The National Cotton Council (NCC) is the central organization of
the United States cotton industry. Its members include producers,
ginners, merchants, cooperatives, warehousers, textile manufacturers
and cottonseed processors and merchandisers. Cotton's scope and
economic impact extend well beyond the approximately 19,000 farmers
that plant between 8 and 12 million acres of cotton each year. Taking
into account diversified cropping patterns, cotton farmers annually
cultivate more than 30 million acres of land. Processors and
distributors of cotton fiber and downstream manufacturers of cotton
apparel and home furnishings are located in virtually every state.
Nationally, farms and businesses directly involved in the production,
distribution and processing of cotton employ almost 200,000 workers and
produce direct business revenue of more than $27 billion. Accounting
for the ripple effect of cotton through the broader economy, direct and
indirect employment surpasses 420,000 workers with economic activity
well in excess of $100 billion.
Cotton is a cornerstone of the rural economy in the 17 cotton-
producing states stretching from Virginia to California. Unfortunately,
the current economic situation is chipping away at that cornerstone and
threatening to cause long-term and potentially irreversible damage to
the industry and the associated infrastructure. In response to weaker
price conditions for cotton relative to competing crops, U.S. producers
responded with plantings of just 8.5 million acres of cotton in 2015
(based on the November 2015 NASS estimates). Acreage is down in all
regions, and the U.S. total is the lowest since 1983, which was a year
when acreage was sharply reduced by government programs that encouraged
land idling.
Losses in cotton area translate into pressure on associated
businesses, infrastructure and rural economies. For example, USDA
reports that only 601 gins operated in 2014, down 33% over the past
decade. Researchers at Louisiana State University \1\ have affirmed the
multiplier effects on rural economies when cotton acreage declines. A
thriving cotton economy is critical to the success of many local
economies.
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\1\ http://ageconsearch.umn.edu/bitstream/46823/1/
Fannin_Paxton_Valco_SAEA_
2009_sub_ver.pdf.
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As the 2015 harvest winds down, cotton futures prices trading in
the low to mid 60 range are at the lowest levels since 2009. Concerns
about world demand, burdensome global stocks, a stronger U.S. dollar
and general price pressure in commodity markets are playing a factor in
the current price environment. The effects of these factors are evident
in the latest estimates of cotton production and use.
To understand the challenges facing cotton farmers, it is important
to review the dynamics at work in global cotton demand. USDA estimates
world mill use at 111.6 million bales for the current 2015 marketing
year. The estimate represents an increase of approximately 1% from 2014
mill use, and mill use is expected to exceed world production for the
first time in 6 years. However, even with very modest growth, world
cotton demand remains almost 13 million bales below the peak demand
observed in 2006. Slumping demand is largely the result of the
tremendous increase in polyester use. During the 2006-2015 period when
cotton mill use fell by 13 million bales, polyester's production
capacity, primarily located in China, increased by 145 million bales.
Excess production capacity, in many cases fueled by government support,
is contributing to polyester prices in Asian markets below 50 per
pound. While consumers continue to express their preference for cotton
products, the tremendous increase in low-priced polyester production
has created extraordinary hurdles for increasing cotton demand.
For cotton farmers, the prospect of higher cotton prices is further
challenged by a world stocks-to-use ratio that exceeded 100% in the
2014 marketing year. Current stocks-to-use ratios stand in stark
contrast to historical stocks that generally ranged between 50 and 60
percent of total use. The recent increase in stocks was the direct
result of policies in place in China for the 2011 through 2013 crops.
During those years, China supported its cotton farmers by purchasing
vast amounts of its production into government reserves at prices well
above the world market. With most domestic production locked in
reserves, China imported annually between 14 and 24 million bales from
the world market.
A number of significant outcomes resulted from China's policy of
building reserves. First, purchasing the majority of the domestic crop
at the support level essentially established a floor on internal cotton
prices. By late 2011, China's cotton prices were well above
international cotton prices and also well above polyester prices.
China's mill use of cotton suffered as a result of uncompetitive
prices. China's cotton area was generally stable between 12 and 14
million acres.
However, it became clear that continually building stocks was not a
long-term solution. After 3 years of amassing more than 50 million
bales of cotton in government reserves, China instituted a target price
program for the 2014 crop at a level of roughly $1.45 per pound. The
new target price program was applicable to the western province of
Xinjiang, while the remaining cotton-producing provinces received a
direct subsidy of $0.15 per pound. The target price program was
continued for the 2015 crop, although the target price was reduced by
3.5% when measured in local currency. The announced target price
equated to approximately $1.40 per pound based on exchange rates
prevailing at planting time. In another change from the 2014 crop, no
direct support was announced for the eastern provinces. As a result,
cotton area in those provinces has sharply declined.
China is not the only country to support cotton production with
government programs. Recent testimony \2\ presented by the National
Cotton Council to the House Agriculture Committee provides a more
exhaustive review of policies in place in other countries. With 1 out
of every 4 bales of the global cotton crop now produced in India, their
government programs can have a significant impact on the world market.
The Cotton Corporation of India, a government-run procurement and
distribution company, is responsible for administering the price
support program. The Minimum Support Price (MSP) is announced by the
government each year. Between 2010 and 2015, the MSP for medium staple
cotton increased by 52%, while the MSP for long staple cotton increased
by 42%. The MSP is announced on the basis of seed cotton. Converting to
a lint-equivalent basis requires an assumption about turn-out rates
when the cotton is ginned. Assuming gin turn-out rates between 35% and
40%, current minimum prices in India equate to between $0.70 and $0.80
per pound.
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\2\ http://agriculture.house.gov/uploadedfiles/
10.21.15_adams_testimony.pdf.
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While U.S. cotton policy is a focal point in international circles,
there are ample studies and reports that document the various forms of
government support present in most cotton-producing countries. While
U.S. support for cotton has been declining in recent years, government
intervention in other countries has been increasing. With reduced
support in the 2014 Farm Bill, U.S. cotton farmers are competing with
cotton producers in other countries that are benefiting from higher
support levels. Two recent reports illustrate the comparative support
rates across selected cotton producing countries. In June 2015
testimony to the House Agriculture Committee, Dr. Darren Hudson with
Texas Tech University noted that the marketing loan in the United
States was below support prices in China, India, Pakistan, Brazil, and
Uzbekistan.\3\
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\3\ http://agriculture.house.gov/uploadedfiles/
hudson_testimony.pdf.
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In a November 2014 report,\4\ the International Cotton Advisory
Committee (ICAC) reported that average direct assistance to cotton
production across all countries was $0.26 per pound. For the United
States, ICAC estimated the average support at $0.07 per pound. Direct
assistance to U.S. cotton producers was well below levels provided in
other countries. It should be noted that the ICAC study was based on
the 2013 crop year, which was the final year before the significant
changes implemented by the new farm legislation.
---------------------------------------------------------------------------
\4\ International Cotton Advisory Committee. Production and Trade
Policies Affecting the Cotton Industry. November 2014. Washington, D.C.
---------------------------------------------------------------------------
The studies underscore the challenging conditions facing U.S.
producers with international cotton production supported at a level
almost four times the level of support in the United States.
Unfortunately, current proposals submitted within the World Trade
Organization (WTO) would lead to a further imbalance in the situation.
The U.S. cotton industry is steadfastly opposed to any proposals
considered in the lead-up to or during the December WTO Ministerial
that further commits the U.S. to additional changes in cotton policy. I
encourage this Committee and our negotiators to hold firmly to the
position that agricultural markets have changed since 2005, and that
the U.S. cotton industry has evolved in ways that far exceed the
demands of the Hong Kong Mandate. A cotton specific ``solution'' in the
WTO negotiations is no longer necessary.
I bring these issues to the attention of the Subcommittee because
of the critical influence of international markets in the financial
conditions of U.S. cotton farmers. In recent years, approximately 75%
of U.S. production enters export channels. Policies that directly
affect international production, consumption and trade have a direct
bearing on U.S. market prices. Currently, the strength of the U.S.
dollar is a limiting factor in exports. China, already covered in some
depth, remains the largest cotton importer although they are projected
to significantly reduce imports given the current balance between
supply and demand. Another obstacle impeding U.S. exports is an ongoing
dumping investigation conducted by the Turkish Government.
In recent years, Turkey has been the second largest export customer
for U.S. cotton. For the past year, Turkish authorities have been
investigating U.S. cotton exporting companies to determine if U.S.
cotton is being dumped into the Turkish market. An affirmative finding
by Turkish officials would mean that an anti-dumping duty would be
applied to U.S. cotton imports, while imports from other countries
would remain duty free. A duty would undermine the competitiveness of
U.S. cotton and directly impact prices received by U.S. cotton farmers.
The uncertainty of the ongoing investigation is already dampening
interest in U.S. cotton by Turkish mills, as current sales for this
marketing year are just \1/3\ of year-ago levels.
The Turkish Government self-initiated the investigation shortly
after the U.S. announced anti-dumping/countervailing duty (AD/CVD)
investigations of Turkish steel pipe. The Minister of Economy was
quoted in Turkish press as saying Turkey would launch three
investigations for every one the U.S. aimed at Turkish products. The
document produced to support the initiation of the investigation is
largely redacted, so the information upon which the allegation of
dumping is based is not available for parties to rebut. Many observers
believe that Turkey seeks to damage the U.S. cotton industry by using
the AD investigation not to benefit their domestic industry but out of
retribution for the U.S. steel cases. This is just as much in
contravention of the WTO as using trade barriers out of protectionist
intent.
It is against the backdrop of these challenges that 2015 U.S.
exports projected at 10.2 million bales would be the lowest in 15
years. Of course, the demand base for U.S. cotton is much different
than 15 years ago. When cotton exports last fell short of 10 million
bales in 2000, the U.S. textile industry consumed almost 9 million
bales. Unfortunately, that is no longer the case.
Between 1997 and 2008, the amount of cotton used by U.S. textile
mills experienced a precipitous decline, falling from 11.3 million
bales down to 3.5 million bales. Since 2008, the U.S. textile industry
has stabilized, and there has even been a modest increase in cotton
consumption with mill use for the current marketing year expected to
reach 3.7 million bales. In recent years, the U.S. industry has
benefited from new investments, and textile companies are building new
spinning operations in the United States.
One factor contributing to the renewed optimism in the U.S.
industry is the continued benefits of the Economic Adjustment
Assistance Program (EAAP), first authorized in the 2008 Farm Bill.
Recipients must agree to invest the proceeds in equipment and
manufacturing plants, including construction of new facilities as well
as modernization and expansion of existing facilities. EAAP funds have
allowed investments in new equipment and new technology, thus allowing
companies to reduce costs, increase efficiency and become more
competitive against imported textile products. I would like to thank
the Members of this Subcommittee for their work in the reauthorization
of the program in the 2014 Farm Bill. The continuing support of the
program allows U.S. textile mills to make the new investments necessary
to remain competitive.
For the U.S. textile industry, the Export-Import (Ex-Im) Bank plays
an important role in providing financing. Members of the Subcommittee
are likely aware of the amount of U.S. cotton production that enters
export channels, but it is also the case that the majority of yarn and
fabric produced by our textile manufacturers is exported. The Ex-Im
Bank plays a critical role in financing exports of textile products. We
commend Congress for taking steps to reauthorize the Ex-Im Bank.
A final issue to bring to your attention, particularly as it
relates to the U.S. textile industry, is the Trans-Pacific Partnership
(TPP) agreement. Overall, the agreement provides for equity and
reciprocity for many aspects of trade in cotton fiber between the
United States and the other TPP countries. With respect to cotton fiber
imports into the United States, the agreement provides for elimination
of import duties within 10 years. The duties and quotas applicable to
U.S. cotton fiber exports to TPP countries appear to be eliminated
immediately.
The cotton industry cannot evaluate any free trade agreement
without consideration of the provisions of the agreement that affect
trade in cotton textiles. The U.S. cotton industry has long held the
concern that a TPP agreement that includes Vietnam is not positive for
the U.S. textile industry. Much of the concern stems from granting
additional access to the U.S. textile market to a centrally-planned
economy that has textile companies with a history of contract defaults.
With those overarching concerns in mind, U.S. negotiators appear to
have taken steps to mitigate the negative impacts. The agreement
generally contains acceptable rules of origin for textiles and limited
exceptions that allow for a well-balanced outcome for all parties as
well as our partners in the Western Hemisphere. However, there are
special provisions with Vietnam and Malaysia that can be detrimental to
the U.S. cotton industry if not appropriately implemented. Strong
customs enforcement is of critical importance to ensure that the
provisions of the agreement are adhered to.
The 2014 Farm Bill included a number of significant changes, not
only for cotton policy, but on a more general basis. The unified
payment limit that now includes marketing loan gains has been extremely
burdensome to implement and created additional uncertainty for cotton
producers and merchandisers. It is our hope that a reauthorization of
generic certificates will provide relief from this provision.
Another issue creating challenges in the marketing of cotton is the
requirement for producers to file a CCC-941 Average Adjust Gross Income
(AGI) Certification and Consent to Disclosure of Tax Information form
on an annual basis. The requirement for each producer to file a CCC-941
every program year has caused a major interruption in the orderly flow
of marketing cotton. The overwhelming majority of producer's average
adjusted gross income is less than $900,000. An alternative would be to
require that filing this form be done on a one-time basis and remain in
effect for the life of the farm bill. Then require the IRS to annually
audit and report to FSA if the producer's AGI exceeds $900,000. Since
the determination of the average AGI is performed on the 3 years
preceding the previous crop year, IRS should be able to report any
changes in AGI status on producers prior to any payments for the crop
year. As it works today, IRS reviews every producer every year. Why
make the producer re-file the same form each year? This would be a more
efficient use of all involved in the process. Any assistance you can
bring to alleviate the huge burden this puts on all cooperatives and
marketers handling this issue will be greatly appreciated.
Mr. Chairman, the National Cotton Council sincerely appreciates the
opportunity to provide an update on the economic situation of the U.S.
cotton industry. With the lowest U.S. acreage in more than 30 years,
the smallest exports in 15 years, and cotton prices at their lowest
level since the 2009 recession, economic pressure is mounting with
revenue down 34% from the average levels of 2010 to 2013. Lower
revenues generated by an acre of cotton lint and cottonseed production
come at a time when costs of production remain at elevated levels. The
differential between costs and market revenue is the largest in the
past 10 years. Given the cumulative impacts of 2014 and 2015, producers
are increasingly concerned about securing production financing for the
2016 crop.
We understand that commodity markets are cyclical, and low prices
are the cure for low prices. However, in the current cycle, the cure
may not come in time to sustain many producers and businesses reliant
on cotton. Futures markets suggest that a relatively flat price
situation could prevail for 2016 and 2017. Cotton prices remain
pressured by global stocks in excess of 100 million bales with more
than 60 million bales held by China. In the face of increased
government support in other countries, the U.S. industry is requesting
USDA to designate cottonseed as an `other oilseed' for the purpose of
the Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC)
programs authorized in the 2014 Farm Bill.
The 2014 Farm Bill (and previous farm bills) includes statutory
authority for USDA to designate `other oilseeds' for purposes of farm
bill programs. The infrastructure for the U.S. cotton industry (gins,
warehouses, marketing co-ops and merchants, and cottonseed crushers and
merchandizers) will continue to shrink unless there is a stabilizing
policy for cotton to help sustain the industry in periods of low prices
such as currently exists. This program will be important to ensure
continued crop diversity in many parts of the Cotton Belt and the
continued economic activity in rural areas.
Cotton is the only traditional `program' crop that does not have
any fixed price protection policy delivered by FSA in the 2014 Farm
Bill. While this was the result of the WTO case brought by Brazil
challenging U.S. cotton policies and the export credit guarantee
programs from more than a decade ago, there still exists an ability and
opportunity to provide support for a major co-product of cotton
production--cottonseed. It is also important to remind the Subcommittee
that more than 80% of retaliatory authority given to Brazil was due to
export credit programs.
In order to provide timely relief from current financial pressures,
the Secretary is requested to implement the program as early as the
2015 crop. For the 2015 crop, streamlined implementation can be
achieved by offering a producer the option to receive cottonseed PLC/
ARC payments on cottonseed acres attributed to generic base without
penalizing producers who made other covered commodity program planting
decisions. For the 2016 crop and beyond, the U.S. cotton industry will
work with the Secretary to develop comprehensive provisions of the PLC/
ARC programs.
Numerous lending institutions have expressed their support for the
proposal through letters to the Secretary. We understand that a letter
is being circulated among Members of the House, and we thank those of
you who have signed the letter and encourage those who have not yet
signed to please do so. The cotton industry understands the significant
request represented by this proposal. Such a program does not come
without an additional workload for USDA and the potential for
additional spending. However, spending under a cottonseed program
should be viewed in the same manner as other farm program spending,
which is an investment in not only production agriculture but the rural
economy. As previously noted in my testimony, the cotton industry
generates annual economic activity in excess of $100 billion.
Implementation of the cottonseed proposal will play a critical role in
protecting that economic activity.
Thank you, and I will be happy to answer any questions at the
appropriate time.
The Chairman. Thank you, Mr. Stephens.
I now want to recognize a constituent of mine who has made
the trip up here, and also want to congratulate you and your
family on your recent award for Arkansas Farm Family of the
Year. Thank you for being here. I now recognize Mr. Nathan
Reed, for 5 minutes.
STATEMENT OF NATHAN B. REED, J.D., ARKANSAS STATE CHAIRMAN,
AMERICAN COTTON PRODUCERS, MARIANNA, AR
Mr. Reed. Chairman Crawford, Ranking Member Walz, and
Members of the Subcommittee, thank you for the opportunity to
testify today. My name is Nathan Reed and I live and farm in
Marianna, Arkansas.
Cotton acreage in the mid-South region of Arkansas,
Louisiana, Mississippi, Missouri, and Tennessee is 980,000
acres, the lowest amount in several decades, and down from 4
million acres just 10 years ago. A decline of this magnitude is
having severe consequences for the entire cotton industry. I
fear our region is at a tipping point with regard to cotton
acreage and the remaining infrastructure.
If some stabilizing policy is not implemented very soon,
cotton acres are likely to continue their decline to the point
that the remaining infrastructure cannot survive.
Production costs have continuously increased over the last
decade. According to the University of Arkansas, average
production costs for irrigated cotton have increased by $147
per acre since 2008, while current cotton prices are largely
unchanged. With low cotton prices and tight margins, absent
above-average yields, producers are facing negative cash flows.
The importance of cottonseed continues to grow; now
representing 25 percent of the total value from an acre of
cotton production. To address the current economic crisis, I
join the other panelists, the National Cotton Council, and 125
mid-South ag lenders in supporting the use of administrative
authority granted to USDA to designate cottonseed as an other
oilseed for farm program participation.
Another significant concern is USDA's current rulemaking
regarding the determination of whether an individual is
actively engaged in a farming operation. I want to emphasize
the very narrow scope of the farm bill provision that resulted
in this rulemaking process. The farm bill clearly stipulates
that no changes in the actively engaged provisions will apply
to individuals or entities comprised solely of family members.
Further, the bill only requires the Secretary to define the
term significant contribution of active personal management.
Beyond this, no other changes are required by statute. The
Secretary has discretion if deemed appropriate to establish
limits on the number of individuals that can qualify based on
active personal management, but again, this is not required by
law. We urge this Subcommittee to work closely with USDA to
ensure any changes to actively engaged provisions adhere to the
intent of the farm bill. I also want to urge that no other
changes or modifications are made relative to program
eligibility, including implementation of the spousal rule.
EPA's Spill Prevention, Control, and Countermeasures Rule
is a prime example of an ongoing regulation that is
unnecessarily burdening farmers and adding costs to address a
problem that does not exist. Chairman Crawford, we are
extremely appreciative of you leading the efforts to rein-in
this regulation and ensure it is a more realistic and cost-
effective rule.
One of the largest production costs across the Cotton Belt
is managing herbicide-resistant weeds. Currently, there are two
new cotton traits to help manage weed resistance that have been
approved by the USDA, but are still awaiting label approval by
the EPA. We strongly urge this Committee and others in Congress
to engage with the EPA to hold them accountable for the actions
that they are continuing to delay the availability of safe and
effective crop protection products.
I appreciate the Members of this Subcommittee for holding
this timely hearing to review the current conditions facing
U.S. cotton. Feedback from across the industry underscores the
critical importance of policy actions, such as the cottonseed
proposal that can provide stability for our industry. The
current situation in the cotton industry goes beyond the normal
challenges, and is to the breaking point for many producers,
and those in other industry segments.
Thank you for this opportunity, and I will be glad to
respond to any questions at the appropriate time.
[The prepared statement of Mr. Reed follows:]
Prepared Statement of Nathan B. Reed, J.D., Arkansas State Chairman,
American Cotton Producers, Marianna, AR
Introduction
Chairman Crawford, Ranking Member Walz, and Members of the
Subcommittee, thank you for the opportunity to testify today regarding
the current condition of the U.S. cotton industry, the significant
challenges cotton producers face, and what policy changes are needed to
address this worsening situation. My name is Nathan Reed and I farm in
Marianna, Arkansas.
Farm and Background
I am the owner of Nathan B. Reed Farms and Eldon Reed Farms, Inc.
which are row crop operations. I farm approximately 7,000 acres of
rice, cotton, corn, soybeans, and cereal rye in the Delta region of
southeast Arkansas.
Acreage and Infrastructure Impacts
The acreage planted to cotton in the mid-South region of Arkansas,
Louisiana, Mississippi, Missouri, and Tennessee for 2015 is 980,000
acres, the lowest amount in several decades. A decline of this
magnitude is having severe consequences for the entire cotton industry
in the region, from producers, gins, warehouses, marketing
cooperatives, merchants, and cottonseed processors and merchandisers.
This region has the capability to produce some of the highest cotton
yields across the Cotton Belt and has historically been a major area of
cotton production. However, in recent years due to the influence of
many factors, some driven by Federal policies, and some by economics,
acreage has continued to decline. I fear our region is at a tipping
point with regard to cotton acreage and the remaining infrastructure.
If some stabilizing policy is not implemented very soon, cotton acres
are likely to continue their decline to the point that what is left of
our infrastructure cannot survive. As you know, once the infrastructure
of gins, warehouses, and related businesses are gone, they are not
likely to return, making it unlikely cotton production will return to
our region.
Policy Needs
In an effort to address the current economic crisis in the cotton
industry, the National Cotton Council and other cotton industry
organizations have developed a proposal to help bring some stability to
the industry. This proposal is based on the administrative authority
that Congress has provided to USDA in the current and previous farm
bills that allows the Secretary of Agriculture to designate other
oilseeds as eligible for farm program participation. We believe that
cottonseed, which is an important co-product of cotton production,
should be designated as an oilseed and defined as a covered commodity
under this farm bill, making cottonseed eligible for the PLC/ARC
program. The importance of cottonseed continues to grow, as it now
represents about 25% of the total revenue or value from an acre of
cotton production.
It is important to note that the designation we are seeking would
not require any legislative action by Congress and would not reopen the
2014 Farm Bill. The farm bill provides this authority to the Secretary
of Agriculture and we strongly believe the current economic
circumstances of the U.S. cotton industry warrant this action. Without
some stabilizing policy put in place for the cotton industry, given the
current and projected prices and costs of production, we can expect to
see a continued decline in mid-South cotton acres and the associated
infrastructure. As the acreage continues to shrink, our region is
planting more corn and soybeans and this trend will continue. A more
recent development has been the production of peanuts in this region,
and with our productive soils, irrigation capabilities, and the current
farm bill policies, I expect to see further increases of peanut acreage
in the mid-South absent some response to the current cotton economic
situation.
As further evidence of the need for the cottonseed policy, at least
125 lenders across the mid-South region have written to Secretary
Vilsack urging him to take action on the cottonseed proposal to help
address the deteriorating situation. The national Farm Credit Council,
representing all the local farm credit associations, sent a similar
letter outlining the current need for USDA to use whatever authorities
available to assist the industry. Additionally, state farm bureaus
representing four of the five states in the mid-South region have also
written to the Secretary urging him to move forward with the cottonseed
policy.
Costs of Production
Production costs have continuously increased over the last decade.
According to the University of Arkansas extension service, average
production costs for irrigated cotton have increased by $147 per acre
since 2008. With low cotton prices and tight margins, some producers
will likely have negative cash flows in 2015 and 2016. For 2015, the
University of Arkansas extension budgets show a loss of $33 per acre
for center pivot irrigated GLB2 cotton and a loss of $95 per acre for
non-irrigated GLT cotton.
The increase in production costs for the Delta region as reported
by Mississippi State extension is even higher with an average increase
of about $180 per acre since 2008 for the B2RF variety. Mississippi
State published 12 cotton budgets for 2015 based on different
varieties/practice/regions and all showed negative net returns above
total costs for 2015, with an average loss of $67. The University of
Tennessee extension budgets report an average loss of $166 for 2015.
For 2016, the Mississippi State budgets are showing even greater losses
for the Delta and non-Delta regions as compared to 2015. Production
costs for irrigated B2RF cotton are projected to be $65 higher in 2016.
Average losses across all varieties/practices/regions are $90 per acre.
Policy Costs
`Actively Engaged' Rulemaking
One significant policy concern regarding farm bill implementation
is USDA's current rulemaking to modify the parameters used to determine
whether an individual is `actively engaged' in a farming operation and
eligible to participate in farm programs. While we have concerns about
the potential unintended consequences from this rulemaking, we want to
emphasize the very narrow scope of the farm bill provision that
resulted in the `actively engaged' rulemaking. The farm bill clearly
stipulates that no changes in the `actively engaged' provisions will
apply to individuals or entities comprised solely of family members.
Further, the bill only requires the Secretary of Agriculture to define
the term ``significant contribution of active personal management.''
Beyond this, the only other possible change is, if the Secretary
determines it is appropriate, to establish limits on the number of
individuals by farm type that can qualify based on active personal
management. However, this is not a change required by the statute. And
even this provision cannot apply to or impact any individuals or
entities made up solely of family members. We urge this Subcommittee to
continue to work closely with USDA as this rulemaking proceeds to
ensure any changes to `actively engaged' provisions closely adhere to
the narrowly crafted provision in the farm bill.
The NCC has always maintained that effective farm policy must
maximize participation without regard to farm size or income.
Artificially limiting benefits is a disincentive to economic efficiency
and undermines the ability to compete with heavily subsidized foreign
agricultural products. Artificially limited benefits are also
incompatible with a market-oriented farm policy. Arbitrary restrictions
on the contribution of management and labor are out of touch with
today's agricultural operations and would only contribute to
inefficiencies.
Earlier this year, USDA issued the proposed rule on `actively
engaged' and NCC along with numerous other commodity and farm
organizations commented on the proposal. Of the approximately 90
comments received, 26 were from various groups, with 18 of those groups
opposed to the changes and expressing concern about the potential
impacts. We urge USDA to seriously consider the issues raised in these
comments regarding the implications of the proposed rule. It is our
understanding that the final rule is at the Office of Management and
Budget for review, and we strongly ask that the final rule not apply
for the 2016 crop year, given that the 2016 crop year has already
started for fall-planted crops. The final rule should not go into
effect until 2017 at the earliest to allow producers and their families
an opportunity to make the necessary transitions to comply with any new
requirements.
In addition to the `actively engaged' rulemaking, we also want to
ensure that no other changes or modifications are made relative to
program eligibility, including the spousal rule and how USDA implements
this provision.
Regulatory Costs
Spill Prevention, Control, and Countermeasures Rule
The EPA's Spill Prevention, Control, and Countermeasures (SPCC)
rule is a prime example of an ongoing regulation that is unnecessarily
burdening farmers and adding compliance costs to address a problem that
does not exist or a concern that is not realistic. The SPCC rule places
specific requirements on above-ground oil and fuel storage tanks
located on farms. The rule was initially promulgated by the
Environmental Protection Agency (EPA) under the jurisdiction of the
Clean Water Act (CWA) as an attempt to protect navigable waters.
However, the rule lacks a common-sense approach to how best to ensure
natural resources on agricultural land are protected from possible fuel
spills.
Chairman Crawford, we are extremely appreciative of your leading
the efforts to rein in this regulation and ensure it is a more
meaningful, realistic, and cost-effective rule. We are pleased that the
U.S. House has passed both standalone legislation and as part of
broader legislation to address this costly regulation, but we are still
awaiting action in the Senate to finally see enactment of legislation
to make the needed changes to the SPCC rule.
Approval of Herbicide Tolerant Trait and Labels
One of the largest production costs on U.S. cotton farms across the
Cotton Belt today is managing herbicide-resistant weeds and the
activities involved in doing so. The `management' of weeds includes
field preparation activities, cover crops, purchasing seed with
herbicide-tolerant traits, and the use of herbicides. The tools that
farmers have available to them in their toolbox for managing herbicide-
resistant weeds are becoming fewer and fewer, greatly increasing the
need for approval of new herbicide traits and the necessary herbicide
label approvals. With regard to weed control, it is particularly
important that farmers have options and the ability to use multiple
modes of action.
Currently, there are two new cotton traits to help manage weed
resistance that have been approved by USDA's Animal and Plant Health
Inspection Service (APHIS), but are still awaiting label approval by
the EPA. It is taking an inordinate amount of time to have new
technologies approved by EPA. For example, one important technology
that would allow farmers to use dicamba over the top of cotton and
soybeans has been pending for over 5 years at EPA. In addition, EPA
just revoked the label for a formulation of 2-4-D that was used on
limited soybean acreage this year and was scheduled for traited cotton
varieties in the 2016 crop.
Neither of these new tools were made available in time for the 2015
planting season, although the reasons for the delay were weak at best.
Yet today, we are less than 3 months away from the earliest cotton
planting in parts of the Cotton Belt, and still neither of the two
products have approved labels by EPA. At this rate, EPA is very likely
to cause cotton producers to begin yet another production season
handicapped in their efforts to control herbicide-resistant weeds, and
the reasons for the seemingly unending delay are questionable at best.
The approval process at EPA is being hijacked by a broken and
unworkable Endangered Species Act, which one of my fellow panelists
addresses in more detail in his testimony. In addition, EPA, and the
Executive Branch, are allowing those groups opposed to any advances in
modern agriculture to use the court system to slow, and in many cases
halt, the approval process. A recent example is the decision by EPA to
withdraw the registration for the use of a new herbicide label on a new
trait due to ongoing court action.
We strongly urge this Committee and others in Congress to engage
with EPA to hold them accountable for the actions that are continuing
to delay the availability of safe and effective crop protection
products. Without the availability of new tools to control weeds and
other pests, the production costs for cotton will continue to increase,
leading to a further decline in cotton acreage as producers shift to
other crops with lower costs of production, partly due to the
availability of newer, more effective weed control products.
Waters of the U.S. Rule
The final rule provides none of the clarity and certainty EPA
claims. Instead, it creates confusion and risk by providing EPA and
Corps of Engineers (the Agencies) with almost unlimited authority to
regulate, at their discretion, any low spot where rainwater collects,
including common farm ditches, ephemeral drainages, agricultural ponds,
and isolated wetlands found in and near farms and ranches across the
nation. The proposed rule defines terms like ``tributary'' and
``adjacent'' in ways that make it impossible for a typical farmer or
rancher to know whether the specific ditches or low areas at their farm
will be deemed ``waters of the U.S.'' These definitions are certainly
broad enough, however, to give regulators (and citizen plaintiffs)
plenty of room to assert that such areas are subject to CWA
jurisdiction. Moreover, no crisis exists. The Agencies do not argue
that they need to regulate farming and ranching to protect navigable
waters. Yet, the regulation gives them sweeping authority to do so,
which they may exercise at will, or in response to a citizen plaintiff.
Farming is a water-dependent enterprise, especially in the part of the
country where I farm. The majority of my acreage is irrigated, which is
common for most row crop farms in the Mississippi Delta region.
Irrigation ditches carry flowing water to fields throughout the growing
season as farmers open and close irrigation gates to allow the water to
reach particular fields. These irrigation ditches are typically close
to larger sources of water, irrigation canals, or actual navigable
waters that are the source of irrigation water, and these ditches
channel return flows back to those source waters.
Except for very narrow exemptions, regulating drains, ditches,
ponds, and other low spots within farm fields as ``navigable waters''
would mean that any discharge of a pollutant (e.g., soil, dust,
pesticides, fertilizers and ``biological material'') into those
ditches, drains, ponds, etc., will be unlawful without a CWA permit.
This jurisdictional expansion will be disastrous. Farmers need to
apply weed, insect, and disease control products to protect their
crops. On much of our most productive farmlands (areas with plenty of
rain), it would be extremely difficult to avoid entirely the small
wetlands, ephemeral drainages, and ditches in and around farm fields
when applying such products. If low spots in farm fields are defined as
jurisdictional waters, a Federal permit will be required for farmers to
protect crops. Absent a permit, even accidental deposition of
pesticides into these ``jurisdictional'' features (even at times when
the features are completely dry) would be unlawful discharges.
The same goes for the application of fertilizer, another necessary
aspect of farms. It is simply not feasible for farmers to avoid adding
fertilizer to low spots within farm fields that may become
jurisdictional. As a result, the rule imposes on farmers the burden of
obtaining a section 402 National Pollutant Discharge Elimination System
permit to fertilize their fields and put EPA into the business of
regulating whether, when, and how a farmer's crops may be fertilized.
Conclusion
I appreciate the Members of this Subcommittee for holding this
timely hearing to review the current state of the U.S. cotton industry
and hear some suggestions from across the Cotton Belt of policy actions
that can bring some level of stability back to our industry. We know
that agriculture and farming always has its share of ups and downs--
that is to be expected--but the current situation in the cotton
industry goes beyond these expected challenges and is to the breaking
point for many producers and those in other industry segments. Thank
you for this opportunity and I will be glad to respond to any questions
at the appropriate time.
The Chairman. Thank you, Mr. Reed.
I now recognize Mr. Shawn Holladay from National Cotton
Council, Lubbock, Texas.
STATEMENT OF SHAWN L. HOLLADAY, PRODUCER BOARD MEMBER, NATIONAL
COTTON COUNCIL, LUBBOCK, TX
Mr. Holladay. Good morning, Chairman Crawford, Ranking
Member Walz, and Members of the Subcommittee. My name is Shawn
Holladay. My wife, Julie, daughter, Katy, and I grow cotton in
Lamesa, Texas, in Dawson and Martin Counties. I currently serve
as the President of Plains Cotton Growers, as well as the
Chairman of the Farm Policy Task Force of the American Cotton
Producers.
Our area of Texas, which is proudly represented on the
Agriculture Committee by both the Chairman and the Vice
Chairman, is the largest contiguous cotton-producing region in
the country. Texas is also the largest cotton-producing state
in the nation, claiming 55 percent of total acreage. I cite
these statistics to underscore the economic toll on Texas when
the cotton industry is in the tank. The financial situation has
deteriorated, with crop prices falling sharply and input costs
rising. For Texas, the current marketing conditions compound an
already difficult situation brought about by a series of
natural disasters.
As this Committee has thoroughly reviewed in previous
hearings, we are getting hammered in the global market by huge
foreign subsidies, tariffs, and non-tariff trade barriers that
have always been high, but are rising to record levels. Mr.
Chairman, this does not take into account EPA regulations, tax
uncertainty, and other Federal policies that add significantly
to our cost of production.
It is fair to say that all of us in farm country could use
a period of extraordinary yields, plus a strong and sustained
rebound in prices. The cotton situation is unique among
commodities because we have been hit with significant changes
in both market prices and the farm program safety net. Cotton
producers are by and large operating under a safety net that
was never designed to address these dire circumstances.
Successive droughts in Texas, while devastating, are only
part of the story. Even beyond the severest drought years,
yields have continued to be extremely low. Cotton prices remain
depressed, and some producers are suffering a decline in value
due to weather-related quality losses. Resistant weed pressure
is a relatively new challenge that is adding significant costs
to our operations. As a result, farmers in our part of the
country were totally bled out of liquidity by the end of 2014.
Many struggled to get approved for financing this year. Some
were forced to sell off land. Still others were forced to quit
farming.
Mr. Chairman, I know that a lot of this simply is the price
you pay if you want to farm. Trust me, what Mother Nature can
throw at a guy is clear to a family that has farmed mostly
dryland cotton in west Texas for four generations. We
understand the volatile effects of extreme weather conditions.
Good years can be followed by a complete loss. Thanks to the
occasional good years and crop insurance, we have been able to
get through tough times. However, crop insurance was never
designed to deal with anti-competitive trading practices by
countries like China and India, yet that is almost exclusively
what a cotton farmer must rely on today. As many of you know,
China supported world prices by accumulating stocks that today
amount to about 4 years of U.S. production. China then switched
gears to heavily subsidize their own production, sending world
prices into a total tailspin. Now, India is an even greater
concern because it is an exporting country with increasing
domestic support in production. Put simply, cotton farmers in
the United States cannot survive long on 60 cotton, as other
countries subsidize cotton production at a level that is four
times higher than the United States.
This scenario simply does not pencil out. As we have seen
before, once cotton production goes away in an area, the
infrastructure dies with it and whole communities suffer.
As farmers begin to look at financing the 2016 crop, it is
absolutely essential that the Secretary use the authority
Congress granted under the farm bill to take decisive action to
designate cottonseed as an other oilseed. I know that many
times when there has been a crisis in countryside and action
was gummed up in Washington, the Secretary has stepped in and
broken the logjam. That is what we are hoping and praying for
here.
I am indebted to you, Chairman Crawford, Ranking Member
Walz, and Members of the Subcommittee, who have urged Secretary
Vilsack to take action on cottonseed.
Thank you for the opportunity to testify at this hearing,
and I look forward to answering your questions.
[The prepared statement of Mr. Holladay follows:]
Prepared Statement of Shawn L. Holladay, Producer Board Member,
National Cotton Council, Lubbock, TX
Introduction
Good morning, Chairman Crawford, Ranking Member Walz, and Members
of the Subcommittee. My name is Shawn Holladay. My wife Julie, daughter
Katy, and I live in Lubbock, Texas and we grow cotton in Dawson and
Martin Counties. I currently serve as the President of the Plains
Cotton Growers, as well as Chairman of the Farm Policy Task Force of
the American Cotton Producers.
Texas Cotton Situation
Our area of Texas, which is proudly represented on the Agriculture
Committee by both the Chairman and the Vice Chairman, is the largest
contiguous cotton producing region in the country. The State of Texas
is also the largest cotton producing state in the nation, claiming 55
percent of total U.S. acreage. I would add that cotton is also Texas'
highest valued cash commodity.
I cite these statistics not only because I am very proud of them,
but also to underscore the economic toll on Texas when the cotton
industry is in the tank. I know that farmers are struggling all across
the country right now, with net farm income down 55% over the past 2
years from $123.3B in 2013 to a forecast of $55.9B in 2015. Crop prices
are down sharply and input costs are rising. While a good many farmers
have enjoyed some very strong yields in recent years, many others are
recovering from strings of natural disasters. Still others are very
much in the grips of drought, flooding, or both.
As this Committee has so thoroughly laid out in previous hearings,
we are getting hammered in the global market by huge foreign subsidies,
tariffs, and non-tariff trade barriers that have always been high but
are rising to record heights. Mr. Chairman, this does not take into
account EPA regulations, tax uncertainty, and other Federal policies
that add significantly to our costs of production. I have gone into
more detail on these challenges in my written statement.
It is fair to say that what all of us in farm country could really
use is a period of some extraordinary yields plus a very strong and
sustained rebound in prices. What distinguishes the situation for
cotton farmers from that of others is the severity with which cotton
has been hit; that cotton farmers have been hit by all of these
culprits nearly all at once; and that cotton producers are by and large
operating under a safety net that was never designed to meet this kind
of crisis.
I will defer to my colleagues at this table to speak about the
unique situation for cotton in their own region of the country. I will
speak only of our situation at home. Compounding already high input
costs has been the introduction of resistant weed pressure in Texas
that is adding significant costs to our operations.
Successive droughts in Texas, while well documented is only part of
the story. Even beyond the severest drought years, yields have
continued to be extremely low while at a time the floor has fallen on
cotton prices.
The result is, farmers in our part of the country were totally bled
out of liquidity by the end of last year. A great many struggled to get
approved for financing for this year, with many forced to sell off
land, and still others forced to quit. [Crop year] 2015 got off to a
promising start with, finally, some really good rains. But that rain
ultimately became excessive. A lot of our crops were washed out. This
meant not only the additional cost of having to replant but also having
to put down the even greater weed pressure that all of the rain brought
with it. At the end of the day, when excessive moisture turned into 3
months of little or no rain, the root systems in our crops proved too
weak to produce anything close to the promising yields we had been
praying for.
I know that a lot of this is simply the price you pay if you want
to farm.
Trust me, what Mother Nature can throw at a guy is clear to a
family that has farmed mostly dryland cotton in west Texas for four
generations. Thanks to the good Lord smiling on us every now and again
and crop insurance, we have been able to get through tough times.
However, crop insurance was never designed to deal with anti-
competitive trading practices by countries like China and India. Yet,
that is almost exclusively what a cotton farmer must rely on today.
As many of you know, China drove up world prices, and our costs, by
accumulating stocks that today amount to about 4 years' of U.S.
production. China then switched gears to instead heavily subsidize
their own production, sending world cotton prices into a total
tailspin. Now, India is following suit in pursuing its own set of
harmful policies.
Put simply, cotton farmers in the United States cannot survive long
on 60 cotton as China and other countries subsidize and glut the world
market by guaranteeing their farmers $1.40 a pound. This scenario
simply does not pencil out and as we have seen before, once cotton
production goes away in an area, the infrastructure dies with it, never
to return, and whole communities suffer.
While many of my fellow producers had a difficult time
understanding the circumstances facing our industry concerning cotton
farm program options for the 2014 Farm Bill, as a leader, I know the
hard choices that had to be made by our leadership and this Committee.
We appreciate the inclusion of the STAX cotton crop insurance and other
crop insurance enhancements including the APH adjustment. However, we
believe there are still program options possible for cotton producers
that do not require re-opening the 2014 Farm Bill.
As this Subcommittee is aware, our industry is asking Secretary
Vilsack to designate cottonseed as an ``other oilseed'' and make it
eligible for PLC and ARC programs. We appreciate Chairman Conaway and
Ranking Member Peterson authoring a Congressional letter to the
Secretary urging him to take such action. We are encouraging all Cotton
Belt Members to join this letter. We are also initiating a similar
effort in the Senate as well as a major push from agricultural lenders.
A letter signed by 197 lenders in Texas and over 400 letters across the
Cotton Belt were recently sent to Secretary Vilsack in strong support
of USDA designating cottonseed as an ``other oilseed'' for ARC/PLC
purposes. Implementation of this program is not a ``silver bullet''
that will restore profitability, but it will be a tremendous help in
allowing our industry to survive these difficult economic times.
Federal Crop Insurance
Earlier, I referenced our dependence on a sound Federal Crop
Insurance Program as a critical risk management tool. However, it is
important to understand that crop insurance benefits are not profit.
Multi-peril and area-wide policy coverage does not fully indemnify
producers for weather-related risks. Most producers in my state and
across the Cotton Belt have 25-40% threshold exposures before coverage
kicks in. This is one of the reasons why our industry supported
shallow-loss coverage provisions such as STAX and SCO.
Our industry appreciates this Committee's stance on challenging the
proposed $3 billion reduction in crop insurance expenditures. Given the
cotton industry's major dependence on Federal crop insurance, it is
critical to avoid any budget reductions.
In this, the initial year of STAX being offered to producers,
approximately 12,000 policies were purchased, covering about 30% of the
insured acreage. While this adoption rate is less than hoped for, there
were several factors that contributed to this level. Many producers
were challenged to understand the complexities of the 2014 Farm Bill
options at the same time as having to evaluate the new menu of crop
insurance provisions. We believe with more education for producers and
more training for agents, the STAX adoption rate will improve.
Specifically, we are encouraged that the Risk Management Agency has
announced positive changes in the STAX program for the 2016 crop that
will improve the product. Producers will now have the option of
purchasing individual STAX coverage by practice and will now be able to
add the cottonseed endorsement to their STAX coverage.
Producers appreciate the farm bill's APH Yield Adjustment provision
which allows the exclusion of extremely low yields in the APH
calculation. An additional change that is still needed would be to
allow producers the option of individual enterprise unit pricing by
practice. While enterprise unit pricing is now rated by practice, a
producer is still required to have all production in a county covered.
This additional flexibility would allow producers to enhance the
individualized crop insurance coverage options.
Boll Weevil and Pink Bollworm Eradication
Two of the major initiatives by our industry and USDA that have
been a positive for cotton production are the success of the boll
weevil and pink bollworm eradication programs. The Boll Weevil
Eradication program is in its final stages with the only active zone
being the Lower Rio Grande area of southern Texas bordering Mexico.
However, this area is proving to be one of the most difficult to
eradicate. While significant progress has been made, we still face an
influx of boll weevils from northern Mexico. Our industry, in
conjunction with USDA APHIS, is exploring every possible option to
conquer this challenge. Likewise, the Pink Boll worm Eradication
program is nearing completion, and a transition plan [is] now in effect
that will hopefully allow the U.S. Cotton Belt to be designated pink
bollworm-free. Therefore, it is vital that Congress maintain funding
for both of these programs as we transition to eradication. Any
reduction or a discontinuance of appropriated funds could reverse the
eradication efforts that the successful producer/Federal Government
partnership has achieved to date.
Crop Protection Products
Another significant concern of our industry is serious challenges
to the availability of crop protection products and biotech traits that
are critical inputs for cotton and all major commodity producers.
Specifically, the approval of cotton biotech trait chemistries to
combat resistant weeds are being delayed by EPA. Resistant weeds are
quickly becoming a major problem in west Texas given the return of
periodic moisture. Cotton varieties with biotech traits are available
to cotton producers but without the approval of the associated
chemistries they cannot provide an effective tool to fight [resistant]
weeds. It is vitally important that EPA expedite the approval process
for these products.
The Endangered Species Consultation process required under the
Endangered Species Act between EPA and Fish and Wildlife Services is
broken and continues to delay the approval process while the two
Agencies seek a solution. The broken consultation process continues to
provide legal challenges against EPA by anti-pesticide groups. And the
fear of legal action increases the delay of critically needed
production products.
Additionally, an entire class of agriculture chemistry, known as
the organophosphates, is under regulatory review by EPA. This review
includes several critical cotton pesticides, with Malathion being one.
Our concern is the prospect of adding unwarranted safety criteria based
on unsound risk principles that could result in a severe limitation or
cancellation of use. The industry is concerned that EPA's adoption of
this new risk factor in the registration review of multiple
organophosphates sets a new precedent that could jeopardize the boll
weevil eradication program. Scientists who have advised the cotton
industry and APHIS on boll weevil eradication operations indicate that
there is no Malathion substitute product to functionally conduct a boll
weevil eradication program. The Organophosphate review process
threatens several critical products used in cotton production. For
example, Bidrin is critical for control of certain stinkbug
populations. It is not used across the whole Cotton Belt as EPA assumes
in their risk process, but it is critical at random locations based on
the occurrence of the pest. Tribufos, a critical harvest aid product
that aids in defoliating cotton, is critical especially under certain
environmental conditions.
The industry is very concerned that EPA is adopting risk assessment
procedures that lean more toward the European model of precaution
rather than sound science-based risk assessment balanced with a sound
science-based benefits assessment. We applaud efforts made by USDA's
Office of Pest Management Policy to advocate for agriculture and
provide consultation to EPA, but we feel EPA gives little consideration
to the consultation. Our industry hopes EPA returns to reliance on
sound scientific data and risk-benefits analysis directed under FIFRA.
Conclusion
Mr. Chairman, I wish I could come to this hearing with more
positive news about the state of the U.S. cotton industry, especially
in my home State of Texas. But, the reality is that cotton producers,
cotton infrastructure and the rural communities that depend upon a
viable cotton industry are in peril. All of these challenges I have
outlined combine to create the worst cash flow situation for cotton
growers in years, and without some relief, many producers will be out
of business because they will not be able to obtain financing. Our
industry has faced difficult economic circumstances before and if these
challenges I have outlined can be somewhat mitigated, we have a good
chance to become profitable again in the future.
Again, I commend this Subcommittee for holding this hearing and
allowing the cotton industry to share its concerns. I will be happy to
respond to questions at the proper time.
The Chairman. Thank you, Mr. Holladay.
Mr. Wannamaker, you are recognized for 5 minutes.
STATEMENT OF KENDALL ``KENT'' W. WANNAMAKER,
PRESIDENT, SOUTHERN COTTON GROWERS, SAINT
MATTHEWS, SC
Mr. Wannamaker. Good morning. I am Kent Wannamaker, a
sixth-generation producer from Saint Matthews, South Carolina,
and I farm cotton, peanuts, and corn. I currently serve as
President of the Southern Cotton Growers, an organization that
represents thousands of cotton farmers from six southeastern
states.
I first would like to thank Chairman Crawford, Ranking
Member Walz, and Members of the Subcommittee for the
opportunity to testify.
My state and farm recently endured the wrath of Mother
Nature in the form of historic rains and floods. My area
received around 11" of rain, while some areas of the state
received more than 25". The rain and floods occurred in October
at the beginning of harvest, when all inputs have been put into
the crop. Unfortunately, persistent rains have not allowed
field work to resume in many areas. The result has been not
only yield losses, but also quality losses.
At a recent meeting with RMA, an issue was raised regarding
the timing of indemnity payments. Current procedures require a
producer who is accepting an appraisal to destroy the crop
prior to receiving the indemnity. Unfortunately, many producers
will not be able to destroy their crop for many weeks to come.
The request to RMA is to allow a producer the opportunity to
pledge to destroy the crop at the earliest date possible, or
provide documentation that the crop was destroyed, but allow
indemnity payments to be made prior to destruction. Getting the
indemnity payments to these producers in the timeliest manner
is extremely important. Ongoing delays are compounding the
challenges for servicing debt for this year's crop, and
securing financing for next year's crop.
Another issue that has intensified over the last several
years is the challenge to control damaging pests with minimum
impact on managed honeybee colonies. The cotton industry is
troubled by the recent decision of the Ninth Circuit Court that
vacated the registration of crop protection product because the
court did not believe EPA had sufficiently shown no harm to
bees. The industry further notes the court did not consider the
benefits of the chemistry, as EPA is mandated to do. The
court's decision will alter the registration and registration
review process of EPA, creating additional costs, and delaying
timely review of necessary crop protection tools.
One of the most challenging issues from the 2014 law is the
imposition of the unified payment limit on the marketing loan
program. With 2014 ARC and PLC payments having been paid, many
producers have found themselves with either no limit left for
the payment, or only eligible to receive a portion of the
payments due to them. In the worst case, the producer received
payments in excess of the limit and will be required to repay a
portion to USDA.
The Fiscal Year 2016 House agriculture appropriations bill
includes language that directs USDA, beginning with the 2015
crop, to operate the marketing loan program as they did prior
to the 2008 Farm Bill. This provision allows USDA to issue
marketing certificates, thus permitting the program to function
as intended. If this provision is not included, it is likely
that some cotton will be placed in the marketing loan for the
full 9 month term, and then be forfeited to USDA rather than
being actively marketed during the year. This practice will
lead to cotton being locked in the loan program, disrupting
cotton flow to the market, and leading to potentially greater
government costs.
Other panelists have mentioned the request that the
Secretary designate cottonseed as an other oilseed to be
eligible for the ARC and PLC programs, and I want to echo my
strong support. In addition to numerous calls for action from
the cotton industry, 50 agricultural lenders from the Southeast
have contacted the Secretary requesting you take action. In my
state, we have seen a production decline of over 40 percent in
just 1 year, making it much harder for gins and warehouses to
cash flow with the type of reduction in volume. Crop insurance
has been there to help us when we needed it. The Agriculture
Committee and others have worked to strengthen and enhance the
role of crop insurance to respond to weather-related disasters
since Congressional approval of ad hoc disaster assistance has
become much more difficult in recent years. Yet crop insurance
alone is not equipped to address long-term price declines as
currently being experienced in the cotton industry. Therefore,
the cottonseed program is needed to help provide income support
for cotton producers.
Mr. Chairman, I appreciate the opportunity to testify
before this Subcommittee, and I am happy to answer questions at
the appropriate time.
[The prepared statement of Mr. Wannamaker follows:]
Prepared Statement of Kendall ``Kent'' W. Wannamaker, President,
Southern Cotton Growers, Saint Matthews, SC
Introduction
I am Kent Wannamaker a sixth generation producer from Saint
Matthews, South Carolina. My farming operation consists of 2,500 acres
of cotton, peanuts and corn. I have ownership interests in a cotton
gin, a peanut buying point and a cottonseed rail handling facility.
Currently, I serve as President of Southern Cotton Growers. Southern
Cotton Growers, Inc. represent thousands of cotton producers throughout
Alabama, Georgia, South Carolina, North Carolina, Florida, and
Virginia. Southern is the largest pure cotton producer's organization
in the United States in terms of states represented.
I first would like to thank Chairman Crawford, Ranking Member Walz,
and Members of the Subcommittee for the opportunity to present these
views regarding the state of the U.S. cotton industry.
My state and farm recently endured the wrath of Mother Nature in
the form of historic rains and floods. My area received around 11" of
rain while some areas of the state received 25". Our crop literally
started out with a drought and ended with a flood. To compound matters,
the rains and floods occurred in October at the beginning of harvest
when all the inputs have been put into the crop. The situation in my
area is truly dire. We have been working with the insurance companies
and the Risk Management Agency (RMA) to make sure appraisals are
correct, consistent and handled by knowledgeable appraisers. I recently
attended a meeting in South Carolina with RMA Associate Administrator
Tim Gannon and appreciate him taking time to come to our state. One of
the requests made at the meeting and echoed in a letter to the RMA
Administrator from the National Cotton Council has to do with the
timing of indemnity payments. Current indemnity procedures require a
producer who is accepting an appraisal to destroy the crop prior to
receiving their indemnity. I understand the basis for this procedure is
to ensure compliance with crop insurance procedures that minimize moral
hazard within the program. However, in this special circumstance, many
producers will not be able to destroy the crop for many weeks, thus not
receiving their indemnity until a much later date. This issue is
compounded with the end of the year approaching and many farm and
machinery notes coming due. The request to RMA is to allow a producer
facing these circumstances the opportunity to pledge to destroy the
crop at the earliest date possible or provide documentation at a later
date that the crop was destroyed but allow for indemnity payments to be
made prior to crop destruction. Getting the indemnity payments due
these producers in the timeliest manner is extremely important.
Implications of Unified Payment Limitation
One of the most challenging issues from the 2014 law has been the
imposition of the unified payment limit on the marketing loan program.
Unlike previous farm bills, this is the first time a single, unified
limit has applied to multiple programs--marketing loan program,
Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC). This
fact, coupled with the direct attribution provisions that were first
instituted with the 2008 Farm Bill, has resulted in an extremely
complex and challenging task for USDA's Farm Service Agency (FSA) to be
able to accurately and timely track the accrual of marketing loan
benefits to an individual producer. Since producers can and do market
their cotton (and other crops) using multiple marketing channels--
marketing cooperatives, private merchants, direct marketing--the
complexity of tracking marketing loan benefits through these multiple
transactions in a timely manner has proven to be beyond the capability
of FSA's current systems.
For producers of multiple crops, the implications of the unified
payment limit will be particularly harmful as a portion or all of a
producers' payment limit could be used for marketing loan benefits as
the crop is marketed throughout the year. In many cases the exact time
of loan redemption is out of the producers' control if the commodity is
marketed through a cooperative or a private merchant that has the
option to redeem the loan commodity at any time. Now that ARC and PLC
payments for the 2014 crop have been paid, many producers have found
themselves with either no limit left for the payments or only eligible
to receive a portion of the payments they are eligible for. In the
worst case, a producer receives payments in excess of the limit and is
required to repay a portion of the payment to USDA.
NCC has worked closely with FSA over the past year to help
facilitate information sharing between FSA and industry marketers in an
attempt to develop more accurate and timely tracking of loan benefits.
In addition, we continue to be concerned about the long-term impact on
marketing decisions as producers see the impact of this unified payment
limit. The Fiscal Year 2016 House agriculture appropriations bill
includes language that directs USDA to operate the marketing loan
program as they did prior to the 2008 Farm Bill beginning with the 2015
crop. This provision allows USDA to issue marketing certificates and
will allow the program to function as [intended] since its
implementation nearly 30 years ago. Unfortunately if this provision is
not included, it is likely that some cotton will be placed in the
marketing loan for the full 9 month term and then be forfeited to USDA,
rather than being forward contracted or actively marketed during the
year. This practice will lead to cotton being locked in the loan
program, disrupting cotton flow to the market and to end-users, and
leading to potentially greater government costs.
Resistant Weeds
Production costs are always a concern for cotton producers,
especially during times when cotton prices are low. Producers struggle
to minimize crop inputs but are often forced to allocate additional
funds in response to pest pressure from plant diseases, insects and
weeds. The cotton industry recognizes the importance of preserving crop
protection materials that function differently from each other in the
way they control pests. For example, producer's reliance on glyphosate
alone created tremendous selection pressure on weeds to single out the
few plants, particularly a few palmer amaranth, that contained genetic
abilities to survive the glyphosate applications. This example is not
the first time some weeds were selected out of a weed population
demonstrating survival of the fittest. Scientists explain that the
diversity of the genetics in weed populations is so great that there
are likely weeds resistant to herbicides that have not been discovered.
The importance of this is to understand that production practices must
use multiple herbicide modes of action, which means additional
herbicide products rather than just one product. Scientists tell us
that this approach will minimize the isolation of resistant plants that
then produce offspring of weeds resistant to the single mode of action.
Producers have changed weed control practices in order to combat
resistant weeds, but that has dramatically increased the cost of
production. Scientists warn that there are few chemistries currently
available for weed control and no expectation of new products on the
market for many years. Producers recognize we must preserve the
materials available, but we must have flexibility to accommodate
individual farm needs that differ in geographic location and
environmental influence. Regulatory mandates that attempt to identify
management practices for all farms will not work--it is not a case of
one size fits all. Weed management and resistance management should be
emphasized and promoted through educational efforts. Federal agencies
should recognize the need for multiple crop protection practices and
chemistries in order to achieve a diverse, sustainable production
system. Novel, genetic approaches that expand the use of current
products which have been safely used for many years should be
encouraged. The Environmental Protection Agency (EPA) should be
encouraged to understand that low usage of a product should not be
interpreted as a lack of need, but that it may fit particular important
needs. Additionally, EPA should be encouraged to understand each
product removed from use increases reliance on fewer remaining products
and decreases resistance management options. EPA should be encouraged
to refrain from mandating resistance management practices that reduce
producer flexibility and do not consider the needs of different
geographic systems. USDA should be encouraged to streamline the
regulatory process for transgenic plants in order to expand the
opportunities for additional pest control practices. Extension service
experts should be encouraged to provide the scientific educational
material related to resistance management that addresses the needs of
their respective state. Producers must have educational assistance to
determine scientific practices that accomplish the needs of their farm
and flexibility in those practices in order to identify cost effective,
sustainable production practices.
Pollinators
An additional development that has intensified over the last
several years is the challenge to control damaging insect pests with
minimum impact on another insect--managed honey bee colonies. The
cotton industry recognizes the harsh challenges the beekeeper industry
is facing, but is concerned that some groups are misrepresenting the
science of multiple factors contributing to honey bee decline in order
to focus attention solely on crop protection products. The cotton
industry compliments USDA and EPA for their multiple efforts to discuss
the research demonstrating multiple factors and urges the agencies to
continue their focus on the broad issues rather than isolating the
focus on crop protection practices alone. The cotton industry
additionally encourages the development of a scientifically reliable
measure of the status of managed honey bee colonies. The cotton
industry compliments EPA on their recognition that most of the issues
of concern at the farm level can be avoided just by having a more clear
communication process between crop producers and beekeepers. The cotton
industry has urged it's producers to become engaged in these
communications and to work with a broad group of stakeholders including
extension service, state departments of agriculture, other crop
producers, beekeepers, and others involved in the use of crop
protection materials to develop local practices and communications
plans that work for the needs of the area. Such plans, sometimes
identified as state pollinator protection plans, bring together local
parties in order to collaboratively identify local needs and local
solutions that provide coexistence of all.
The cotton industry is troubled by the recent decision of the Ninth
Circuit Court that vacated the registration of a crop protection
product because the court did not believe EPA had sufficiently shown no
harm to bees, and further notes the court did not consider the benefits
of the chemistry as EPA is mandated to do under the Federal
Insecticide, Fungicide, and Rodenticide Act (FIFRA) risk-benefit
analysis. The cotton industry in concerned the court's decision will
alter the registration and registration review process of EPA creating
additional costs and delaying timely review of necessary crop
protection tools. The cotton industry understands that honey bees are
managed property and are often congregated in close proximity to
managed crops. This practice is not new, and both industries have
coexisted for many years. However, the removal of crop protection
products will not allow a continuation of crop production and
scientists have stated the removal of pesticides alone will not solve
the decline in honey bee health.
The cotton industry is appreciative of the National Strategy that
has identified multiple partnerships to address multiple factors
causing honey bee decline. The cotton industry is encouraged that the
plan seeks to expand beekeepers access to public lands and parks, and
seeks to improve public-private partnerships to enhance pollinator
habitat. The cotton industry compliments USDA Natural Resources
Conservation Service (NRCS) programs to encourage the expansion of
pollinator habitats on farms, but urges NRCS to expand the plant
selection beyond native plants. Honey bees are not native to the U.S.,
but were brought here because of the ability to house the bees in boxes
that could be managed for pollinating some crops. Therefore, improving
honey bee habitat should not be limited to native plants that have
limited supply and are costly, but should be broadened to include
clovers and other, lower cost plants known to be favored by honey bees.
Although it is estimated that one out of every three bites of food
involve pollinators, we must remember we cannot sacrifice the other two
bites. The cotton industry believes local communication and cooperation
between crop producers and beekeepers, along with expanded affordable
habitat will provide continued coexistence of the two industries.
Additionally, USDA should be encouraged to increase research focus on
the control of the multiple pests of honey bees and their hives as well
as technology improvements that would provide beekeepers better ability
to monitor hive health.
Cottonseed
Others have mentioned the proposal by the National Cotton Council
and other cotton organizations that requests that the Secretary
designate cottonseed as an `other oilseed' and be eligible for the ARC
and PLC programs, and I want to echo my strong support. As you are
aware this proposal would not require any legislative changes nor would
it reopen the farm bill. It is a request that the Secretary use the
authority given to him in the farm bill to designate `other oilseeds'.
This action is desperately needed to provide stability in the cotton
industry and in addition from calls for action within the cotton
industry 50 agriculture lenders from the Southeast have contacted the
Secretary requesting he take action. In my state we have seen acreage
decrease by over 15% in just 1 year. This is causing a strain on the
cotton infrastructure as it is much harder to make a gin or a warehouse
cash flow with that type of single year reduction in volume. Cotton
farmers have experienced a significant decline in the market since
passage of the 2014 Farm Bill and I believe the economic situation
facing the industry warrants the Secretary's approval of this request.
As I mentioned earlier, in my state and on my farm, we have experienced
a devastating flood this year. Crop insurance was there to help us when
we needed it but unfortunately does not mitigate the multi-year price
decline. As we all recognize, the Committee and others have worked to
strengthen and enhance the role of crop insurance to respond to
weather-related disasters since [Congressional] approval of ad hoc
disaster assistance is no longer seen [as] politically viable. Yet,
crop insurance alone is not equipped to address long-term price
declines as [is] currently being experienced in the cotton industry.
Therefore, the cottonseed policy is needed to help provide price
support for cottonseed. I thank all the Members of this Subcommittee
who have signed Chairman Conaway and Ranking Member Peterson's letter
to the Secretary in support of this program and I encourage you to
contact the Secretary directly as the situation in cotton country is
dire.
Conclusion
As you have heard from my testimony and that of others, the U.S.
cotton industry is at a critical junction and any assistance from
Congress and the Administration is needed to help us weather this
economic and regulatory storm. I appreciate the opportunity to testify
before this Subcommittee and commend the Chairman and Ranking Member
for holding this important hearing to better understand the many issues
facing the cotton industry. Thank you for the consideration of my views
and [I] am happy to answer questions at the appropriate time.
The Chairman. Thank you, Mr. Wannamaker.
I am pleased to recognize the gentleman from California,
Mr. Costa, to introduce our next witness.
Mr. Costa. Thank you very much, Mr. Chairman, and Members
of the Subcommittee, for holding this hearing. It is important;
as we talk about not only America's cotton industry, but as a
part of the larger context of commodities that we produce
throughout the country. And our next witness, Cannon Michael,
is a friend of mine. He and his family have farmed in the San
Joaquin Valley now for six generations. It is a family-owned
farm, the Bowles Farming Company. Part of California's great
agricultural history is part of Cannon Michael's history. They
are a diversified operation, farming cotton, wheat, fresh
market and processing tomatoes, fresh market onions, and
cantaloupes, and last night Cannon told me they are going to
start growing carrots. But they have been devastated, as all
farmers in California have, by the drought, both Mother Nature
and the lack of our ability to fix a water system that is long
overdue, that has compiled to make it very difficult, and they
have had to fallow acres.
Nonetheless, he has been innovative. As he has worked up,
they have included various innovative irrigation technologies,
and they have focused on production methods that included
planning of transgenic varieties, and employing organic methods
as well.
So we are very proud of not only Cannon Michael and his
family, but all of the agricultural organizations that are
reflected here today, and that he is a member of. Among his
leadership positions, he serves on the Board of Directors of
the National Cotton Council, the Cotton Council International,
and he is past Chairman of the California Cotton Growers
Association, and Cotton Foundation.
Let me just close, because he has his 5 minutes, but it is
with a thought, 15 years ago, California had 1\1/2\ million
acres of cotton production. Fifteen years ago. Today, we have
less than 200,000 acres that has been planted, and is primarily
pima cotton. The argument by some who don't understand
agriculture is that we shouldn't be planting cotton because it
uses too much water. Of course, the argument today is we
shouldn't be planting almonds because they use too much water.
I guess if we didn't plant anything we wouldn't use any water,
but nonetheless, that obviously doesn't take into account the
importance of California agriculture as a part of American
agriculture.
I present to you my friend, Cannon Michael.
The Chairman. Mr. Michael, you are recognized for 5
minutes.
STATEMENT OF CANNON MICHAEL, PRODUCER BOARD MEMBER, NATIONAL
COTTON COUNCIL, LOS BANOS, CA
Mr. Michael. And, Congressman Costa, I appreciate the very
kind introduction, as well as the long-term friendship that we
have had. Thank you, Chairman Crawford, Ranking Member Walz,
and Members of the Subcommittee.
Congressman Costa covered a lot of my background, so I will
just start with, when I returned to my family's farm in 1998,
there were almost 2 million acres of cotton being grown in the
West region, and the West region includes Arizona, California,
and New Mexico, and it was truly a vibrant industry that we
were a part of. You fast forward to 2015 and the acreage
planted to cotton in the West region is just slightly over
300,000 acres. This includes 167,000 acres of upland cotton and
151,000 acres of ELS, or extra-long staple or ELS cotton.
The West has the highest per acre yields of any area of the
Cotton Belt, and it produces some of the highest quality cotton
due to our unique climate. Yet we also have the highest
production costs in the Cotton Belt, largely due to the heavy
regulatory burden that is placed on agriculture in California.
Given the economic situation facing the cotton industry, some
action must be taken to stabilize the acreage declines and
infrastructure loss in our region.
As you know, the farm bill gives the Secretary of
Agriculture the authority to designate additional oilseed crops
without reopening the farm bill. We are now seeking this
designation for all cottonseed, whether produced from upland or
ELS cotton, since there is no distinction in the seed produced
from both types.
The 2014 Farm Bill continued the ELS cotton loan program,
as well as competitiveness provisions to ensure ELS cotton
remains competitive in international markets. The industry is
currently working with the USDA to ensure that the most
accurate market quotes are used to administer the program.
With China's increased government support boosting their
ELS production significantly, its market prices must be
considered in implementing the U.S. competitiveness provision.
Satellite imagery indicates that this past year 1 million
acres of productive California farmland sat idle due to lack of
water. This year on my farm alone, we fallowed about \1/3\ of
the farm. Every acre of farm that is fallowed has a ripple
effect throughout the economy. Less production means fewer
workers have jobs, local businesses suffer, with reduced sales
of fuel, tires, fertilizers, seed, and other inputs, and
transportation companies must scale back operations due to
reduced volumes. Impacts that I am describing go well beyond
just the sectors I mentioned, as I have not even touched on
equipment sales, lending institutions, and eventually the
consumers themselves.
The current water situation in California is a result of
both the prolonged drought, as well as misguided and inflexible
regulatory constraints. Five years ago, reservoirs in
California were brim full of water. Since then, much of our
precious water supply, which had previously gone to Central
Valley farms and communities, has been mandated to flow out the
Golden Gate by Federal and state fish agencies with no apparent
benefit for the fish species that they are trying to protect.
We must manage water to meet all needs, but in a manner
that shares the pain and does not create winners and losers. We
have lost sight of the goals and purposes that the Federal
water projects were originally built to serve.
In many parts of the West, litigation stemming from citizen
suit provisions of environmental laws, including the Endangered
Species Act or ESA, is producing Federal court decisions or
court-approved settlements that direct Federal agency
management of state water resources. As a prime example here in
California, Federal management of the water in the Bay Delta,
driven in part by third party citizen law suits via the ESA,
has redirected millions of acre feet of water away from human
uses towards the perceived needs of the environment, with no
documented benefit to the fish intended for protection.
And I have just a couple of quick slides to go through. The
largest reservoir in the State of California is Lake Shasta. As
you can see, the red line is the operations in 1977 when they
used the reservoir for what it was for, which was to give water
to communities, farms, wildlife refuges. They took that
reservoir down to 650,000 acre feet in storage. This past year,
held captive was over 1.2 million acre feet in this fourth year
of drought, held away from family farms, from communities in
the Central Valley. So you can see here water supply is being
held hostage. Also this shows how much water has flowed into
the Bay Delta and how much water is let out to the ocean,
again, with the ESA being the main driver.
We do need more surface storage as well as groundwater
storage, and we need to continue to push back on these
inflexible regulations.
I thank the Subcommittee and the Members here today for the
opportunity to discuss some of these challenges, and appreciate
the time.
[The prepared statement of Mr. Michael follows:]
Prepared Statement of Cannon Michael, Producer Board Member, National
Cotton Council, Los Banos, CA
Introduction
Thank you, Chairman Crawford, Ranking Member Walz, and Members of
the Subcommittee for the opportunity to testify today regarding the
current condition of the U.S. cotton industry, the significant
challenges cotton producers face, and what policy changes are needed to
address this worsening situation. My name is Cannon Michael and I farm
in Los Banos, California.
Farm and Background
I manage the Bowles family farming operation. I am the 6th
generation of my family to be involved with California agriculture. My
great-great-great grandfather came over from Germany as a young man and
was able to start a cattle business on some of the same land that we
now farm today. Starting at age 13, I began to work on the farm during
the summer months. I learned about efficient irrigation practices,
operation of farm equipment and gained experience with many aspects of
managing an integrated farming operation in California's San Joaquin
Valley. I met my wife in Los Banos in 1999 and we now have three sons.
I live on the farm with my family and cannot imagine a better
environment to raise my children. We farm in an area that has a very
historic water right, but that has not spared us from the impacts of
the ongoing drought.
I'm a farmer and I'm here to talk about what I know best: farming,
and farmers and ranchers in California and elsewhere in the West have
been hit hard by the drought.
Acreage and Infrastructure Impacts
The acreage planted to cotton in the West region, which includes
Arizona, California, and New Mexico, for 2015 is 318,000 acres. This
includes 167,000 acres of upland cotton and 151,000 acres of Extra Long
Staple (ELS) cotton in the three-state region. A decline of this
magnitude is having severe consequences for the entire cotton industry
in the region, from producers, gins, warehouses, marketing
cooperatives, merchants, and cottonseed processors and merchandisers.
The West region has the highest per acre yields of any area of the
Cotton Belt and produces some of the highest quality cotton due to our
unique climate. Yet, we also have the highest production costs of
anywhere in the Cotton Belt, largely due to the heavy regulatory burden
placed on agriculture in California, particularly.
Policy Needs
Given the current economic situation facing the U.S. cotton
industry, it is imperative that some action be taken to help stabilize
the escalation of acreage declines and infrastructure loss in our
region. While there are other cropping options in many parts of the
Cotton Belt, there is significant importance and value in maintaining
crop diversity that includes cotton. The increased production of
perennial tree crops in our area has picked up some of the acres
previously devoted to cotton. However, each year, we are seeing more
and more acres that are fallowed as a result of the worsening water
crisis in California. I will address this issue in more detail later in
the testimony.
To address the current crisis, the National Cotton Council and all
of the U.S. cotton industry is seeking the designation of cottonseed as
an `other oilseed' for purposes of the ARC/PLC programs in the 2014
Farm Bill. As you know, the farm bill gives the Secretary of
Agriculture the authority to designate oilseed crops for such purposes,
and this can be accomplished without reopening the farm bill. We are
seeking this designation for all cottonseed, whether produced from
upland or Extra Long Staple (ELS) cotton, since there is no distinction
in the seed produced from both types.
Extra Long Staple Cotton Policy
The 2014 Farm Bill continued the Extra Long Staple (ELS), or
``Pima'' cotton loan program as well as a competitiveness provision to
ensure U.S. Pima cotton remains competitive in international markets.
The balance between the upland and Pima programs is important to ensure
that acreage is planted in response to market signals and not program
benefits.
According to the farm bill, the ELS Competitiveness Payment Program
(CPP) is intended to:
Maintain and expand the domestic use of ELS cotton produced
in the U.S.;
Increase exports of ELS cotton produced in the U.S.; and
Ensure that ELS cotton produced in the U.S. remains
competitive in world markets.
While this program has proven to be an effective and efficient tool
to address global competitiveness issues for ELS cotton since its
implementation in 1999, there is a relatively recent development that
is hampering the proper operation of the program. In December 2014,
USDA FSA announced, without any notice to the industry, that it would
be withdrawing one of the foreign growths of cotton used in the
program--Egyptian Giza 86 price quote. FSA indicated this action was
taken due to a decrease in the quality characteristics for the 2014
crop of Giza 86 compared to previous crop years. The removal of this
key quote significantly impacts the operation and effectiveness of the
program as the other foreign price quotes currently used in the program
have relatively small amounts of production. The U.S. industry is
concerned that the current foreign price quotes being utilized do not
adequately allow for the appropriate determination of potential CPP
payments. We strongly urge that USDA reinstate the use of the Giza 86
quote for use in the program this marketing year.
In addition, there is a separate issue with regard to ELS cotton
production in China. China has been the largest market for U.S. ELS
cotton for a number of years, yet in 2014, China introduced a domestic
subsidy for Chinese ELS cotton. This has led to a significant increase
in ELS cotton acreage in China. For this reason, we believe USDA should
also add the Chinese ELS 137 cotton price quote as one of the
competitive growths for the CPP. This price quote is currently
available and should be added to the CPP to ensure the program serves
the intended function of helping to ensure a competitive market for
U.S. ELS cotton production. We ask this Subcommittee to please engage
USDA to help ensure these necessary changes are made and are effective
for the current marketing year.
Policy Costs
Western Water Policy and Drought
Water connects us all--farms, cities and the environment--and while
drought presents unique problems for each sector, our solutions should
be interconnected and mutually beneficial--not divisive. That requires
a willingness of all parties, including Federal agencies, to be
creative and flexible. That is happening in some places. In other
places, it's not. The most helpful thing that Congress can do for
drought-stricken states is to encourage, demand and mandate, where
necessary, creativity and flexibility on the part of Federal water
management and regulatory agencies.
In 2014 our family fallowed more than 15% of our farm. This year,
we have \1/4\ of the farm abandoned or fallowed. When one hears that
land is ``fallowed'' it might only seem that the impact is to the
farmer, but that is definitely not the case. Every acre of farmed land
generates jobs, economic activity and products. That is why the drought
is so devastating to the rural agricultural communities of the Central
Valley.
If I leave an acre fallow, my workers have less work and I use my
tractors less. If I use my tractor less, I buy less fuel, lubricants
and parts and tires, which means the local businesses that supply these
things sell less and their companies suffer. When I don't purchase
inputs for the land (fertilizer, seeds, amendments, etc.), the local
companies that sell these items suffer reduced sales and the truck
drivers who deliver these items have less work. With fewer trucks
running fewer routes, fuel and parts purchases are reduced.
This is a very scary time for me and my family, since substantial
investments are being made, primarily with the intent of converting
more of our operation to drip irrigation, which we hope will stretch
limited water supplies. Those investments will be for naught if the
current drought/regulatory paradigm persists into the future and there
is no water to conserve.
Five years ago, reservoirs in California were brim full of water.
Since then, much of that stored water--which had previously supplied
Central Valley farms for decades--has been allowed to flow out the
Golden Gate by Federal fisheries agencies, with no apparent benefit for
the fish species it is intended to protect.
The key challenges western irrigators face in times of drought
include competition for scarce water supplies, insufficient water
infrastructure, growing populations, endangered species, increasing
weather variability/climate change, and energy development.
Water Infrastructure Improvements
Also, new tools to assist in financing major improvements to aging
water infrastructure will be needed in the coming years to ensure that
farmers and ranchers charged for these upgrades can afford repayment.
Water infrastructure is a long-term investment, as are farms and
ranches, and long repayment and low interest terms will be crucial in
reinvesting in aging facilities to meet the challenges of tomorrow.
Such improvements could include investments in everything from new
water storage reservoirs (both on- and off-stream), regulating
reservoirs, canal lining, computerized water management and delivery
systems, real-time monitoring of ecosystem functions and river flows
for both fish and people, and watershed-based integrated regional water
management. With the advent of the Water Infrastructure Finance and
Innovation Act (WIFIA) in the WRRDA 2014, the Alliance believes a
similar affordable loan program could be instituted at Reclamation to
assist in providing capital for such investments. Also, more
flexibility may be needed to allow for private investments at
Reclamation facilities in order to attract additional capital to meet
future water supply needs.
Western irrigators need flexible, streamlined policies and new
affordable financing tools that provide balance and certainty to
support collaborative efforts and manage future water infrastructure
challenges. Solutions in all of these areas will be crucial to future
enhanced agricultural production, conservation and community outcomes
in the West.
Growing concerns about the delays and costs associated with the
proposed Sites off-stream reservoir project in the Sacramento Valley of
California, as well as the need for a local voice, led to the
formation, in August of 2010, of the Sites Project Joint Powers
Authority (Sites JPA). The Sites JPA, which includes Sacramento Valley
counties and water districts, was formed with the stated purpose of
establishing a public entity to design, acquire, manage and operate
Sites Reservoir and related facilities to improve the operation of the
state's water system.
The project would also provide improvements in ecosystem and water
quality conditions in the Sacramento River system and in the Bay-Delta,
as well as provide flood control and other benefits to a large area of
the State of California. The formation of local JPA's was included as a
key provision in the 2009 California Water Package Water Bond
legislation for the purposes of pursuing storage projects that could be
eligible for up to 50% of project funding for public benefits.
As the Sites JPA began working with the Bureau of Reclamation and
California Department of Water Resources, the JPA took a common-sense
approach. The JPA worked with Reclamation and DWR to put together
Foundational Formulation Principles. In other words, first identifying
the needs of the water operations system and then designing the project
that would meet those needs. Local project proponents envisioned a
project that would be integrated with the system they already had, and
one that would also operate effectively regardless of future
operational changes to the larger system, such as construction of new
conveyance to export water [to] users located south of the Delta. The
JPA wanted to maximize the benefits associated with existing
infrastructure and provide as much benefit as possible to both the
existing state and Federal water projects at the lowest feasible cost.
The JPA approached the Sites project with the goal of making the
best possible use of limited resources, and in the end, local
irrigators believe they have identified a project that is both
affordable and will provide significant benefits. The proposed project
maximizes ecosystem benefits consistent with the state water bond,
which states that at least 50% of the public benefit objectives must be
ecosystem improvements. Other benefits include water supply
reliability, water quality improvements, flexible hydropower
generation, more recreation benefits and increased flood damage
reduction. In short, the JPA approached the Sites project with the goal
of generating water for the environment while improving statewide water
reliability and regional sustainability in northern California. They
believe they have achieved that goal.
Environmental Regulatory Costs
Endangered Species Act
We need a new way of looking at how we manage our limited water
resources, one that includes a broader view of how water is used, along
with consideration of population growth, food production and habitat
needs. The goal should be to integrate food production and conservation
practices into water management decision making and water use
priorities, creating a more holistic view of water management for
multiple uses. We must begin to plan now in order to hold intact
current options. Planning must allow for flexibility and consider all
needs, not just focus on meeting future needs from population growth.
In many parts of the West, litigation stemming from citizen suit
provisions of environmental laws including the Endangered Species Act
(ESA) and Clean Water Act (CWA) is producing Federal court decisions
(or court approved ``settlements'') that direct Federal agency
``management'' of state water resources.
Congress should recognize that this type of litigation and
resulting settlements can actually harm the overall health and
resilience of landscapes and watersheds by focusing on single species
management under the Federal Endangered Species Act (ESA). We should
seek solutions that reflect a philosophy that the best decisions on
water issues take place at the state and local level. Finding ways to
incentivize landowners to make the ESA work is far more preferable than
what we have been seeing in recent years, where the ESA has been used
by special interest environmental groups and Federal agencies in court
as a means of ``protecting'' only a single species (such as the
Sacramento-San Joaquin River Delta smelt in California) without regard
for other impacts, including those on other non-listed species.
Litigation and the manner in which certain Federal agencies
administer the ESA are very much driving water management decisions
these days, at least in the West. And adversarial, single-purpose
approach is not helping the agencies recover very many species. Recent
research into litigation associated with Federal environmental laws is
beginning to uncover some unsettling facts: the Federal Government
appears to be spending about as much money funding plaintiffs'
environmental lawyers as it does to directly protect endangered
species. Certain tax exempt, nonprofit organizations have been
consistently awarded attorney fees from the Federal Government, for
suing the Federal Government. These same environmental groups are
receiving millions of tax dollars in attorney fees for settling or
``winning'' cases against the Federal Government.
We must manage water to meet all needs but in a manner that
``shares the pain,'' not creates winners and losers, especially when
the losers are the very beneficiaries the Federal water projects were
originally built to serve. The past Federal management of water in
California's Bay-Delta, which has redirected under the ESA millions of
acre feet of water away from human uses and towards the perceived needs
of the environment, with no documented benefit to the ESA listed fish
intended for protection, is a prime example. Meanwhile, California
water and power customers have suffered enormous, unmitigated losses
due to this ``management by perception'' approach.
To Central Valley Project agricultural water contractors, the loss
of 123,000 acre feet of Trinity River water that could have been
diverted to the CVP for drought relief in today's water market equates
to nearly a $250,000,000 replacement value. And this calculation
doesn't account for the other known socioeconomic impacts resulting
from fallowed acreage, lost production, lost sales, lost employment,
and increased need for social services throughout the San Joaquin
Valley's communities, many of which are considered disadvantaged under
Federal and state laws.
Good water management requires flexibility, as well as adaptive
management. More regulation usually reduces this flexibility. Federal
agencies managing the competing demands for water in the West have in
some cases failed in creating opportunities for more flexible water
management during times of drought.
The original intent of the ESA--stated in the Act itself--was to
encourage ``the states and other interested parties, through Federal
financial assistance and a system of incentives, to develop and
maintain conservation programs which meet national and international
standards.'' Of special importance to the Family Farm Alliance is that
the ESA explicitly declared that it was the policy of Congress that
``Federal agencies shall cooperate with state and local agencies to
resolve water resource issues in concert with conservation of
endangered species.''
The authors of the ESA clearly believed in applying the ESA in a
way that would foster collaboration and efficiency of program delivery,
in an incentive-driven manner. Unfortunately, implementation of the ESA
has ``progressed'' in recent years toward an approach that is now
driven by litigation and sometimes the inappropriate, inconsistent and
incorrect interpretation of the law by Federal agencies. As far as the
Act itself is concerned, little to no progress has occurred to keep
this 40 year old law in step with the modem era. The ESA has not been
substantially updated since 1988.
The ESA is an outdated law that is clearly not working as it was
originally intended. It needs to be more about incentives and
collaboration and less about litigation and regulation. Fewer than 2%
of the species ever listed under the Act have been recovered and
removed from the list, and the failures under the law far outstrip the
successes. Meanwhile, the economic and sociologic impacts of the ESA
have been dramatic. From the Alliance's standpoint, the law has really
only inflicted harm and generated litigation that uses the Act as a
weapon against our members' ability to use our natural resources for
farming and ranching, while doing little to help the environment or the
very species it was designed to protect.
More surface and groundwater storage is still a critical piece of
the solution to water shortfalls. Congress should streamline regulatory
hurdles to assist in developing new environmentally sensitive water
storage projects and other necessary water infrastructure improvements.
Congress should work to facilitate the construction of new surface
storage facilities, providing a more effective process to move water
storage projects forward.
New Federal Ozone Air Quality Standards
The EPA has recently adopted yet another, more restrictive, and
unrealistic, ozone standard for California. The new standard is 70
parts per billion (ppb) which will be extremely overwhelming for
California agriculture. Specifically, the San Joaquin Valley has not
yet been able to meet the previous three ozone standards by EPA. In
fact, the plans to meet these earlier standards haven't even been
written, yet EPA is moving forward with a new, stricter standard.
As you know, California already has some of the strongest air
regulations in the country, and much of the world. These standards are
resulting in severe economic consequences for agriculture in the state
due to requirements such as:
Mandatory replacement of all trucks used in agriculture.
Mandatory replacement of all irrigation pump engines.
Mandatory replacement of all tractors and harvesters.
Rule for the control of on-farm dust.
Reduction of pesticide VOCs.
This is all being done in an area that already has background
levels of ozone at 60 ppb. Yet, EPA has stated ``For California's
nonattainment areas to meet the updated ozone standards, the state and
EPA have recognized that transformational change is likely needed, such
as transition to largely zero or near-zero emission vehicle
technologies, and a significant turnover of the legacy fleet of
vehicles, among other changes.''
To be able to even come close to meeting the new EPA standards for
ozone, it would require converting all equipment to electric, yet the
technology to do so does not exist today. As a result, failure to meet
the new standards will lead to penalties that all businesses, including
agriculture, must pay. These are costs and penalties that are
unnecessary and lead to an uncompetitive business environment, yet
California already has the cleanest, lowest emission equipment in the
world, and the toughest regulations to go along with it.
Conclusion
I would like to thank the Members of this Subcommittee for the
opportunity to discuss some of the extreme challenges facing the U.S.
cotton industry, and particularly the excessive regulatory burdens on
California producers. With today's market prices, the added costs of
regulatory compliance and added production costs are making a bad
situation much worse. There must be some relief provided, both to
provide some economic stability and to relieve some of the stifling
regulatory regime. Thank you again for this opportunity and I will be
glad to respond to any questions at the appropriate time.
Attachments
Lake Shasta Storage Levels
The Chairman. Thank you, Mr. Michael.
Mr. Wright, you are recognized for 5 minutes.
STATEMENT OF MIKE WRIGHT, EXECUTIVE VICE PRESIDENT, CITY BANK
TEXAS, LUBBOCK, TX
Mr. Wright. Chairman Crawford, Ranking Member Walz, and
Members of the Subcommittee, thank you for taking time to host
this important hearing on the general state of the U.S. cotton
industry. My name is Mike Wright. I am the Executive Vice
President for the agricultural lending division of City Bank in
Lubbock, Texas.
City Bank is a locally owned bank with assets in excess of
$2 billion, with an agricultural loan portfolio of about $200
million. I was born and raised on a Lubbock County cotton farm.
I farmed for 8 years, and I have been involved with ag lending
since March of 1982. Agriculture is my background and it is my
livelihood.
In Lubbock and the surrounding 67 county area, cotton is
the main economic industry, with 20 to 25 percent of the U.S.
cotton produced in this region. Cotton production is extremely
important for the survival of many rural economies across
Texas. Declines in cotton acres are a tremendous concern for
agricultural lenders as this translates into pressure on
associated businesses, infrastructure, and rural economies,
which are also our customers. Prolonged production declines of
this scale will result in severe strain on the entire cotton
infrastructure, which continues to be the backbone of many
small, rural communities across Texas. A thriving cotton
industry is critical to the success of many local economies.
According to the Federal Reserve Bank, demand for operating
loans has increased in the third quarter of 2015, and loan
repayment rates have slowed. The margins in farming have been
getting tighter every year due to higher production costs and
lower commodity prices. As cotton prices have been suppressed,
in part due to policies and other cotton-producing countries,
U.S. producers are struggling to service their debt and make a
profit. Producers need above-average yields just to break even.
In this economic environment, access to credit remains one
of the most important resources for agriculture producers. In
2016, we are anticipating cash flow problems from some of our
very good customers with a long history with our bank. The
importance of FSA guaranteed loans cannot be understated in the
current economic environment. City Bank is an FSA preferred
lender in the Guaranteed Loan Program. Over the years, the
Guaranteed Loan Program has been a tremendous benefit to the
producers as well as to lenders. In some cases, a producer has
a terrible year and his loan may still be a good loan, but weak
in one or more areas of our analysis. The Guaranteed Loan
Program allows our bank to continue working with the producer,
but a portion of the loan is guaranteed and the producer has
some time to work out the situation.
The elimination of direct and countercyclical payments
significantly increased the risk endured by producers and
lenders. Now, crop insurance provides the main safety net and
is vital to our customers. We greatly appreciate the continued
support for the crop insurance program, and the successful
efforts of the Members of this Subcommittee to eliminate the
proposed cuts to crop insurance. If insurance premiums increase
so that producers are not able to afford insurance, we will not
be able to provide financing.
As you have heard from others, the addition of a cottonseed
support policy will be important to ensure continued economic
activity in rural areas. A cottonseed support policy will help
alleviate the increasing financial stress within the cotton
industry, and allow for continued credit availability.
As I close, let me express my sincere appreciation to the
Subcommittee for allowing me to testify today. As you move
forward, I pray that you can show other Members of Congress
that agriculture is the backbone of this great nation. My
family is dependent on it, as well as yours. As you leave
today, I would hope that you would take the following quote and
have it somewhere you will see every day, and remember the
words of William Jennings Bryan: ``Burn down your cities and
leave our farms, and your cities will spring up again as if by
magic, but destroy our farms and the grass will grow in the
streets of every city in the country.''
The American farmer is one of the most efficient producers
of the world. If they can continue to provide food and fiber at
a price that allows the American people to spend the largest
part of their incomes on homes, vehicles, televisions, and
phones, the American farmer will continue to do just that. But
if there is no incentive or profit in their actions, then the
grass will begin to grow.
[The prepared statement of Mr. Wright follows:]
Prepared Statement of Mike Wright, Executive Vice President, City Bank
Texas, Lubbock, TX
Chairman Crawford, Ranking Member Walz, and Members of the
Subcommittee, thank you for taking time to host this important hearing
on the general state of the U.S. cotton industry. My name is Mike
Wright, Executive Vice President of the agricultural lending division
of City Bank in Lubbock, Texas.
Background
City Bank is a locally owned bank with assets in excess of $2
Billion with an agricultural loan portfolio of about $200 Million,
which is of just over 11% of the total borrowing. I was born and raised
on a Lubbock County cotton farm, farmed for 8 years and have been
involved with ag lending since March of 1982. Agriculture is my
background and my lifeblood.
Current Market Situation
Texas is the largest cotton producing state, with about 54% of the
total U.S. cotton acreage. In Lubbock and the surrounding 67 county
area, cotton is the main economic industry with about 20-25% of U.S.
cotton produced in this region. Cotton production is extremely
important for the survival of many rural economies across Texas. Only
4.8 million acres of cotton were planted in 2015, down 30% from 2014
and 24% less than the recent 5 year average. The 2015 cotton acreage is
the lowest amount in Texas since 1989. Excessive rains plagued much of
the state during planting time and according to the Farm Service
Agency, Texas had almost 400,000 prevented planted cotton [acres] this
year.
Losses in cotton area are a tremendous concern for agricultural
lenders as this translates into pressure on associated businesses,
infrastructure and rural economies who are also our customers.
Prolonged production declines of this scale will result in severe
strain on the entire cotton infrastructure, which continues to be the
backbone of many small, rural communities across Texas. A thriving
cotton economy is critical to the success of many local economies.
Low prices and high production costs have created tremendous
financial pressure on the agricultural industry. As the 2015 harvest
nears completion, producers across Texas are facing incredibly
difficult economic conditions. According to a survey by the Federal
Reserve Bank of Dallas,\1\ many Texas cotton growers may actually fare
better in earlier drought years than in 2015. Production costs have
been even higher this year as increased rainfall led to additional weed
problems. In some areas, excess moisture has negatively impacted
yields. In 2011 and 2012, crop insurance guarantees were higher due to
much higher prices. This year, crop insurance guarantees are lower and
many producers have average yields that will not trigger a crop
insurance indemnity. In addition, some producers are dealing with
quality issues that will likely result in further discounts to the
price they receive for cotton. The projection of continued declines in
market revenue coupled with elevated production costs cause serious
concerns among the lending community.
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\1\ Federal Reserve Bank of Dallas. ``Special Report: Commodities
and Drought.'' Agricultural Survey. Third Quarter 2015. Available at:
https://www.dallasfed.org/assets/documents/research/agsurvey/2011/
ag1103b.pdf.
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Current Lending Situation
In this economic environment, access to credit remains one of the
most important resources for agricultural producers. However, with
increasing debt and tighter margins, agricultural lenders are facing a
tough situation. According to the Federal Reserve Bank of Dallas,\2\
demand for agricultural operating loans has increased in the third
quarter of 2015 and loan repayment rates have slowed. After 2 years of
declining farm income and few expectations for higher commodity prices
in the near future, one of our most significant problems at City Bank
is getting a producer's loan to show a positive cash flow. The margins
in agricultural production have been getting tighter every year due to
higher production costs and lower commodity prices. Producers need
above average yields just to break even. There is no doubt that some
cotton farmers will not qualify for financing next year. We are
concerned about our ability to continue to meet the lending needs of
America's cotton farmers in years to come. Going into the next crop
year, the ability to obtain financing will become increasingly more
difficult as crop prices remain low.
---------------------------------------------------------------------------
\2\ Federal Reserve Bank of Dallas. ``Agricultural Survey: Survey
Highlights.'' Third Quarter 2015. Available at: https://
www.dallasfed.org/assets/documents/research/agsurvey/2015/ag1503.pdf.
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Production costs have continuously increased over the last decade.
According to Texas A&M extension, production costs have increased by
about $72 per acre for non-irrigated cotton and $169 per acre for
irrigated cotton since 2008. The increase in seed costs is particularly
concerning now that producers are experiencing more problems with
chemical resistant weeds. Harvest expenses have increased as well due
to a large increase in equipment costs. Cotton is a highly capital
intensive crop requiring a much higher investment in equipment as
compared to other row crops. A new cotton harvester costs $650,000.
Term debt service on these types of inputs is extremely high. With low
cotton prices, the cash flows have become much tighter and the margins
are even lower. For 2015, the Texas A&M extension budgets show a loss
of $18 per acre on dryland cotton and $85 per acre on irrigated cotton.
Looking ahead to 2016, were are anticipating potential cash flow
problems from some of our very good customers with a long history with
our bank, including producers who are not highly leveraged. The
increased short-term debt burden coupled with 2 years of declining farm
income is particularly concerning. Although some producers will still
have some equity position going into 2016, lower grades of cotton and
lower prices may lead to a carryover of debt for 2015. With low price
expectations for 2016 and carryover debt, these producers may not be
able to show a positive cash flow in 2016.
To further intensify the situation, lenders are currently facing
even tighter underwriting standards. New banking regulations require a
more stringent stress-testing approach and the ability to show a
positive cash flow. As noted by an extension economist at Texas A&M, as
implementation of additional reform measures continues, credit
standards will be higher and the requirements for risk-based capital
liquidity will increase.\3\ As lenders face stricter standards for loan
underwriting, credit analysis, and loan risk rating from bank
examiners, the ability to extend riskier loans will be less likely.
---------------------------------------------------------------------------
\3\ Klinefelter, D. ``Back-to-Back Low Returns Bound to Raise Flags
with Farm Lenders.'' AgFax. May 14, 2015. Available at: http://
agfax.com/2015/05/14/back-to-back-low-return-years-bound-to-raise-
flags-with-farm-lenders-dtn/.
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Importance of Government Programs
The importance of FSA guaranteed loans cannot be understated in the
current economic and lending environment. City Bank is an FSA Preferred
Lender in the Guaranteed Loan Program. FSA guaranteed loans provide
lenders with a guarantee of up to 95 percent of the loss of principal
and interest on a loan. Farmers and ranchers apply to an agricultural
lender, which then arranges for the guarantee. The FSA guarantee
permits lenders to make agricultural credit available to farmers who do
not meet the lender's normal underwriting criteria. Over the years, the
Guaranteed Loan program has been a tremendous benefit to the producers
as well as to lenders. There have been times when a producer has had a
terrible year and maybe his loan is still a good loan but weak in one
or more areas of our analysis. The Guaranteed Loan Program allows City
Bank to continue working with the producer but a portion of the loan is
guaranteed and the producer has some time to work out the situation.
Over the years, we have had many producers on guaranteed loans who have
been able to work their way back to a direct City Bank loan following a
good crop year. As it stands today, City Bank will be utilizing the
program even more for 2016. Continued funding for the Guaranteed Loan
Program with no additional cuts is a high priority for the agricultural
industry.
The elimination of direct payments and countercyclical payments
significantly increased the risk endured by agricultural producers and
lenders. Direct payments provided a reliable source of income for loan
repayment. In most cases, direct and countercyclical payments would be
included as profit in the farming operation and would allow a farm to
cash flow and continue farming. As cotton prices have been suppressed
in part due to agricultural policies in other major cotton producing
countries, U.S. cotton producers are struggling to service their debt
and make a profit. While other commodities have a substitute program in
the 2014 Farm Bill, cotton is no longer a covered commodity under Title
I programs, so the safety net is entirely comprised of the marketing
loan and crop insurance programs. The marketing loan program provides
important collateral for lending and is a vital component of the cotton
safety net. The proposed addition of marketing loan certificates would
help alleviate some of the financial pressures faced by our growers.
We greatly appreciate the continued support for the crop insurance
program and the efforts to eliminate the proposed cuts to crop
insurance. Crop insurance is a vital component of the safety net for
cotton producers and any additional cuts would be detrimental to the
cotton industry. Crop insurance provides assurance to lenders that
farmers can repay their operating loans. We appreciate the addition of
the STAX program to provide additional risk management for cotton
producers. However, due to the uncertainty in area-wide payments as
well of the timing of payments, it is difficult to factor a STAX
indemnity into loan repayment.
In Texas, 97% of cotton acreage is covered by an individual
insurance policy. This area is extremely vulnerable to weather related
problems and large temperature variations and weather extremes are very
common, even within a 24 hour period. While agriculture has always been
a risky business, the risks for cotton producers have been exacerbated
in the past few years due to low prices, farm policies of other major
cotton producing countries, 2014 Farm Bill changes to the cotton safety
net, and now chemical resistant weeds. The increased risks for
producers directly affects the ability to qualify for financing. If a
producer has a good financial equity position, can obtain affordable
crop insurance and receives government program payments that can be
used for loan repayment, banks can use those tools for loan
collateralization. Any increase in crop insurance premiums for the
producer could greatly affect the affordability of insurance and the
ability to secure financing as most lenders will require crop
insurance.
Policy Needs
Producers across the Cotton Belt are struggling with the effects of
low prices, weak demand, and growing competition from heavily-
subsidized foreign producers. The infrastructure for the U.S. cotton
industry (gins, warehouses, marketing co-ops and merchants, and
cottonseed crushers and merchandizers) will continue to shrink unless
there is a stabilizing policy for cotton to help sustain the industry
in periods of low prices such as currently exists today.
As you have heard from others, the National Cotton Council and
other cotton industry organizations have developed a proposal to help
bring some stability to the industry. This proposal is based on the
administrative authority that Congress has provided to USDA in the
current and previous farm bills that allows the Secretary of
Agriculture to designate other oilseeds as eligible for farm program
participation. We believe that cottonseed, which is an important co-
product of cotton production, should be designated as an oilseed and
defined as a covered commodity under this farm bill, making cottonseed
eligible for the PLC/ARC program. The importance of cottonseed
continues to grow, as it now represents about 25% of the total revenue
or value from an acre of cotton production.
The addition of a cottonseed support policy will be important to
ensure continued economic activity in rural areas that is based on
cotton production and the associated activities to process, store,
transport, and market cotton and cotton products. A cottonseed support
policy could help alleviate the increasing financial stress of the
cotton industry and allow for continued credit availability.
Without some stabilizing policy put in place for the cotton
industry, given the current and projected prices and costs of
production, we can expect to see a continued decline in Texas cotton
acres and the associated infrastructure. As further evidence of the
need for the cottonseed policy, at least 197 lenders across Texas have
written to Secretary Vilsack urging him to take action on the
cottonseed proposal to help address the deteriorating situation. The
national Farm Credit Council, representing all the local farm credit
associations, sent a similar letter outlining the current need for USDA
to use whatever authorities available to assist the industry.
From a lenders point of view, it is imperative that actions be
taken that can have a stabilizing effect on the U.S. cotton industry.
We strongly recommend you use all authorities at your discretion to
assist in this situation and specifically that you designate cottonseed
as an `other oilseed' for purposes of the Agriculture Risk Coverage and
Price Loss Coverage programs. This designation would help bring much
needed stability and support to producers, and in these times of low
prices, allow them to have the balance sheets necessary to procure
production financing.
As I close, let me express my sincere appreciation to the Committee
for allowing me to testify today. As you move forward I pray that you
can show others of our legislature that agriculture is the backbone of
this great nation. My family is dependent on it as well as yours. As
you leave today, I would hope that you will take the following quote
and have it somewhere you will see every day and remember the words: In
1896 William Jennings Bryan said it best, ``Burn down your cities and
leave our farms, and your cities will spring up again as if by magic,
but destroy our farms and the grass will grow in the streets of every
city in the country.'' The American farmer is one of the most efficient
producers in the world today. If they can continue to provide food and
fiber at a price that allows the American people to spend the largest
part of their income on homes, vehicles, televisions and phones, the
American farmer will continue to do just that. But if there is no
incentive or profit in their actions, then the grass will begin to
grow.
The Chairman. Thank you, Mr. Wright.
The gentleman from Texas, Mr. Vela, is not a Member of the
Subcommittee but has joined us today. Pursuant to Committee
rule XI(e), I have consulted with the Ranking Member, and we
are pleased to welcome him to join in the questioning of
witnesses.
With that, I will recognize myself for 5 minutes.
I am going to direct this to Mr. Reed initially, and then
some of the other producers might want to weigh in on this.
Some of your testimony mentioned the request that the Secretary
of Agriculture designate cottonseed as an other oilseed for ARC
and PLC programs. Talk more about why you as a farmer, as well
as upstream and downstream businesses in the broader rural
economy, need that sort of action. How would it help you as a
producer as well as the stakeholders in your community, and how
that proposal would impact other commodities and cotton
farmers, or farmers in the other regions?
Mr. Reed. Thank you. The cotton industry now is in dire
straits. We have shown that. The problem in our area is we have
irrigation, we have fairly consistent yields, but with the
price that we are receiving, it just does not work. And pretty
much every university budget in the Delta shows that. For us to
continue to produce cotton at these price levels is just
unsustainable. Also, when you lose your cotton farmers, you
lose your cotton industries.
I was looking this morning at auction papers, and
generally, most of the farm auctions that are coming up have a
cotton picker in them. So it is mostly cotton farmers. And with
the removal of cotton from the farm program in this last farm
bill, the problem with crop insurance is there is not a price
policy there whenever the price is at its lowest levels, even
with the STAX and the buy-up that we buy. So it is extremely
important if cottonseed can be designated as an other oilseed,
without opening the farm bill, we can receive some support
there and maybe stop the bleeding in the cotton industry.
The Chairman. Thank you.
Mr. Holladay, would you like to weigh in on that?
Mr. Holladay. Yes. If you look at where cotton is today and
look where we are headed over the next few years, you cannot
see an up-tick in cotton prices, basically due to the policies
of these other countries. Being a part of the commodity title,
again in respect to some sort of support on what we grow, would
be a very important thing in being able to cash flow our
operations. Having the ability to have cottonseed as an other
oilseed would do that. It is not going to be a silver bullet,
and it is not going to be enough of a cash exchange to where
you are moving acres from one place to the other, but it will
sustain cotton operations and it would be sound policy.
The Chairman. Thank you.
Mr. Wright, you mentioned that some of your long-time
customers having negative cash flow issues, have a history of
being good customers, productive farmers, would this cottonseed
proposal enhance their ability to cash flow in your perspective
as a lender?
Mr. Wright. Yes, sir, it would. Sorry. Yes, sir, it would.
We are looking for anything that we can use to cash flow
these producers. As I have stated, as well as the other panel
members, when we lost our direct payments and our
countercyclical payments, a lot of times for our producers,
that was their profit.
When you work their loan and you have finally got it all
done, when you look at the bottom line and if they show a net
profit in their operation, you could go back and generally it
was the direct payment or in the countercyclicals. So when that
went away, then we lost that option and the cotton prices went
down. So this is another tool that lenders will be able to use
and it will help us greatly.
The Chairman. Thank you.
Let me ask you, Mr. Stephens, changing the subject a little
bit. We are looking at the next few years with huge world
cotton stocks overhanging the market. We know that has been a
problem. China and India are probably the culprits in that
scenario. In spite of market signals, we see cotton production
ramped up in those countries. Based on that, what is your
expectation for the future of cotton prices and returns for
U.S. cotton farmers throughout the life of this farm bill?
Mr. Stephens. Yes, sir. Well, of course, USDA is projecting
flat prices through the farm bill, the prices are not deemed by
most experts to have a whole lot of upside. And you already
mentioned China with 60 million bales that is government-
controlled, that is if it is available to the market, or is it
not available to the market. Well, that is a decision the
Chinese Government makes, not the free market. And so that is
overhanging the potential rise in prices.
And then you mentioned India also, with 1 in 4 bales
produced in India now, and with a minimum support price in
India, and other subsidies that those producers receive, and
the government controlling the internal and external
availability of Indian cotton. Then it puts the U.S. producer
in an untenable and really a position where they can't predict
what these foreign governments are going to do and how they are
going to affect their prices.
The Chairman. Thank you, sir.
I appreciate the responses. I now recognize Mr. Walz, for 5
minutes.
Mr. Walz. Thank you, Chairman. And thank you all for your
testimony. It is really helpful.
I was mentioning to the Chairman, listening to Mr.
Wannamaker and Mr. Michael, you are sixth generation producers.
That is longer than Minnesota has been a state, so that ought
to stand for something. And the knowledge that you bring means
something, and so I like it.
This is kind of a primer for me. I want you to help me with
this. Last fall, my producers' biggest decision was ARC or PLC,
basically, on how they were going to go. That is not the case
for you. It was base acreage reallocation. And one of the
things that this Committee has stood strong on is this crop
insurance issue, and I know your producers are covered by that.
What I am trying to understand is only 30 percent of cotton
acres are covered by STAX, and I am trying to understand why
that is the case, what we could do, why it either works or
doesn't work. But as your decisions with the new farm bill were
put into place, for the growers, how did you decide those base
acre reallocations, and how do you decide whether to get into
STAX or not?
Mr. Wannamaker. Most of the STAX decisions were probably
influenced most by the crop insurance salesman. In my
particular instance, my crop insurance salesman showed me a 10
year scenario of how many years I would be paid, according to
what the premium was, and he convinced me that it was a good
risk to take. Most crop insurance salesmen did not push the
STAX program, in my area anyway, and so a lot of people did not
take it. If they had it to do over again, they would. But I am
surely glad I did but, like I say, everybody needed to hear
that scenario he painted for us. STAX is not true crop
insurance, it is an investment that over the long haul will
pay, but it is not true crop insurance on my farm. I actually
took 75 percent coverage and then took a buy-out with STAX
above that because I felt like if I didn't have full coverage
on my farm with 75 percent, that I might have a loss and my
neighbors might not. So, in other words, my reason might not
happen, but it might, so I wanted to have true crop insurance
for myself. STAX is a good tool, it is just that it wasn't sold
by the people selling crop insurance very well.
Mr. Walz. Mr. Michael, I am going to turn to you. Well, I
appreciate that, and we have to see it. That is an interesting
take for us to try and understand.
This is the thing that gets so frustrating up here, the
either-or choices that get made, and you mentioned in
California is a unique situation in certain ways because of the
regulation. It is very helpful on the water situation, but I
would like you to explain in real terms, because unfortunately,
we get painted into a picture on this. If you bring up a
concern about a regulation then you are painted as if you don't
care about that, which, of course, you do. You care about clean
water, you care about endangered species. My question to you
is, if you could help me understand this. On the issue of
background ozone levels, in real practical terms for you to
meet what is being proposed, what would that look like, what
would that piece of equipment look like? How would you go about
your operation if you were just going to make a good faith
effort and do everything you could to meet that requirement,
because it is the right thing do to if you think that, but what
does it mean in practical terms?
Mr. Michael. Well, I would love to have you guys come out
and see some of the tractors and the contraptions that we now
have on our equipment out in California. Not only does it make
it a lot more expensive and a lot more maintenance, but it
makes that piece of equipment really not saleable out of the
State of California in the future. So not only do you have to
pay more for the equipment, it has less value, going forward.
But, these future requirements that are being proposed now
are going to really make it even more difficult on top of the
layers of regulation that we already have. I don't know what we
are going to end up with. I think we need to go back to a mule
and a plough, but we are trying to be as efficient and
productive as we absolutely can. And, again----
Mr. Walz. Would it be farfetched to--are you looking at
electric tractors?
Mr. Michael. There is everything being proposed right now.
At some point that may even be on the table. But, we are trying
diesel and clean-burning diesel, which we have an ultra-low
sulfur formulation that is only for California that we have to
use. So, we are already doing every step that we can. So in----
Mr. Walz. What is----
Mr. Michael.--this----
Mr. Walz. What is the price on a boutique fuel like that?
Mr. Michael. Our average is $1 more than the rest of the
nation. We can't import from other states because of the
special formulation, so we kind of exist in our own island out
there.
Mr. Walz. Well, I do think it is important because all too
often those of us who are concerned about this, and I know many
in this room, we want to have sustainability, we want clean
air, clean water, but there is a practical nature that has to
be applied too. And it gets very frustrating for you, saying we
are doing everything possible to reach that, but here is what
it means. I think sometimes if we can articulate this is what
it looks like in the real world, not just theoretically, I
think that is really important. So thank you for your
testimony.
I yield back.
The Chairman. I recognize the Chairman of the full
Committee, Mr. Conaway, for 5 minutes.
Mr. Conaway. Well, thank you, Chairman. I appreciate our
witnesses being here.
Could one of you give us a quick scenario? We get this
comment from time to time from folks who don't understand a lot
about agriculture, and that is, ``Why don't you just plant
something else?'' If you can't make a profit from growing
cotton, why don't you plant something else? Shawn, would you
like to take a shot at that?
Mr. Holladay. Yes, thank you, Mr. Chairman. In our area of
Texas, and a large portion of Texas is historically cotton-
specific country. As you well know, the land has always been
cotton land from the very beginning when it was tilled out of
prairie. Cotton is the most profitable plant from a water usage
standpoint out there, there is a vast majority, especially on
the southern high plains of dryland operations, and the water
input is high efficiency, low volume water that is putting on
there, drip irrigation, LEPA system irrigation, and such as
that. And cotton has a whole lot more yield potential when it
comes to breaking even on a crop.
Mr. Conaway. All right. There are so many bits and pieces
to it, but can you flesh out the impact that a permanent loss
of cotton production would have on your area? In terms of the
both the upstream and downstream industries, from inputs and
suppliers to gins, compresses, and merchants, those kind of
things?
Walk us through that a little bit.
Mr. Holladay. As you know, the pipeline of cotton is not
the only thing affected in the cotton country. Especially mom-
and-pop organizations within these rural communities are highly
stressed right now in the cotton country. Your infrastructure
itself, which, if you lose, is not something that you can
afford millions and millions of dollars to----
Mr. Conaway. Describe that----
Mr. Holladay.--put that in place.
Mr. Conaway.--infrastructure.
Mr. Holladay. Yes.
Mr. Conaway. You are talking about mom-and-pop shops, you
have mechanics and other suppliers.
Mr. Holladay. Yes.
Mr. Conaway. Walk us through some of the faces----
Mr. Holladay. Well, you have----
Mr. Conaway.--that we would lose.
Mr. Holladay. Yes, sir. Your tractor dealerships would
consolidate, they would use less mechanics, there would be one
to every four or five communities. That is being looked at. The
gins would consolidate to one or two per county. You would lose
jobs in every instance that you look at something like that.
You have tire dealerships, hardware stores. I mean if you are
looking at--on the high plains of Texas, you are looking at
between one to four and one to five jobs are related to
agriculture, and cotton is the primary crop grown in that area.
And if you switch to a different crop and go to something that
is unsuited for our soils, you are going to take the amount of
farmers down a significant number, and the amount of support
down, everything comes down, and that affects the rural
communities.
Mr. Conaway. Mr. Wright, we had the Farm Credit
Administration in here last week. We asked them about
availability of credit for the 2016 crop year and beyond. I am
worried that some of the mechanical underwriting rules being
placed on banks will prevent lenders like you from being able
to use your own judgment for risks, and this automatically
prevents you from financing next year's crop. Can you walk us
through that? Is that a legitimate risk, or am I overplaying
that?
Mr. Wright. Yes, sir, it is a very legitimate risk. As I
have told people before, agriculture is a different animal, and
when you look at it from a banking standpoint, you have to
understand ag. I have been part of an organization before where
they changed upper management and they hired guys that didn't
understand agriculture, and it became a reg, and that is when I
went to City Bank and found some people that understood. But
the regulators are coming in now, and our cash flows, years and
years ago--and you may remember this--you had what was asset-
based lenders, and as long as you had plenty of collateral and
as long as you could secure it, then you could pretty well go
and make the loan. That all changed, and we got back into the
cash flow position that we are in now. So you can have all the
collateral you want to, but if you can't cash flow this, then
they hold our feet to the fire. And so we have to be
accountable to the regulators and to the banking industry, and
this it makes it tough.
Mr. Conaway. Is there a way to have a non-credit-supported
production agriculture system? Could we do away with banks
altogether, and make that work?
Mr. Wright. Well, just give me a few more years and then it
will be time for me to retire, and then we might want to do
that. We at City Bank are pretty fortunate because of our total
loan portfolio, ag is about 11 percent of that, which sounds
pretty small. We topped out at about $216 million this year,
which is pretty big, one of the bigger lenders. And what is
going to hurt is when you talk about these other industries,
the smaller banks and the smaller towns, those loan deposit
ratios are in 80 percent, 90 percent, and those are in ag
loans. That is what they loan to. That is all they have to loan
to. And so it will cripple them.
Mr. Conaway. All right. Thank you, Mr. Chairman. I yield
back.
The Chairman. Thank you, Mr. Chairman.
I now recognize the gentleman from California, Mr. Costa,
for 5 minutes.
Mr. Costa. Thank you very much, Mr. Chairman.
I want to go back to our witness from the San Joaquin
Valley. Mr. Michael, you talked about, because of the result of
a lot of changes, many factors above and beyond your control,
you have had to become innovative in your efforts to try to
maintain your efforts in the cotton industry. You described the
extra long staple cotton competitiveness payment program, and
the possible changes you would like to see as it relates to the
pima cotton that you grow and the blends. It is the added value
that you get for growing that pima cotton that allows you to
still stay in that business. Could you be more explicit in
terms of what you would like to see?
Mr. Michael. Sure. The ELS cotton does exist sort of in a
world of its own because of its length and strength
characteristics. We do need to be able to stay competitive,
China right now is subsidizing their growers over 40 a pound,
and that has boosted their production to a very high level of
ELS that we haven't really seen before. We would like to
include that price as a reference point in with the discussions
for our competitiveness program that we have in place.
Mr. Costa. Do we know for sure that China is maintaining
that premium blend, or are they, in fact, blending it with
other varieties of cotton?
Mr. Michael. Well, it is very possible, from what we have
seen with our pima cotton, that there is a lot of blending out
there because it is a higher-price product, so retailers are
starting to find that there is actually quite a bit of
gamesmanship going on. There is sort of some fraud being
perpetrated on the consumer by products that are supposed to be
100 percent ELS cotton are actually heavily blended with lower-
quality cotton, mainly at the mill level in China.
Mr. Costa. Have you or your neighbors been able to utilize,
out of the farm bill that we worked very hard on, some of the
programs involved, like the EQIP program?
Mr. Michael. We have used the EQIP program and been very
successful getting some funding. The one problem is that we are
just one entity, and the caps, you hit them pretty quickly. And
so it sort of deincentivizes in some ways the larger producers
from investing in larger conservation projects because of some
of the cap limits. I understand there are reasons maybe for
some of those limits, but in terms of water conservation in a
state like California, it would be much more helpful if we had
additional access to some grant funding. But unfortunately, we
get capped out pretty quickly.
Mr. Costa. I would like to ask all the witnesses quickly,
if you can, because my family has been in the cotton business,
we no longer are, it was no longer financially feasible with
our kind of operation, we went to permanent crops, but there
has always been the debate on the use of cotton for fiber in
this country and around the world versus synthetic blends, and
we look at the competition that is out there, where do you see
the role of cotton in American and global economy in the next
10 years? Anybody care to comment?
Mr. Stephens. Well, of course, we see cotton as the
premiere fiber, and the fiber you want to put----
Mr. Costa. Well----
Mr. Stephens.--next to your baby's----
Mr. Costa.--no, I agree with you.
Mr. Stephens.--skin. And what we have seen in the past
several years is the largest textile consumer in the world, the
textile supplier to the world, has had the highest cotton
prices and the lowest polyester prices due to their government
policy.
Mr. Costa. Yes.
Mr. Stephens. And so we as U.S. cotton farmers----
Mr. Costa. Do we have any numbers on utilization of
polyester products versus cotton today, and any trends over the
last 20, 30 years?
Mr. Stephens. Yes, sir, we do.
Mr. Costa. Does the National Cotton Council?
Mr. Stephens. Yes, sir, we do. And we will be happy to get
those to you.
Mr. Costa. Yes. Finally, Mr. Cannon Michael, I want to go
back to your comments on the Endangered Species Act, and we
have dealt with the Sage-Grouse in the Midwest and other
problems that you alluded to with regards to the Delta smelt
and salmon protection, I mean it is your view that we need to
take another look and recalibrate the way the Endangered
Species Act is being applied?
Mr. Michael. I just would like to see a little bit more
accountability and some metrics set in place where if there are
going to be resources allocated for endangered species, there
should be a level of accountability. We have seen in this
drought, a high level of focus on urban use and agricultural
use, but we are also using our engineered system to supply
water for species, and if that is going to be the case, then we
need to have that level of accountability. And for any state
that is facing Endangered Species Act issues, it is advisable
that you all would focus on wanting that to have some
accountability because it is being applied in ways in
California that are not helping the species, and that are still
taking the resources, even though it is not working to help
those species.
Mr. Costa. Thank you. My time has expired, but for the
Members of the Subcommittee, a bit of a footnote for history. I
said a sixth generation farmer, and I am not sure which
generation it would be appropriate, but somewhere back, great-
great-great-grandfather was a Speaker of the House of
Representatives, by the name of Joe Cannon.
The Chairman. That is interesting.
Mr. Costa. So----
The Chairman. Very interesting.
Mr. Costa. Yes.
The Chairman. Thank you, sir. I appreciate that.
Mr. Austin Scott from Georgia, you are recognized for 5
minutes.
Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
And I could ask this question of any of you, I guess, but I
am going to ask it of you, Mr. Wannamaker. We have heard here,
and I hear back home, I am from Georgia, cotton is obviously a
tremendous crop for us, about the challenges of obtaining
financing if the situation doesn't improve. And I look at the
stockpiles in China, and other areas around the world, of
cotton and I just wonder, what percentage of the producers in
our part of the world do you think are under so much pressure
that they may not be able to borrow the money to plant next
year?
Mr. Wannamaker. I would venture to say that the biggest
impact will be on young producers. I am 59 years old. I went
through some good times, but a lot of these younger producers
that are out there now went through some good times, they have
never seen any bad times and they don't have any equity built
up yet. I mean the young producer is probably the most at risk
of any of them. The small, young producer that is just getting
started or just got started in the last few years is at the
most risk. I don't know the exact numbers, we probably could
come up with them, but I would say the main focus should be on
the next generation, keeping the next generation in business.
Mr. Austin Scott of Georgia. So and if you don't want to
answer this question, feel free not to. Sir, do you
collateralize your own loan with other assets that you have
already accumulated? Do you secure them or do you----
Mr. Wannamaker. I do. My lender takes everything he can
get. I try to give him as little as I can give him.
Mr. Austin Scott of Georgia. I understand. The thing I hear
from my bankers is they want the cash back on the loan. They
don't want to take anybody's land. I mean that is----
Mr. Wannamaker. Right.
Mr. Austin Scott of Georgia.--that is not what they are in
the business of. But it concerns me that when you see the
stockpiles, and knowing nobody has a crystal ball, I mean 1
year, 2 years, 3 years, how long does it take to----
Mr. Wannamaker. It is at least the length of the farm bill,
and that is why we are here today. We see it is bad now, but we
see it staying this bad and this is probably the most, I don't
know, I am really so anxious about this cottonseed program
because it is the lifeblood of cotton. Cotton is going to leave
the United States if we don't get this. I really believe we are
on the road to having that happen.
Mr. Austin Scott of Georgia. I am very concerned that you
are right as well.
Which brings me to the next question. So Brazil took action
against the United States with regard to cotton, but if we are
honest, it is China and India that is the problem with the
global cotton market. How do we--what suggestions do any of you
have for Congress and how we address that issue with regard to
China and to India, and maybe why didn't Brazil take action
against one of those two countries?
Mr. Wannamaker. Well, I think partly because they
considered themselves underdeveloped. The United States is
considered a developed country, and so we are the ones that are
picked on all the time. We are the most efficient producers in
the world, yet we have to be asked to grow cotton for 64 when
other countries are being subsidized up to $1.40.
Mr. Austin Scott of Georgia. Yes.
Mr. Wannamaker. I have made this comment to other farmers
around, I said I would be growing cotton in my lot next to my
house if I could get $1.40 for it. So we just can't compete
against governments. We can compete against producers----
Mr. Austin Scott of Georgia. Yes.
Mr. Wannamaker.--but we can't compete against governments.
So we have to make those governments more accountable and make
them give their numbers and be as transparent as we are.
Mr. Austin Scott of Georgia. I am down to less than a
minute, but if any of the rest of you who are producers would
like to speak about that, or any of you have any suggestions on
kind of the global market and how long you see it takes to
shake out? Mr. Holladay?
Mr. Holladay. Yes. You can see if China's stockpile stays
isolated, Shane would speak better to this than I can, but if
their stockpile remains isolated and it is something that they
are going to use, you can see an up-tick in the market 3 to 4
years out maybe. Maybe sooner, depending on what happens in the
rest of the world. I mean it is still a commodity that is used
in the world, so depending on what China does with their
stockpile would have a great impact on what our prices are
going to be.
Mr. Austin Scott of Georgia. Yes.
Mr. Stephens. Yes. The U.S. producer, and to my knowledge,
nobody in the U.S. has any influence or control, it is strictly
we are at the mercy of the Chinese Government's decisions with
their huge stockpile. It is twice what would be considered a
long-term stock-to-use ratio, and it is because of the huge
stockpiles in China. The market doesn't know are they
available, are they going to be made available, are they going
to be held off the market. It really is limiting our potential.
The Chairman. The gentleman's time has expired.
We are going to stay in Georgia, move across to Mr. David
Scott, and recognize you for 5 minutes.
Mr. David Scott of Georgia. Let's stay on the China
situation that my good cousin over there, Austin Scott, brought
to the fruition. How long do you think that China's current
stocks will suppress the world's market, how much longer?
Mr. Stephens. We really wish we knew. The only people that
can answer that is the authority in China.
What we do know is they continue to increase polyester
production into the face of an already oversupplied polyester.
They continue to take internal policies that lower the price of
polyester in China, and they continue to hold the price of
cotton inside China well above world prices.
Mr. David Scott of Georgia. So in order for us to really
see how we can, over in the United States and our agricultural
policy, can thwart this or deal with this, what is your best
understanding of why, why is China doing this? Is it to move
into other crops, to diminish this, for example, you brought up
polyester, some of our own mills are turning to polyester
instead of cotton. What is the thinking, if you could get into
the Chinese mindset, what is their thinking, they have to have
some reasonable rationale for why they are doing this, because
it could eventually come back to hurt them as well if they
continue and suppress cotton?
Mr. Stephens. Yes, sir. I suspect some people might say
they don't have to have a reasonable decision-making process,
what we understand is that China is a net importer of cotton,
and has been for years. They are not a net importer of
polyester. They continue to produce polyester inside China----
Mr. David Scott of Georgia. Yes.
Mr. Stephens.--to satisfy their internal use and the
polyester that they sell to the rest of the world. So they are
becoming less and less of an importer of raw cotton, so they
are not looking----
Mr. David Scott of Georgia. Yes.
Mr. Stephens.--to the United States to supply raw product
like they used to.
Mr. David Scott of Georgia. And so for our cotton farmers,
because I am very concerned about it because while the
Chairman's beloved State of Texas is number one in cotton
production, Austin in my State of Georgia is number two. So we
are very much concerned. What would you say is the economic
impact of the situation right now? In other words, financially,
what is it costing our cotton farmers in the United States,
this situation in China and India? Anybody? Is there a dollar
figure? Is there something we can hang our hat on to say if we
don't change this situation, if something isn't happening in 2
or 3 years, or put some kind of figure on it, this is what is
going to happen to the cotton farmers in Georgia and the United
States?
Mr. Stephens. Well, Mr. Scott, we have reported that there
is $100 billion economic impact derived in the United States
through the cotton industry. And you have heard the producers,
and the producers I have talked to all across the mid-South and
Southeast on a weekly basis tell me that the cotton industry
will not sustain itself unless something substantial changes
relatively quickly.
Mr. David Scott of Georgia. Yes.
Mr. Reed. And I would add that as a U.S. producer, I feel
like, on a level playing field, I can compete against any
producer in the world. I don't feel like we are in that
situation now with the Chinese and India heavily subsidizing
their cotton industry. So that is part of my----
Mr. David Scott of Georgia. Yes. And so what would your
best recommendation be as to what we need to do about it in
terms of our agriculture policy?
Mr. Reed. I would say, immediately short-term, have some
system in place where cotton farming not even becomes
profitable, just becomes where we don't go broke----
Mr. David Scott of Georgia. Yes.
Mr. Reed.--in the short-term. And that is really what we
are asking for is to stop the bleeding. There will be some in
this cottonseed program we are proposing. A lot of these
generic base acres are going into peanut production, which has
a very high government payment, and rice production.
Mr. David Scott of Georgia. Right.
Mr. Reed. There will be quite a bit of savings there by
people not bleeding off acres into cotton production.
Mr. Stephens. Oilseed.
Mr. Reed. Yes, if we do get the oilseed payment, there will
be quite a bit of savings there of people stopping to grow the
peanuts just for the farm payment.
Mr. David Scott of Georgia. So the one thing that we can do
is make sure, if I hear you right, to make sure that the
Secretary to Agriculture, Secretary Vilsack, designates
cottonseed as other oilseed? That is something----
Mr. Reed. Short-term, just to stop the bleeding and save
our cotton infrastructure, because we are at a definite
breaking point. Much less cotton in the mid-South, we are going
to see gins fold up, and once that happens, they don't really
come back.
Even if the cotton market comes back, it will be very
difficult.
Mr. David Scott of Georgia. So the one thing we can
definitely do as Members of Congress is to get letters and to
get in contact with Agriculture Secretary Vilsack to spur him
on to make this definition of other oilseed?
Mr. Reed. Absolutely.
Mr. David Scott of Georgia. We will do it. Thank you.
The Chairman. The gentleman's time has expired.
We are going to continue with the Georgia show and move
across the aisle to Mr. Allen. You are recognized for 5
minutes.
Mr. Allen. Thank you, Mr. Chairman. And I am going to give
you a few statistics on Georgia. I guess that is why there are
three of us sitting here at this hearing. But first I want to
thank our panel for coming before the Subcommittee today.
I was the son of a farmer, so I know a little bit about
your pain, although we didn't grow cotton, we were in the dairy
business, which is the smartest thing my dad ever did was get
out of that business and become a gentleman farmer.
But I represent the 12th District of Georgia, and, of
course, in 2014, the State of Georgia planted around 1.38
million acres of cotton, and a yield of about 900 pounds per
acre. And, in listening to both our farmers in the district and
to you today, I don't see that it is our farmers' fault that
prices are so low. Last year, for example, again, we averaged
about 900 pounds per acre, compared to a national average of
around 685 pounds per acre. So we are getting very efficient at
what we do. And the thing that amazes me is that you still ride
down the roads of Georgia, and I am sure it is like this in
other states, where we have the old textile mills. They are now
becoming office buildings and things like that. At least they
are being converted, but for so long those buildings were
vacant. We lost our textile industry, and for the life of me, I
tell you, I do agree with some of our presidential candidates
who have talked about our trade policies in the past. I don't
understand why China would pay their farmer $1.40 a pound, or
more, for cotton, which is less quality than our cotton, they
will only pay us 62 a pound for the cotton to be able to make
this shirt that I paid $35 for, that I bought and was made in
China. Somewhere we are getting the short side of that deal,
absolutely no question about it, and we need to make our
friends in China aware of that. I am assuming that we could buy
this shirt somewhere else, possibly. And that is the root of
the problem as I see it, is that we have lost our textile
industry, and now we are at the mercy of other nations. Eighty
percent of our cotton grown in our district is sent through the
Savannah port overseas. And we have to find a market for that.
Of course, we have some things we have been working on as far
as trade goes; but, obviously, we have to get to work on the
source of the problem, and that is the ability to stabilize
this world market and treat our farmers fairly in this country.
And I see that as really a national security issue, Mr.
Chairman.
But again, enough on the foreign issues. Obviously, you all
have talked about the economic impact of cotton as we reduce
acreage. I have 18 gins in our district. When you build a
cotton gin, it is a lot of infrastructure. You might be able
to--okay, we are going to convert to cotton and grow cotton
next year because it is back to $2.50 a pound, it takes years
to build that gin. So you have those issues.
I guess what do we do in the short-term? What can we do as
a body in the short-term to shore us up and get us where we
need to be?
As far as the STAX Program, is there--Mr. Wannamaker, you
commented on it. Is there any way we can make that program a
bridge--I know we have the cottonseed issue, and our Chairman
has sent a letter, which we are party to, to get the cottonseed
thing done. But as far as the STAX program in place, is there
any future as far as it stabilizing our situation until we can,
as a country, get this thing solved?
Mr. Wannamaker. STAX is a good program, but the cottonseed
thing is--I think is definitely needed now. I mean----
Mr. Allen. Okay.
Mr. Wannamaker.--I just don't think----
Mr. Allen. Well, that is----
Mr. Wannamaker. Yes.
Mr. Allen. That is an emergency.
Mr. Wannamaker. Right. Right.
Mr. Allen. Yes. It has to happen.
Yes, sir, Mr. Reed?
Mr. Reed. I was just going to add to that that STAX is an
insurance program, and this low-price environment that we are
in, it is----
Mr. Stephens. It is a revenue.
Mr. Reed. It is a revenue insurance and it is not--at 64
cotton STAX is a little bit irrelevant because no matter how
good the yield we make, it still doesn't come out.
Mr. Allen. Yes. Well, I am out of time, doggone it. But
anyway, thank you. Hang in there and let us know what we need
to do to get this thing fixed. I appreciate it.
The Chairman. The gentleman's time has expired.
The gentleman from Texas, Mr. Neugebauer, is recognized for
5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman. Thank you for
holding this hearing. It is good to see some great folks from
the 19th District here today. Thank you, Shawn and Mike, for
coming up and being a part of this panel.
When you look at some of the options out there, near-term
and long-term, and then you talk about the cottonseed issue,
can you kind of walk the Committee through what the numbers
would look like? Shawn, if you had something like that in place
today on a per acre basis, what would we be talking about?
Mr. Holladay. Well, the preliminary numbers that we are
looking at, if you are wanting to look at, basically, you would
be using a factor of about 1.4 percent to lint, so you would
have a constant factor over to cottonseed. You would have
probably a $60 or so acre payment on a 500 pound frozen yield
at the FSA Office on your base acres, basically. That is a
rough number. That is the way we figured it. That would be not
a silver bullet and not enough money to move a whole lot of
acres around, but a traditional cotton producer, it would be a
big impact, as you well know, on cash flow in an operation. And
near-term, without opening the farm bill, that is what we have
available to us right now to try to get done, and we appreciate
your help in getting that done.
Mr. Neugebauer. Yes, thank you.
And, Mr. Wright, back in your testimony you mentioned that
it was hard to factor in STAX when you are doing these cash
flow analyses, and you are saying you are getting some pressure
from the regulators now of these cash flows. I have had a
number of conversations with you and others that these cash
flows are really tight, and particularly with the weather
patterns we have had over the last 2 or 3 years, a lot of that
equity has shrunk and so the cash flow becomes much more
important. Can you kind of talk to us a little bit about the
difficulties of using STAX in the cash flow projections, and
how you incorporate that, and do you incorporate it?
Mr. Wright. Well, we look at it, but STAX is a revenue
insurance. And so it is based on, in our area, based on the
county. And those 2015 indemnities won't be paid until some
time in the late summer of 2016. Well, our guys need the money
now. We need the money then, but it takes that much longer. So
it is hard for us to take a number when we don't know what it
might be, and it might not be anything. And so we really don't
have anything concrete to put our hands on, to put it on paper,
to put it in those cash flows.
Mr. Neugebauer. One of the things that you mentioned is
these cash flows are getting tighter and the examiners are
looking at it harder. One of the things we saw last year was a
lot more FSA Guaranteed Loan Program, and one of the things
that happened to us because the demand had picked up in that
program, is that we had people calling, literally, it was time
to plant and they had not been able to get approval on their
guarantee.
We talked to the Secretary about that. They put some
additional people in there, but my guess is if these prices
remain at these levels, that that activity is going to increase
because you are going to find it more and more difficult with
the scrutiny you are getting, from the regulatory standpoint.
Are you seeing where you are going to have to look at moving
some more of that business to the guaranteed program?
Mr. Wright. Yes, sir. Yes, sir. We are going to utilize it.
We have used it, and it is one of the reasons we are a
preferred lender. As a preferred lender, all we can use is our
analysis. And so as a preferred lender, when we submit it to
the state for approval, we just have to send an application and
a narrative. Now, this narrative is about 6 or 8 pages long,
but it takes in their whole operation. So once we do that, and
that is why it is so critical for us to be a preferred lender.
Now, we don't just send loans to FSA for guarantees just for
the sake of doing it. If we see that we have a problem, we deal
with the problem, we don't push it off on FSA. And another
reason that we don't is there are regulations in place through
FSA, to be a preferred lender you can't have--and I would have
to go back and look at the regulation, but your loss ratio
can't be but a certain level. And once you get to that level,
then you could lose your preferred lender status. And we can't
afford to do that, so we really look at the ones that we really
think would go and would make.
We heard some stories last year, we sent ours in early.
Last year we had the option of choosing the county office or
the state office to submit our applications through. We chose
the state office, and it was a little slow down there but it
wasn't anything like it was in the county. So we are going to
have that again, I feel sure.
Mr. Neugebauer. Well, one of the things we are going to
need to do is anticipate that and make sure that they ramp up
early and don't cause the kind of delay.
Mr. Chairman, my time has expired. Thank you.
The Chairman. Thank you very much.
I want to thank each of you for coming. I know this was
short notice, and you all responded. We certainly do appreciate
that. And we appreciate your testimony. You have given us a lot
to think about, a lot to work with.
Before we adjourn, I want to invite the Ranking Member to
make any closing statements he would like to make.
Mr. Walz. Well, again, I thank the Chairman. And you
demonstrated it again, you have a strong advocate on your side.
We certainly appreciate it. And to each of you, you have made
important points. Your marching order to us on action steps to
take here. This issue on oilseed is immediate, needs to be
done. The Secretary is aware of that. All of us will keep
helping move them along to make a decision. And then some of
these broader issues, from trade and the pressures you are up
against. The Chairman keeps reminding me that this is the first
step. Soybeans are in their sights too the same way. Once
again, it reminds all of us you are fighting a fight for all
agriculture, getting this right from unfair trade practices to
how we go about some of these regulations to make sure they
work.
I would close, Mr. Wright, by thanking you for that quote
from William Jennings Bryan. My family's farm is in Nebraska,
and it is not often we hear a good Democrat quoted in here,
especially from Nebraska. So he also had another quote where he
said, ``He hopes the Democratic Party's, both wings could flap
together.'' I would say on this one, ``both parties are
flapping together for you.'' It is important you are here. We
are unified in making this work. And six generations of
families doing this, as I said, again, that says something
about our heritage and our commitment.
So I thank you all, and I yield back.
The Chairman. I thank the gentleman.
I just want to say, in dovetailing with the Ranking
Member's comments, a couple of things that came to light in
your testimony that was consistent across the board, first, I
think we can agree that cottonseed designated as an oilseed
would go a long way in mitigating any further damage while we
address where we go from here. Again, not the silver bullet,
but a good starting point. We are going to continue to urge the
Secretary to take action on that.
One of the things that I think Mr. Michael referenced
this--or no, no, it was Mr. Wannamaker, we are a developed
nation, and China and India continue to be referenced as
developing nations. They have a competitive advantage against
us in the World Trade Organization, so when we have grievances
that are aired in the WTO, we are not on the same level playing
field.
That is something beyond the scope of this Committee, I
believe, but something that maybe the Administration should be
addressing is how we address that, going forward, because they
are certainly a developed economy and should be treated as
such, otherwise we will never fully be able to address these
issues to a productive outcome.
Thank you for being here.
Under the rules of the Committee, the record of today's
hearing will remain open for 10 calendar days to receive
additional material, and supplementary written responses from
the witnesses to any questions posed by a Member.
This Subcommittee on General Farm Commodities and Risk
Management hearing is now adjourned.
[Whereupon, at 11:26 a.m., the Subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
Submitted Statement by Dan Smith, Member, Board of Directors, Texas
Farm Bureau
My name is Dan Smith; I'm a fourth-generation cotton farmer from
Floyd County, Texas, and Member of the Board of Directors of the Texas
Farm Bureau. I appreciate the opportunity to provide testimony on the
looming financial crisis in the South Plains of Texas. The seeds of our
current situation were sown years ago and threaten to play havoc with
the economy of an entire region of my state.
Those interested in the health of the cotton industry wrestled for
years with how to address our World Trade Organization (WTO) loss in
what is commonly known as the ``Brazilian Cotton Case.'' The WTO loss
and decreasing levels of spending on farm programs dictated significant
farm policy changes for U.S. cotton. The 2014 Farm Bill gave us a
totally crop insurance-based support program for cotton and removed our
crop from Title I.
The removal of cotton as a covered commodity could not have come at
a worse time. Cotton prices have dramatically decreased and the lack of
a safety net has made profitable cotton farming much less likely.
Cotton production is infrastructure intensive. Farmers depend on a
network of capital-intensive businesses to process what we produce.
From gins at the local level to textile plants at the end of the
chain--all must be profitable to stay in business. It's a partnership.
The farmer needs the downstream handlers and processors; who need the
cotton flowing into the marketing stream. At present, all levels of our
domestic cotton industry are hurting, but without farmers growing the
crop to begin with, the industry grinds to a halt.
Texas leads the United States in cotton production, growing 55% of
the nation's total acres. The value of cash receipts for cotton is the
largest of any crop in Texas at $2.2 billion. Needless to say, cotton
plays a vital role in the Texas economy. If cotton production declines
significantly as a result of persistent low prices, not only will local
economies suffer but the state as a whole will suffer.
Prices are one thing; profitability is another. The cotton
industry, indeed much of American agriculture, is caught in a classic
cost-price squeeze. The prices we pay for inputs are still high and
reflect the overall high commodity prices of a few years back. Today's
commodity prices are not sufficient to afford inflated input costs that
remain high.
The Agricultural and Food Policy Center at Texas A&M University
(AFPC) tracks the financial health of representative farms across the
country, including 16 cotton farms located in eight states. In March
2015, they released their latest report. They projected nine of the 16
farms would have a probability greater than 50 percent of a cash flow
deficit by 2018. Half the farms were projected to lose net worth in
that same time. Of the eight representative farms located in Texas,
only one was ranked ``good'' in terms of long-term economic viability,
two were ``marginal,'' and five were ``poor.'' If anything, the AFPC's
bleak March forecast has deteriorated further since release.
We are only aware of one proposed solution to address this
situation. The request that the Secretary of Agriculture designate
cottonseed as an ``other oilseed'' for purposes of inclusion in the
Agriculture Risk Coverage and Price Loss Coverage programs (ARC/PLC) of
the current farm bill. I believe this would be a wise step forward for
all of agriculture, not just cotton farmers.
When I harvest a cotton crop, I produce two distinct commodities:
lint and seed. I bear production and price risk for each of those two
products. Certainly if growing conditions are less than optimal, I
produce less lint and less seed. However, other factors influence the
price risk I face. Cottonseed prices are determined by a multitude of
factors, chief among them global supply and demand for cottonseed meal
and cottonseed oil. Those two commodities rise and fall in concert with
other oilseed products. It stands to reason that they should be treated
similarly in terms of government programs.
Further, farmers can purchase a cottonseed endorsement on their
crop insurance policies. Since the federally-backed crop insurance
program recognizes the financial risk I face for the seed portion of my
crop, it follows that the ARC/PLC programs of the 2014 Farm Bill should
recognize that risk, as well.
I strongly encourage USDA Secretary Tom Vilsack to use the
authority he already possesses, designate cottonseed as an ``other
oilseed,'' and get cottonseed eligible for the ARC/PLC safety net as
soon as possible. This move will help ensure production of our number
one natural fiber, increase the financial viability of family farms,
and help the local economies of the Cotton Belt.
Again, Texas Farm Bureau appreciates the opportunity to submit
testimony on this important issue and salutes the Subcommittee for
shining a spotlight on the current state of cotton production.
______
Submitted Questions
Questions Submitted by Hon. K. Michael Conaway, a Representative in
Congress from Texas
Response from Shane Stephens, Vice Chairman, National Cotton Council
Question. This is not the first time cotton prices have fallen so
low. Can you talk about why the situation this time is different, and
what role the cuts in the cotton safety net might be having on cotton
farmers in the situation you now face?
Answer. We last saw cotton prices at these low, sustained levels in
the late 1990s and early 2000s. And while those were also severely
challenging economic times for cotton producers, the low prices were
also impacting almost every other major crop. As a result, Congress
stepped in to provide economic assistance in the short-term, and then
the Agriculture Committees reauthorized the farm bill in 2002 to
include programs better equipped to respond to significant price
declines. These programs were there for all the crops to help weather
the low prices until the economic environment improved, which it did in
the latter half of the last decade.
However, today cotton producers find themselves in a situation of
extremely low cotton prices (cotton is currently the only crop with
prices below the loan rate), yet cotton policy in the current farm bill
is the least equipped or adequate to deal with multiple years of low
commodity prices. This is largely due to the fact that most of cotton's
policy is built around crop insurance products, which can be effective
risk management tools for intra-year price and revenue swings, but
largely ineffective for periods of sustained low prices. The U.S.
cotton industry is now entering the third straight year with cotton
prices below the cost of production and to date there has been no
meaningful assistance provided.
Response from Nathan B. Reed, J.D., Arkansas State Chairman, American
Cotton Producers
Question. We have heard a lot about how prices for cotton are low,
and how the market situation is very unfavorable, with cotton farmers
looking at net losses for planting cotton. How does the situation for
cotton influence cotton planting decisions when you decide what to
plant next spring and in future years? With the low market prices
experienced for cotton lint, how do you decide whether to plant other
crops, and what is the outlook for improved returns from those crops?
Answer. In my area of the cotton belt, the Delta region of
Arkansas, and for most producers throughout the Mississippi Delta, we
have a number of cropping options given our soil type, climate, and
irrigation capabilities. As a general rule, we have seen corn and
soybean acreage increase and cotton acreage decline over the last
several years as prices and returns from the grain crops have been more
favorable than cotton. However, we want to continue to grow cotton, and
continue to keep it in our crop rotation. Many cotton producers are
also invested in cotton gins and warehouses, and unlike most grain
crops that can all be handled by the same grain handling equipment and
storage facilities, only cotton can be processed through a cotton gin.
And cotton is important for our rural communities as the production
inputs and processing of cotton result in more dollars turning over in
the local economy than most other row crops.
Given where cotton prices have been in recent years relative to
grain crops, our cotton acreage has declined. However, for the upcoming
season, with prices lower for corn, soybeans, and wheat, the relative
returns for these crops compared to cotton are not significantly
different. So, we may see some movement back to cotton acres because of
the decline in grain prices not due to an improvement in cotton prices.
However, the grain crops still have the advantage of farm policies that
help protect against long term price or revenue declines, in addition
to the ability to purchase crop insurance. Neither cotton lint nor
cottonseed is currently able to utilize long term price and revenue
protection offered by the ARC/PLC programs. It is for these reasons
that USDA must work to designate cottonseed as an ``other oilseed''
making it eligible for ARC/PLC.
Response from Shawn L. Holladay, Producer Board Member, National Cotton
Council
Question 1. Mr. Holladay, in your written testimony you mentioned
that crop insurance was never designed to deal with anti-competitive
trading practices by countries like China and India. It was also
mentioned that crop insurance does not mitigate against multi-year
price declines. I think there is this perspective out there that crop
insurance is all a producer needs. Can you expand on whether this is
the case?
Answer. Crop insurance is a vital part of a producer's overall risk
management portfolio, but it certainly is not all a producer needs to
provide effective risk management. Crop insurance was created to
mitigate losses due to a multitude of factors outside of a producer's
control. Like any type of insurance, crop insurance is purchased by
producers, a loss must be incurred and a deductible (in many cases the
deductible is 30-40%) must be met before any indemnity is paid. The
most popular type of crop insurance products are revenue based. These
products are simply not as effective during a multi-year price decline.
Cotton producers need a diversified portfolio of tools such as crop
insurance for when disasters occur, but also access to other USDA
programs such as ARC and PLC like other commodities to help mitigate
multi-year price declines.
Question 2. Can you explain the role the Stacked Income Protection
Plan (STAX) plays in risk management for cotton farmers? Does STAX
protect cotton farmers from multi-year price declines, and in your view
is it sufficiently protecting cotton farmers in the price environment
they now face?
Answer. STAX was created in the 2014 Farm Bill for upland cotton
producers. STAX is an area wide revenue insurance plan. STAX allows a
producer to purchase an area wide plan to cover a range of 70-90% of
their expected county revenue in concert with or in lieu of a
traditional policy. This can be a very important part of a producer's
overall risk management strategy as this can help cover a portion of
the deductible of traditional insurance policies. STAX, like
traditional crop insurance, was not designed to protect farmers from
multi-year price declines as other USDA programs such as PLC focus on
this issue. Unfortunately, neither cotton lint nor cottonseed is
eligible for PLC. While STAX is functioning as it was envisioned, the
cotton price environment and market dynamics have changed since STAX
was first conceptualized in 2012 leading up to the new farm bill that
was ultimately passed in 2014. During this period and when the bill was
passed cotton prices were in the 80 range--the harvest price under
STAX for 2015 was around $0.64 . STAX like other revenue-based
insurance products are not as effective in a low price environment.
Response from Kendall ``Kent'' W. Wannamaker, President, Southern
Cotton Growers
Question. The written testimony emphasized how cotton production is
specialized and requires specific equipment and infrastructure that
cotton requires, such as cotton pickers and cotton gins. Can you
explain more about any specific equipment and infrastructure for
planting, management, harvest, or post-harvest processing that cotton
requires?
Answer. Of all the major row crops, cotton is one of the most
intensively managed and requires some of the most specialized
equipment. For example, cotton typically requires several applications
during the growing season of pest control products to control insects,
weeds, and diseases. Many other crops only require one or two such
applications. In addition, cotton is harvested by either a cotton
picker or cotton stripper harvester. These machines cost between
$450,000 and $700,000 today and can only be used to harvest cotton.
Most other crops are harvested with a combine, which costs on the low
end of what a cotton harvester costs, and can be used to harvest
multiple crops.
Also, while most grain crops are marketable immediately upon
harvest by a combine, cotton must be ginned to separate the fiber from
the seed. This results in two marketable products--cotton fiber and
cottonseed. This is another unique aspect of cotton production since it
yields two separate, distinct, and marketable products from the same
acre of production, which is unlike almost any other crop. The
infrastructure for cotton production is extensive from the farm gate
forward. The cotton gin is the first step in the post-harvest process.
Next the bales of cotton fiber are shipped to warehouses for storage.
From the warehouse, the bales are marketed by either cooperatives or
merchants that sell the fiber to domestic textile mills or into the
export market. Cottonseed is also stored in seed warehouses, typically
located at the cotton gins, and then shipped to either cottonseed
processors for crushing to produce cottonseed oil and meal or shipped
to dairies as a feed source. The cottonseed is marketed by cottonseed
merchandisers.
Response from Cannon Michael, Producer Board Member, National Cotton
Council
Question. We have heard a lot about how prices for cotton are low,
and how the market situation is very unfavorable, with cotton farmers
looking at net losses for planting cotton. How does the situation for
cotton influence cotton planting decisions when you decide what to
plant next spring and in future years? With the low market prices
experienced for cotton lint, how do you decide whether to plant other
crops, and what is the outlook for improved returns from those crops?
Answer. In the Central Valley of California where I farm, there are
a number of factors that determine what crops we plant and whether we
put ground into trees to produce fruit and nut crops or maintain the
acreage in annual crop production, including cotton. Much of our
situation continues to be dictated by the ongoing drought, burdensome
and outdated water regulations, misguided environmental regulations
that pick winners and losers, and our irrigation capabilities.
Cotton was once a significant crop in the Valley, but we have seen
significant acreage declines due to higher returns from specialty crops
and the need to fallow acres due to water availability. We need to and
want to grow cotton though, and we can produce some of the highest
quality, highest yielding cotton in the world when given a chance to
plant and produce a crop. However, we need commonsense water and
environmental regulations that don't waste our water resources and we
need to policy for cotton that allows it to remain competitive with
cotton in other countries. On a level playing field, we can compete,
however we can't compete with other governments that heavily support
their cotton industries such as China and India. We need our government
to make sure producers are equipped with policies that help level the
playing field with other major cotton producing countries. Until these
policy changes are made, we will continue to see acres in California
fallowed due to water limitations and acres planted to other, higher
return crops. If USDA would exercise their clear authority to designate
cottonseed as an ``other oilseed'' within the Farm Bill, then that
would help to tip the scales toward the U.S. in terms of competing with
foreign governments supporting their cotton producers.
Response from Mike Wright, Executive Vice President, City Bank Texas
Question 1. Mr. Wright, how does the troublesome financial
situation in agriculture translate to farmers' ability to obtain
financing? Could the current situation impact how willing banks are to
make loans to farmers, regardless of what crop they are growing? What
about any potential impacts of your use of FSA loans, and the loan risk
FSA will be asked to take on? How widespread do you think any of the
issues with obtaining financing will be?
Answer. As we move into working loans for 2016, at this point, cash
flow will be the major issue that hinders a producer in obtaining a
loan. In our area, crop production has been better than average, but
due to cotton grades being down, the prices paid to the producer have
fallen. The result is that a big percentage of the producers will still
pay in full their operating loan for 2015 but they may not have enough
to service their term debt. If they do not pay their operating loan in
full, then we will look at setting up a carryover note but then the
cash flow problem becomes worse. When we set up another payment, then
the margins shrink even more. They still may have some equity in their
statement, but can't cash flow another payment.
In our case, it really doesn't matter what crop it is. This is
mainly cotton country. We can grow some different crops but the problem
remains the same or could be worse depending on the crop and what it
takes to harvest that crop if the producer does not have that
particular crop harvesting equipment.
We will continue to use the FSA Guaranteed loans as a means to help
the producer stay in business, work his or her way out of a problem and
give the bank some ability to continue with the producer and at the
same time protect the bank and satisfy the regulators. As an FSA
Guaranteed Preferred Lender, we mitigate the risk to FSA. If our bank
exceeds a certain loss percentage, our preferred lender status could be
in jeopardy and we want to avoid that. So if we have a loan that we
know just won't make, we will not submit it for FSA approval. We will
deal with the credit and work it out.
The issues with financing will be nationwide.
Question 2. Mr. Wright, you mentioned in your written statement
that you are anticipating potential cash flow problems from some of
your ``very good'' customers with a long history with your bank.
Without divulging details of your bank's operations, can you give us a
sense of the financial pressure? Help us understand how big of a
problem cotton producers and their lenders face.
Answer. We have discussed this with our management and chairman and
if prices don't substantially improve in the next several years, we
feel that 50% of our customers could be in dire problems or out of
business. I have talked with one of our local auctioneers and he said
that his phone has exploded over the last several weeks with people
wanting dates for farm sales. I asked him if it was banks calling or
people that have been told that they aren't going to be financed and he
said that wasn't the case right now. It was producers that have just
decided they didn't want to fight it anymore.
Question 3. Mr. Wright, how does the risk to cotton farmers'
financial situation impact your bank, and how you structure your loan
portfolio? What do you expect the impact on other banks, particularly
small community banks, due to these downturns to be?
Answer. Total assets for our bank are over $2 billion. The loan to
deposit ratio at the end of the year was at about 82%. We are a very
diversified bank as far as loans are concerned with our consumer loans,
mortgage loans, commercial real estate loans, commercial business loans
and our agriculture loans. The ag loan portfolio is just over 11% and
that represents approximately $215 million. It is a very important part
of our bank and has been since the beginning of the bank. But smaller
rural towns are not as fortunate as a larger city. Their loan to
deposit ratios can run 80% to 90% to 100% in some cases the majority
being agriculture loans. If the smaller banks lose loans due to the
downturn, they don't have the diversity to replace them. It affects the
town, the school system and everything in that community.
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