Thank you very much for this invitation today.  I have been the Chairman of the Subcommittee on General Farm Commodities and Risk Management for two years.  This Subcommittee has jurisdiction for all major program crops, crop insurance and the Commodity Futures Trading Act.

Before getting into my remarks, allow me to briefly address each of these program areas.  On farm programs, implementation of the 2002 farm bill was a massive undertaking.  The United States Department of Agriculture (USDA) did a rather good job updating producers' bases and yields, implementing a new counter-cyclical program and expanding conservation programs.  To date, we've seen a good response to the results of the bill.  

While traditionally separated from farm programs and the farm bill process, crop insurance, with its effect on farm operations, is becoming increasingly important.  Last year my Subcommittee held six hearings to review the effectiveness of the federal crop insurance programs.  The Agricultural Risk Protection Act of 2000 provided for a major overhaul of the crop insurance program, with the intention of reducing cost, improving delivery and expanding coverage.  Since 2000, the number of eligible acres has increased from 206 million to 218 million, a six percent increase.  And the level of buy-up policies has increased from 76 percent to 83 percent.  However, there is still room for improvement, primarily in the area of multi-year loss.  Producers need to be able to rely on crop insurance to manage risk and cover losses in situations like the widespread drought experienced in over the past several years.  Both multi-year loss and encouraging the creation of new risk management products will continue to be a priority for me and the subcommittee.

I was asked today to focus my remarks on what I expect to be the near term and intermediate policy forces on U.S. agriculture policy.  While it is nearly impossible to address all of the factors that affect agriculture policy, I will focus on a few critical areas, including the budget outlook, international trade and the political environment.  To provide you with what I see as the major forces in the future, I feel it necessary to quickly review the policy environment leading to the crafting of the 2002 farm bill. 

Chairman Combest and the House Agriculture Committee began work on developing the major components of the 2002 farm bill in 2000, during the Clinton Administration.  We held several dozen hearings over a two-year period, listening to all facets of the agriculture sector – from producers to commodity groups. 

In 2000, Freedom to Farm – the 1996 bill – had been in place for four years.  The U.S. agriculture economy had been expanding for several years, commodity prices were high and agricultural exports were increasing by leaps and bounds, setting a record at $59.8 billion.  However, shortly after signing the bill into law, the world commodity markets went through a major transition.  For the years leading to Freedom to Farm, world consumption of total grains was outpacing global production.  This changed in 1997 when production exceeded consumption.  This trend continued until the 2000-2001 crop year, resulting in significant declines in U.S. commodity prices.

This situation led us to a series of emergency market loss assistance payments, beginning in 1998 and continuing for the next three crop years.  These payments totaled roughly $19 billion over the course of four years and were vital to keeping many farming operations afloat.  While the agricultural economy was struggling, the rest of the U.S. economy was booming.  The stock market was soaring, and for the first time in decades, the federal budget was balanced, and we were looking at budget surpluses.  With this in mind, agriculture policy makers were interested in turning around the agricultural economy.  While the funds were available, Congress wanted to ensure the viability of U.S. agriculture.

Then several events took place that changed the policy dynamic in Washington, D.C. once again.  September 11th, the ensuing war on terror and homeland security became the national priority.  Today we find ourselves in a completely different political environment, and very concerned with government spending and the national deficit.

Fiscal conservatives in Washington, D.C., including me, take the deficit very seriously, and we will work aggressively to reverse the situation within the next few years.  This has already started with the House budget resolution, which has proposed cuts for five committees: agriculture, education and workforce, energy and commerce, government reform and ways and means.  The cuts propose to find $13.2 billion in savings from FY 2005-2009.  Specifically in agriculture, we have been asked to find $110 million in FY 2005 and a total of $371 million between FY 2005 and 2009.  These budget cuts are modest and may not remain in conference.

Regardless, next year in 2005, we will likely face a major budget reduction across all areas of the budget, and agriculture clearly will be included.

This brings me to international trade, which, coupled with the budget outlook, could be the most significant policy force facing agriculture policy and the U.S. economy as a whole.

In August of 2001, Congress approved Trade Promotion Authority for President Bush.  The president's trade agenda is comprehensive, including active bilateral, regional and multilateral negotiations.  We have already seen a number of bilateral agreements completed, starting with Chile and Singapore, now in the first months of implementation.  Most recently, the Administration completed an agreement the five Central American nations of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua.  In addition, the administration will include the recently completed agreement with the Dominican Republic when President Bush sends these agreements to Congress. 

The President has also concluded negotiations with Australia and Morocco.  All of these agreements are expected to provide benefits to the overall U.S. economy, and in some cases, for agriculture. 

This brings us to the World Trade Organization, which in the near future may turn out to be the most significant policy force affecting agriculture.  The Doha Development Agenda was launched in November 2001, and since then, member countries have been engaged in very intense negotiations.

In November of 2003, all member countries convened in Mexico for the Fifth Ministerial of the WTO.  This was the first time all the trade ministers had met since the launch of the WTO round.    

The Mexico meetings did very little to advance the negotiations.  It was apparent that there were still significant conceptual differences between the major trading partners. 

However, it seems as though the process is back on track.  The Director General of the WTO recently visited with the Agriculture Committee, and reported that it is possible to have a general agreement on the framework in place by this summer.  I will not predict the outcome of the negotiations;  however, I do suspect that export subsidies may be eliminated and that there will be a significant trade-off made between market access and domestic support. 

Growth in the traditional markets, like Europe, have for the most part leveled off, but growth in the developing world is significant.  While the U.S. economy is expected to grow at 4.5 percent in 2004, much of the developing and transitioning world will outpace developed nations in economic growth.  For instance, in the former Soviet Union, GDP is expected to grow by 5.1 percent in 2004.  In Thailand, growth is forecasted at 6.3 percent, India is expected at 6.8 percent and China will grow its economy at 8.2 percent.  This dynamic has been true for nearly a decade and has been very economically significant for the United States.  These countries are our future customers and markets, and when they have tariffs that exceed 100 percent, like India, breaking down these barriers is critical.

One more observation on the policy impact of trade is dealing with the animal and plant health aspects.  Recently, with the discovery of a single case of Bovine Spongiform Encephalopathy (BSE), the U.S. has had to rethink the way it surveys and addresses animal and plant health diseases. 

An event such as BSE really sheds light on the importance of applying sound science and effective food safety controls.  Events such as BSE present countries with an opportunity to erect trade barriers that effectively stop trade.  With agriculture becoming increasingly dependent upon trade, an event such as this affects the entire beef industry.  Over time, without resumption of trade, it could spill over to other parts of the agriculture sector.

An issue I mentioned in my introduction and an area that will likely become even more important in the future is how to address weather related crop losses, especially multi-year losses.  Moreover, how does farm policy and crop insurance blend together to become the ultimate safety net?

Crop insurance has been a vital risk management tool.  However, in recent years, crop insurance alone has not adequately dealt with massive losses like those we experienced with the widespread droughts of 2001 and 2002.  The Risk Management Agency and the crop insurance companies paid more than $3 billion to affected farmers during this period.  However, disaster assistance was still needed, particularly for the livestock industry, where crop insurance is not nearly as prevalent. 

Therefore, in the future, when crafting farm policy, Congress will have to address how to improve crop insurance – expanding its coverage and streamlining its delivery.  Stability is critical to farming operations.  Ad-hoc disaster payments are never a certainty, especially with the current budget situation.  Crop insurance needs to be a focus in future farm policy legislation. 

Another critical part of this discussion is cost of production.  This issue becomes increasingly important in times when prices are low, profit margins are tight, and when American farmers face stiffer competition from foreign producers.  In addition, it seems to be the center of the argument when discussing the future of American agriculture in the context of world competition.

U.S. producers have some the world’s lowest variable production costs per unit of output.  This varies by region, and every U.S. producers is not equally competitive for every crop.  With soybeans, for instance, one would suspect that Brazil and Argentina would have far lower costs of production.  However, the U.S. has a slight advantage in variable costs, while the Brazilians have the advantage in fixed costs. 

Variable costs in Brazil are roughly $2.60 per bushel and the U.S. is roughly $1.80 per bushel.  Increasing costs for land in the U.S. significantly narrows the gap, but Brazil continues to be stifled by inadequate infrastructure.  Brazil’s most productive land is in the state of Mato Grosso, where land is cheap but costs for transportation are much higher.

Constant innovations in technology and investment in infrastructure can keep U.S. producers at the leading edge.  This in part can be attributed to the competition we have from other areas of the world.  Competition is driving our efficiency. 

However, we must keep in mind factors that cannot easily be controlled, such as natural gas, oil and fertilizer costs.  In recent years, the prices of these vital commodities have been a major factor in profit margins.  We are very concerned with rising costs, especially as margins tighten, regardless of high commodity prices this summer.  These factors are examples of the importance of energy and transportation legislation.

The only positive consequence of increasing energy costs is the opportunity for renewable fuels such as ethanol to gain ground in the energy market.  This presents opportunities for both corn and sorghum producers. 

There are many very significant factors affecting U.S. agriculture.  Reducing the deficit is necessary, but it is still uncertain how necessary reductions in spending will affect agriculture.  I believe that crop insurance will play a very significant role, and we must continue to improve the system.  Funding is a major issue, and the subsidy component will be, as well.  Conservation will become a policy focus, particularly with the urban Congress and the WTO.  Finally, cost of production and global competition will always be a major factor and we must place a greater emphasis on infrastructure and energy policy.