Statement of August Schumacher, Jr.
Under Secretary for Farm and Foreign Agricultural Services
U.S. Department of Agriculture
Before the General Farm Commodities Subcommittee
House Committee on Agriculture
June 25, 1998
Mr. Chairman, members of the Subcommittee, thank you for the opportunity to appear before you today to review the Administration's use of agricultural export programs and the status of our actions to respond to problems in the agricultural sector.
Just two weeks ago, I accompanied Secretary Glickman on a trip to North Dakota and Minnesota, where we met with more than 1,500 farmers and ranchers. During that trip it became clear that while overall, the U.S. economy is performing extremely well, sectors of agriculture are under stress, and in some states, considerable stress.
Declining commodity prices are taking their toll on farmers, particularly farmers in the Northern Plains, where wheat accounts for roughly 45 percent of the value of all agricultural production. Last week, the Kansas City market for wheat dropped below $3 per bushel for the first time since 1991. Farm income in the Northern Plains has fallen sharply due to declining exports, three straight years of record and near-record world wheat production, and repeated years of sustained crop losses.
Since the signing of the 1996 Farm Bill, the Administration has brought to Congress' attention the legislation's deficiencies in providing a safety net during times of low prices, and we have offered a number of suggestions to fix them. A number of these proposals were included in the President's Budget, in addition the Secretary's Commodity Action Plan outlines some of the administrative actions we are taking. We are developing additional proposals as well that we hope to discuss with the Committee in the near future.
One key area where we are focusing our efforts is exports. The U.S. Department of Agriculture (USDA) currently estimates fiscal year 1998 exports at $55 billion -- $2.3 billion lower than 1997 sales and $4.8 billion below the 1996 record.
However, there are some bright spots in the export picture. We are seeing strong gains in exports to our North American Free Trade Agreement (NAFTA) partners, Mexico and Canada, up 19 percent and 8 percent, respectively, over 1997. We also expect increases to South and Central America and the Caribbean -- our exports to Latin America are up nearly 18 percent over 1997. However, these success have not been enough to overcome the decline in exports to Asia.
There is an important lesson in the current difficulties we face: Trade can take farm incomes and U.S. agriculture to new heights. But trade is not always predictable. This year our producers face a triple challenge: weak demand in Asia, increased export competition due to large world supplies, and a strong U.S. dollar. Our once strong, vibrant markets in Asia have turned sluggish due to the financial crisis affecting the region. Major competitors around the world have produced bumper crops. Our strong currency is making our products less price-competitive in overseas markets, particularly in many Asian markets where currency has devalued. Competitor currencies have also fallen, especially those of Australia and Canada.
Over the years, Congress has given USDA a number of program tools and we are using them as aggressively as we can to support U.S. agricultural exports to Asia and around the world. I would like to bring the Committee up-to-date about the steps USDA has taken to support agricultural exports.
Export Credit Guarantees
In response to the Asia crisis, we made available $2.4 billion in export credit guarantees in fiscal year 1998 to countries in Asia. U.S. exporters have registered sales of over $1.1 billion in that region. We could not have gone forward with our export credit guarantee programs for exports to these important markets without the work of the International Monetary Fund (IMF). The quick action of the IMF in negotiating stabilization packages in several Asian markets gave us the assurance that the credits by U.S. banks that we were guaranteeing would be repaid when they fall due. It is crucial that we support the efforts of the IMF and we urge Congress to approve the full IMF funding request.
Overall, we have announced export credit guarantees of nearly $5.8 billion for fiscal year 1998, up from $3.9 billion at this time a year ago. This includes several new allocations or increases, now operational, that were anticipated in the Commodity Action Plan. Through June 15, U.S. exporters registered sales valued at $2.9 billion, more than in all of fiscal year 1997. Using these credits, exporters have registered sales of 3.2 million tons of wheat and flour, 4.0 million tons of feed grains, 3.2 million tons of vegetable oil, 1.7 million tons of soybeans, and nearly 1.6 million bales of cotton so far in fiscal year 1998.
Our export credit guarantee program has proven to be the right tool at the right time. These programs have allowed U.S. exports to continue to move to the troubled Asian markets and have supported exports to other markets as well. The GSM authority allows us to extend additional credit to creditworthy banks, and we continue to review our export credit programs to develop ways to increase program usage. One idea we are considering is to use GSM-102 to match the so called "national account" credit guarantee windows of our competitors, under which they sometimes cover 100 percent of the face value of a transaction.
We also are looking into possible changes in the Suppliers Credit Guarantee Program to make it a more effective marketing tool. We just completed a survey of U.S. exporters, foreign buyers, and our overseas agricultural attaches for their suggestions. We are looking at program modifications now, including possibly increasing the portion of the transaction that is covered by guarantees.
Obviously of great concern to U.S. farmers is the loss of the availability of our export credit guarantee programs to support exports to India and Pakistan as a result of the sanctions provisions of the Arms Export Control Act. Legislation now before Congress would exempt our export credit guarantee programs from those sanctions. President Clinton supports this legislation, which would further separate agricultural trade from America's non-proliferation efforts. Pakistan, in particular, is an important market for U.S. agriculture -- our third largest market for wheat and our top market for white wheat.
More generally, the Clinton Administration supports the goals of sanctions reform legislation to encourage due deliberation in sanctions policy-making, taking into account all U.S. commercial interests and other considerations. We support the intent of legislation such as HR 3654 that recognizes the particular vulnerability of agricultural commodities trade when sanctions are imposed, and we believe that it is inappropriate to single out agricultural commodities as the subject of an embargo. It is the policy of this Administration not to use food as a weapon to influence other nations.
We are always looking for opportunities to expand U.S. agricultural exports to new markets. On June 3, President Clinton signed a determination to continue to waive the Jackson-Vanik for Vietnam. Continuing of the Jackson-Vanik waiver allows credit guarantees to be available with respect to export sales to Vietnam and we would consider making available assistance under Title I of P.L. 480.
Export Enhancement Program (EEP)
EEP remains an important tool in our arsenal, and we will use it when conditions warrant. We reserve the right-as do all countries-to self-defense. In fact, it is our duty to protect our producers and exporters from unfair trade conditions. We are prepared to employ export subsidies when needed to protect U.S. producers from unfair trading practices-as Secretary Glickman's limited re-activation of the EEP for poultry and barley demonstrates. On May 22 USDA reactivated the EEP to announce a 20,210-ton allocation of frozen poultry to six countries in the Middle East (Egypt, Lebanon, Jordan, Oman, United Arab Emirates, Yemen). This initiative will partially compensate our poultry industry for markets they have lost in Europe because of our continued lack of agreement on veterinary equivalency for poultry products. To date, no sales have been made under this initiative. And on May 27 we announced an EEP initiative for 30,000 tons of barley to Algeria, Cyprus, and Norway. This use of the EEP was in response to the European Union's sale of heavily subsidized barley into the United States. To date, 25,000 tons of U.S. barley have been sold under this initiative. In both these instances, EEP is being used in a measured, targeted way to address unfair trade practices.
Perhaps no program generates as much debate today as reactivating the EEP to subsidize sales of U.S. wheat. First, let me say that the elimination of export subsidies is one of the principal U.S. objectives for the next round of multilateral agricultural trade negotiations, and we will work toward that end when negotiations begin next year.
But let me address the issue more directly. Our analysis of global market conditions leads us to believe that the re-institution of the EEP for wheat at this time would not help U.S. farmers where it counts - with higher farmgate prices. Instead, it could lead to a number of outcomes that are only marginally helpful or even detrimental to American farmers.
First, it could lead to a further softening of world wheat prices as our European, Canadian, and Australian competitors use export subsidies or discretionary pricing practices to lower their prices to stay competitive with the subsidized U.S. price. Because the European Union has a policy of disposing of its surplus production on the world market with subsidies, and the Canadian and Australian Wheat Boards have mandates to market all of the grain that their farmers deliver by way of their single-desk selling systems, all three of these competitors have the ability and incentive to lower their export prices to whatever level is necessary to meet these mandates.
Second, our analysis projects that a full scale EEP for wheat would lead to only a relatively slight, temporary increase in average domestic wheat prices. Moreover, the decline in world feed wheat prices ultimately resulting from EEP would lead to lower world prices and exports of U.S. corn and other feed grains.
Third, we would expect a wheat EEP to result in only a modest increase in total U.S. wheat exports as subsidized U.S. sales largely displace anticipated unsubsidized U.S. sales in targeted markets. We estimate that an EEP initiative subsidizing the export of about 18 million metric tons, our WTO subsidized quantity limit in 1997/98, would lead to a little over one million tons in new sales. That is to say, we would have to subsidize a very large portion of our total exports in order to achieve only modest additionality.
Fourth, the lowering of world prices will make the U.S. market even more attractive to imports from Canada. Finally, we could expect a net loss in foreign exchange earnings as a result of the lower world prices.
In short, the small gains to be made in domestic prices and U.S. exports would be largely offset by the effect EEP would have on the world market price and U.S. import levels. EEP would do little to address the underlying cause of current low grain prices. Today's low prices are primarily a result of abundant exportable supplies and weak demand in importing countries. Expanding production has intensified competition among exporters for a world market largely devoid of import demand from China and the former Soviet Union.
We are exploring other ways to use EEP funds for purposes other than strictly buying down the price of the commodity in question. We intend to propose legislation that would allow unused EEP funds to be redirected and spent on food aid at the end of each fiscal year. This would be an adjunct to the budget proposal for the authority to carry forward EEP balances into future fiscal years. Earlier, we had proposed using EEP as a risk offset. This alternative presents practical implementation challenges that must be addressed. We continue to work on these challenges and to look for other ways to use EEP in a manner that would minimize its disruption of world markets.
Dairy Export Incentive Program (DEIP)
Another important tool we have is the DEIP, which we continue to use to the fullest extent authorized by law. USDA has authorized sales of nearly 30,000 additional tons under the DEIP to account for tonnage awards that were previously reported to the World Trade Organization (WTO) but never actually exported. Under this 30,000 ton reallocation, over 4,087 tons of nonfat dry milk sales have been awarded. Total 1997/98 DEIP sales include nearly 119,000 metric tons of nonfat dry milk, whole milk powder, cheese, and butter fat -- up from about 75,000 tons at this time last year.
Market Access Program (MAP) and Foreign Market Development (FMD) Program
Other important tools are our market development programs. On June 11, USDA announced its 1998 allocations of the full $90 million appropriated for MAP to 64 U.S. trade organizations for export promotion activities in international markets. Last September, USDA announced the 1998 program level of $33.5 million to 27 U.S. trade organizations for export promotion activities under the FMD Program.
Public Law 480 (P.L. 480)
Let me also mention our food aid programs. USDA is making full use of the money appropriated by Congress for P.L. 480 Title I funding to ship about 1.5 million metric tons of wheat and other commodities in fiscal year 1998. We also are considering ways to increase the use of commodity sales proceeds for market development in promising markets. We are working with the U.S. Agency for International Development (USAID) to ensure that the non-governmental organizations that participate in Titles II and III of P.L. 480 are aware of our current wheat situation.
Trade Policy Efforts
One of our most important trade policy efforts is the passage of fast track legislation. As the President has consistently stated, fast track is an important trade policy tool and the Administration is committed to securing fast track authority. We intend to continue to work with the Congress on a bi-partisan basis to build the necessary consensus to assure passage. At the same time, we are going to move ahead with a comprehensive trade agenda that seeks new opportunities for U.S. agriculture around the world. On March 18, Secretary Glickman testified to the Committee about our preparations for the next round of multilateral agricultural trade negotiations. In addition to the reduction or elimination of export subsidies that I mentioned earlier, we will be pushing for strong disciplines on state-trading enterprises (STE's), such as the Canadian and Australian Wheat Boards. In our view, STE's need to be put at risk in the marketplace by eliminating their import and export monopolies or by imposing other meaningful disciplines.
We also continue our efforts to resolve bilateral trade issues. After several years of effort, USDA succeeded this spring in removing TCK as a barrier to U.S. wheat exports to Brazil. We are now working closely with Brazilian plant protection officials to demonstrate that the three remaining diseases of concern to Brazilian authorities do not present a risk to that country's wheat production. Just three weeks ago, a team of Brazilian experts visited Washington and Kansas to review technical evidence that should enable Brazil to lift its ban on U.S. wheat.
Mr. Chairman, despite the downturn in exports this year, we continue to believe that opportunity exists for U.S. agricultural products. Our export programs continue to be an important tool to help American farmers compete in global markets and we are using the full range of our authorities to help American family farmers during these difficult times.
That completes my statement. I would be happy to answer any questions.