February 3, 2003

FINANCIAL SECURITY FOR AGRICULTURE

TABLE OF CONTENTS

12.1 Introduction

12.2 Agricultural Credit
       Capital and Credit Needs
       Aggie Bonds

12.3 Agricultural Mediation Programs

12.4 Farm Service Agency
       FSA Loan Eligibility
       FSA Direct and Guaranteed Loan Programs
       FSA Interest Assistance Program

12.5 Improved Seller Protections For Hay Marketing

12.6 Protection For Tenants And Sharecroppers

12.7 Tax Provisions Affecting Agriculture
       Tax Policy
       Business Tax Provisions
       Capital Gains and Estate Tax
       Agricultural Savings Accounts/IRA's
       Self-Employment Taxes
       Health Insurance Premiums
       Depreciable Assets
       Marriage Tax Penalty
       Social Security Taxes
       Commodity Donations
       Incentive Tax Credits

12.8 Farm Income and Production Stability
       Crop Insurance
       Disaster Situations
       Providing a Safety Net for Producers
       Cost of Production Insurance
       Counter Cyclical Assistance
       Specialty Crops
       Dairy Policy
       Education
       Beginning Farmers
       Small and Disadvantaged Farmers
       Farm Business Succession
       Farm Viability Programs

12.9 Producer Security
       Warehouse Regulation
       National Dairy Producer Security

FINANCIAL SECURITY FOR AGRICULTURE

12.1 Introduction
The agricultural economy is in a tenuous economic position. Were it not for near record federal government assistance over the past three years, much of U.S. agriculture would be in financial straits not seen since the Dust Bowl era. According to the Commission on 21st Century Production Agriculture, “midway through 2000” saw many crop prices “at or near historic lows.” Coupled with a strong dollar that has crippled exports — and benefited our export competitors — U.S. farmers and ranchers have been squeezed in an economic vise with no market relief for nearly three years in a row.
The only relief has come from ad hoc emergency market loss payments from the federal government. These payments have helped sustain our nation’s food and fiber production through this economic drought. According to the USDA, direct government payments accounted for three-fourths of net cash income for major field crops in 1999 and two-thirds in 2000. But these payments were ad hoc distributions; while they provided the necessary relief for an ailing agricultural economy they were more bandage than cure.

The 1996 farm bill made sweeping changes to U.S. farm policy; many were good and as such achieved their desired impact. However, broad economic trends — from the Asian economic collapse to the dot-com stock market run-up and subsequent implosion, to the energy price spike of 2000 — have all had effects on farm finances and commodity prices that were certainly outside the vision of the policy makers who crafted the 1996 farm bill. It is the task of policy makers in crafting the farm bill, therefore, to devise a federal farm policy that provides an adequate “safety net” for producers.

The goal: To ensure that sound, well-managed farm operations are not arbitrarily put out of business by extraneous forces beyond their control.

With respect to the financial viability of our nation’s farms and ranches, NASDA’s recommendations are based on the following four principles: fostering financial stability, maintaining planting flexibility, providing a safety net that provides meaningful assistance to all producers, and encouraging good environmental stewardship.

Financial Stability: Producers are in need of a predictable support mechanism that will allow them to receive a reasonable income, even when prices are inadequate to do so. This financial stability is important to consumers and taxpayers, as well as to producers, and is best achieved through a program that provides assistance which is counter cyclical to the market.

Planting Flexibility: One of the features of the 1996 farm bill which is of greatest benefit to producers is the planting flexibility. The farm bill should retain that provision.

Loss Protection: So many factors are out of the control of even the best farm managers. Thus, the farm bill should provide a way for producers of all commodities to limit their losses to no more than 10 percent of their cost of production through a cost of production insurance program.

Environmental Stewardship: The farm bill must consider the financial burdens of environmental compliance and therefore provide incentives and cost sharing opportunities to responsible producers who employ environmentally sound on-farm management practices.

Providing a sound and secure financial system is important for agricultural producers who face times of uncertainty. Farmers need tools in which to ensure financial security and to withstand uncertain times. Educating farmers about risk management will be a growing area of importance.

12.2 Agricultural Credit
The availability of competitively priced credit is critical to the success of the American agriculture and food industries. As consolidations, new financial products, and innovative credit delivery approaches reshape the financial services industry, farmers, and agribusinesses must continue to have reliable, efficient sources of credit.

As the leading lenders to the agriculture sector, the Farm Credit System and commercial banks compete aggressively to provide the capital necessary to fuel agriculture’s production, processing, and marketing costs. This competition results in lowering borrowing costs and providing better service for farmers, ranchers, cooperatives, and some agribusinesses. In addition, Farm Credit’s presence in the market ensures the availability of credit through the inevitable good and bad cycles of agriculture.

Cooperation must exist among agricultural lenders to ensure that the needs of agriculture are met as we approach the 21st Century. Proposals that would create a competitive imbalance in rural lending are not in the best interest of the farm businesses, agricultural cooperatives, or rural communities.

We believe efforts to modernize the Farm Credit charter to enable Farm Credit institutions to finance all of production agriculture and to purchase entire farm loans from commercial banks on a voluntary basis are important. Leveraging Farm Credit to provide credit to companies for the further processing of agricultural, forestry, and seafood products should also be considered.

NASDA opposes any efforts to restructure the Farm Credit System to the extent that farmers would be replaced on boards of directors with commercial bankers. As a cooperative owned and controlled by its customer-members, any governance structure changes to Farm Credit institutions should require stockholder approval.

Capital and Credit Needs — Both the Farm Credit System and commercial banks compete aggressively to provide capital to low risk borrowers. This practice, however, leaves behind many borrowers who are still are adjusting to the depressed commodity markets, or are beginning farmers. During a time of low profit margins, reduced support programs and increased consolidation in the agricultural processing industries, financial tools that assist the producer — especially the beginning producer — may be developed from a combination of federal, state, and private resources.

There are two areas on which NASDA is most focused with regard to capital and credit needs: capitalizing first-time farmers, and retaining entry-level or small, existing farmers. “First-time farmers,” as the name implies, are entering into full time agricultural production for the first time. Today’s financial projections indicate such a producer will need to generate gross annual revenues in excess of $100,000 from production alone or production combined with off-farm income. Given the typical financial position of a beginning farmer, three classes of capital needs can be identified. The first is capital for land ownership or control of lease arrangements, equipment and breeding livestock, and an operating line of credit for inputs and other costs of production. Second, marketing and risk management costs, retained ownership of grains and livestock. And finally, cost of living expenses. These are the target areas for innovative approaches to capital.

Moreover, retention programs for small existing and entry level farmers must encompass a wide variety and range of financial and management needs. Such programs should center on the producers that generate between $100,000 and $500,000 annual gross income, and be based on some of the same foundations that the first time farmer programs are — namely providing adequate financial resources at affordable costs with cross-collateralization capabilities. In the longer run, programs to help these producers acquire marketing skills and avail themselves to value-added opportunities will greatly benefit farmer retention efforts.

USDA’s Rural Development Agency should consider guaranteed loans for producers who have organized as Limited Liability Companies or other business entities for the purpose of value driven marketing programs. The Rural Development agency should not be limited, however, to “brick and mortar” assistance programs with market enhancement programs. NASDA urges the IRS tax code be changed to allow livestock feeding programs (including dairy and egg producers) to be considered as grain processing (biological processing) which would make some Rural Development programs available for value-added marketing alternatives.

NASDA also believes the FSA beginning farmer down payment program should be improved by extending the current amortization program by 15 years.

Aggie Bonds — NASDA recommends removing “Aggie Bonds” from the individual state limits on bond volumes. This would greatly increase the opportunities for the use of Aggie Bonds for entry level and less established producers for purchases such as land, breeding, livestock, machinery, and equipment. Removing the volume cap would also help value added and agribusiness programs to acquire affordable credit. Recently Aggie Bonds have been authorized for use with environmental programs for expansion and compliance. Existing regulations do not allow Farm Service Agency (FSA) to guarantee Aggie Bonds, though the addition of Aggie Bonds to the IRS list of possible exceptions through FSA is appropriate. Indeed, there are exceptions to the code already on the books, such as the Federal Housing Administration, Veterans Administration, and Student Loan Administration

The current $250,000 maximum bond base is insufficient, however, even in the event of other necessary reforms. Land or other purchases are often in excess of the $250,000 and lenders currently charge conventional interest rates on the balance. A larger maximum on the Aggie Bond base will provide an additional tool in agriculture financing. Changing the value limit to $250,000 to match the percentage change is a needed tool for “entry level” producers. NASDA believes the FSA loan program should be maintained with adequate funding.

12.3 Agricultural Mediation Programs
The Executive Director for State Operations, through the Farm Service Agency (FSA), administers the USDA’s Certified Agricultural Mediation Programs. The Secretary of Agriculture was authorized to assist states in the development of USDA Certified Agricultural Mediation Programs under Section 502 of the Agricultural Credit Act of 1987.

Recognizing the efficiency and effectiveness of the Certified Agricultural Mediation Programs, Congress enacted Section 292 of the Federal Crop Insurance Reform and the Department of Agriculture Reorganization Act of 1994 which authorized the expansion of these programs to include, in addition to agricultural credit, the following areas: wetlands, rural water loan programs, grazing on national forest system lands, pesticides, compliance with farm programs including conservation programs, and other issues the Secretary deems appropriate.

The 106th Congress reauthorized the Certified Agricultural Mediation Program through 2005 by enacting Section 306 of the Grain Standards and Warehouse Improvement Act of 2000. The legislation also clarified the use of federal mediation grants for financial advisory and counseling services for parties requesting mediation.

NASDA believes that funding of State Certified Agricultural Mediation Programs is more important now than ever. As funds for programs such as the Farm Credit Program, the Conservation Reserve Program, the Commodity Credit Corporation, and the Federal Crop Insurance Corporation are eliminated, reduced, or frozen at current levels, there will be fewer dollars available for farm families. These reductions will increase levels of frustration, anger, and fear experienced by these families whose resources are already stretched, creating additional demands for a positive alternative to resolving disputes with the USDA.

NASDA supports the expansion of state mediation programs and urges the Secretary to authorize all agricultural disputes approved by individual state mediation programs as eligible under the USDA grant program.

NASDA supports the expeditious issuance of regulations requiring USDA agencies to offer mediation in cases where adverse decisions are made, and to attend and participate in a mediation if requested by producers. Regulations should also include a definition of mediation which provides maximum state program flexibility as intended by Congress. Confidentially of the mediation process should be maintained. For audit/evaluation purposes, NASDA believes that auditors, including the Office of Inspector General, be limited to using confidential mediation information only for the purpose of verifying the appropriate expenditures of funds used for mediation and/or evaluating the effectiveness of the program. Confidential mediation information received through such audits/evaluations should not be used for any other purpose unless consented to by all mediation participants.

12.4 Farm Service Agency
FSA Loan Eligibility — Statutory limitations provide that a Farm Service Agency (FSA) loan applicant is not eligible for any direct or guaranteed loan. The limitations also provide that a loan applicant who has received a debt write-down may receive a direct or guaranteed operating loan if the applicant is otherwise eligible or loan funds will only be used for annual operating purposes. NASDA believes that FSA borrowers who previously filed for bankruptcy, or received debt foregiveness or write downs should remain eligible for direct and guaranteed operating loans, provided they are current on their loans under their original or revised plan of operation.

As of August 1, 1997, FSA has determined that they will offset government payments to any borrower who is 30 or more days delinquent on loan payments. The payments are offset regardless of assignments of the payments to other lenders, or whether the borrower has applied for FSA loan servicing. This rule results in FSA payment being made through offset of government payment ahead of commercial lenders who had prior loans. NASDA urges FSA to reverse this rule and to recognize prior assignments of government payments, and release the proceeds as agreed to in the plan of operation. FSA should not offset payments until FSA loan servicing actions have been concluded.

FSA Emergency Loans — Emergency loans are provided to help cover production and physical losses in counties declared as disaster areas by the President or the Secretary of Agriculture. Generally, in order to be eligible for an emergency loan, producers must have suffered a qualifying physical loss, or a production loss of at least 30 percent in any essential farm or ranch enterprise. Producers are only eligible for an emergency loan if they cannot obtain commercial credit. The loan limit is 80 percent of actual loss with a maximum loan amount of $500,000. Unfortunately, the emergency loan program has been an effective tool for only few farmers because substantial assistance is needed to truly recover losses.

NASDA urges the creation of a new emergency loan program, similar to assistance provided to small businesses, that provides measurable assistance to agricultural producers in disaster situations. We recommend that appropriate loan amount caps be provided in the new program and that the program broaden its eligibility requirements to assist producers who may not currently be eligible for Farm Service Agency (FSA) emergency loans. Further, NASDA recommends that the amount of actual loss demonstrated by the farmer be covered and that the program’s review process for both producer qualifications and agency screening/loan determinations be simplified.

FSA Direct and Guaranteed Loan Programs — The FSA guaranteed loan program has proven to be cost effective in reducing federal budget outlays. However, some rural areas have a shortage of commercial lending institutions that are interested in production agricultural lending. In such areas, the FSA Loan Guarantee program is of little value and leaves many producers dependent on FSA direct loans to finance their operations. NASDA urges continuation of and adequate funding for FSA direct loan programs. In keeping with the mission of FSA lending, NASDA also urges that FSA guaranteed loan limits remain capped at reasonable levels.

Under FSA Instruction 1951-S, required loan servicing actions are offered to producers who become delinquent on FSA direct loans. FSA guaranteed loans provide a substantial safety net for commercial lenders and even though 1951-S loan servicing is available to guaranteed lenders, they are not required to utilize the servicing options before loan liquidation. NASDA urges that an incentive, such as a higher percentage guarantee, be offered to commercial lenders who agree to service delinquent guaranteed loans according to 1951-S.

FSA Interest Assistance Program — Interest assistance is provided on guaranteed loans if cash flow projections indicate the necessity for a feasible repayment schedule. For producers needing interest assistance, the program is a valuable tool. However, funding for interest assistance is often limited. NASDA urges that guaranteed loan interest assistance be re-evaluated following the year end analysis of the farm/ranch operation and that only the actual amount of needed assistance be provided.
Any interest assistance obligated but not distributed should be added to the next fiscal year's appropriation. It is also urged that a higher level of interest assistance be provided to beginning farmers demonstrating the need for assistance.

12.5 Improved Seller Protections For Hay Marketing
Hay marketing in the Western United States remains largely an unregulated industry. Hay producers do not enjoy the localized marketing benefits available to producers of livestock, grains, and fruit and vegetables. Hay producers do not benefit from federal protection such as the Packers and Stockyards Act, the Federal Grain Inspection Act, or the Perishable Agricultural Commodities Act.

This absence of marketing options has resulted in producers often times having to market their crops directly to the consumer or through a loose network of brokers and truckers/dealers. Frequently, these firms are undercapitalized and are unable to absorb losses that may occur, especially in times of high price variability and weather-related emergencies. All too often, the losses from fraudulent or financially-squeezed hay dealers are borne by the hay producers.

NASDA supports a system of reciprocity so that regulatory actions of interstate hay dealers can be recognized and sanctions made against violators on a consistent basis across the United States.

12.6 Protection For Tenants And Sharecroppers
Many landowners are opting not to renew long-standing production contracts with producers so that they may receive transition payments from USDA. As a consequence, land is being diverted to other uses, such as pine plantations, and producers are unable to acquire adequate land for crop production. Not only are these producers, who are dependent on leased land, being denied land-rent contracts, they are also being denied transition payments which go to the landowner. In many cases, the payments are based on the production history of the tenant or sharecropper.

Immediate steps should be taken to protect the rights of tenants and sharecroppers’ availability to land previously rented or cropped, and eligibility for transition payments where they have established crop production bases on lands owned by others.

12.7 Tax Provisions Affecting Agriculture
Tax Policy — Farmers and ranchers will benefit from the reduction in tax rates provided by the Economic Growth and Tax Relief Reconciliation Act passed in 2001. Indeed, lower tax burdens for agricultural producers will mean more spending in their rural communities, and more investment in their businesses which, in turn, leads to benefits for consumers. But from agriculture’s perspective, where relatively low margins are forced to support capital intensive fixed assets and investments like land, buildings, and environmental management measures, more needs to be done than reducing marginal income tax rates.

Business Tax Provisions —The Internal Revenue Service (IRS) has informed farmer cooperatives that are organized under both: Subchapter T, Sections 1381-88 and Section 521 of the IRS (code) that when a commodity is processed through an animal, IRS will NOT deem the proceeds from the marketing aspects of the processing or manufacturing functions to be patronage sourced income.

The Internal Revenue Code should be amended to re-establish the marketing aspects of both Subchapter T and Section 521 cooperatives as it relates to a farmer’s product through an animal.

This will allow the Rural Development (RD) Agency to guarantee loans to cooperatives based on adding value to commodities through animal utilization. Likewise the change in the IRS code will allow some states to use “private issue” bonding authority for similar cooperative development.

Capital Gains and Estate Tax—Capital gains tax exemptions and estate tax exemptions are vital ingredients to a successful, productive future for all Americans, particularly those families involved in agriculture. Trends are showing that fewer and fewer enterprises are being passed from one generation to another. Tax relief serves to lessen financial constraints on family-owned and family-operated operations, including farms, ranches and agribusiness enterprises.

Taxes paid on capital gains prove to be disincentives for agricultural producers. Agricultural operations require large amounts of capital to operate efficiently and that efficiency is taxed away through high taxes on capital gains. NASDA recommends that Congress enact a $500,000 capital gains tax exemption on farm assets, similar to the $500,000 homeowner capital gains exclusion. This exemption should also be indexed to reflect inflation.

Further, NASDA supports a $500,000 capital gains tax exemption on gains realized from the sale of agricultural land preservation or conservation easements or development rights and the creation of a law to exempt the sale of development or conservation easements and development rights from triggering the recapture provision of the special-use valuation regulation.

Estate taxes have contributed to the gradual extinction of the "family business.” As enterprises are passed on, beneficiaries are forced to sell large portions of land, machinery or other assets to simply pay the taxes. The results are that many operations are forced to liquidate some assets or are forced out of business altogether. NASDA supports the elimination of estate taxes for family farms.

Agricultural Savings Accounts/IRA's — NASDA recommends the creation of an expanded agricultural savings account (ASA) program for American farmers and ranchers. Under the program, a farmer or rancher can defer agriculture production revenue to an ASA after a minimum of $10,000 taxable income from agriculture production, or 5% of gross agriculture revenue, whichever is higher. ASA account dollars would be taxable only in the year of withdrawal, have no time limitation, and able to be converted to a retirement account when a producer retires. Non-taxable withdrawals would be allowed for education and medical purposes only of self, immediate family, dependents and employees and all other provisions as provided for in IRA's.

NASDA supports increasing the limit to $10,000 on IRA's for farmers and ranchers.

Self-Employment Taxes — NASDA supports the elimination of the self-employment tax on income from rent of farmland, including CRP rents. Further, NASDA recommends that farmers who have gross income of $2,400 or less be able to report $1,600 as net earnings from farm self-employment.

Health Insurance Premiums — American farmers and ranchers incur significant costs in providing medical insurance coverage for themselves, their families, and employees. NASDA recommends that Congress provide a 100% income tax medical deduction for farmers and ranchers, including all health insurance premiums and medical surgery for self, immediate family, dependents and employees. Prescriptions, Medicare and medical supplies should also be tax deductible.

Depreciable Assets — NASDA supports increasing annual capital expensing of depreciable assets up to $25,000 or 20% of a farm's gross revenue, whichever is higher. This provision should be indexed for inflation.

Marriage Tax Penalty — The marriage tax penalty impacts farmers and ranchers who pay a higher rate when a spouse is working off the farm. NASDA supports eliminating the marriage tax penalty.

Social Security Taxes — NASDA urges Congress to provide self-employed persons the ability to claim one-half of their social security taxes as a business expense.

Commodity Donations — Language should be provided in the Internal Revenue Code for farmers and ranchers to receive 100% tax credit in commodities donated to 501 (3)(c) organizations at cost of production. This provision should also allow for tax credit on the cost of transporting a commodity to a 501 (3)(c) organization.

Incentive Tax Credits — NASDA supports tax incentives which help to strengthen the agricultural industry. NASDA recommends that Congress consider providing the following incentive tax credits:

       20% tax credit for environmental/conservation improvements expenditures.

       20% tax credit for agricultural research directed by agricultural producer committees to include new crops, agriculturally-derived alternative energy sources, and new value-added products.

       20% tax credit for young farmer and rancher program contributions.

       20% tax credit for education and promotion of U.S. grown products.

12.8 Farm Income and Production Stability
Agriculture is changing at an increasingly rapid pace; consequently, there is a need for improved, comprehensive risk management programs. Sound risk management programs are a combination of federal and state governments and private industry working together to provide products, information and opportunities to producers who are willing to utilize risk management opportunities and form risk management plans.

Risk management encompasses education, marketing, and primarily crop insurance programs. Covering production costs and ensuring a minimum price are two elements to consider in a crop insurance/risk management proposal. As farmers are exposed to unpredictable and unusual risks, it is essential that a crop insurance/risk management plan cover, at a minimum, the input cost of production to a producer.

In addition, the federal government should ensure the stabilization of prices received by farmers while at the same time ensuring that such stabilization of prices does not distort production levels. Major, sustained low price levels cannot be protected against with an insurance program that is required to be actuarially sound. Price protection must be provided by separate farm policy. Substantial federal support to producers must be provided during low price periods.

Crop Insurance —

Coverage: Crop insurance coverage must be meaningful and comprehensive. At the same time, premiums must not be cost prohibitive for producers. While current federal policies give producers more flexibility in making production decisions, alternative and non-traditional crops have and will continue to proliferate and must be included in crop insurance coverage. Crops currently not insured and non-traditional crops should be covered by crop insurance. A crop insurance program should be designed to promote innovation and alternative crops. Additional resources will be necessary to aggressively expand insurance coverage to all crops and livestock. Premium subsidies should be higher for higher levels of coverage and lower for lower levels of coverage, encouraging producers to carry more coverage.

Participation: Crop insurance must provide meaningful coverage and provide incentives for farmers to purchase the insurance.

An appropriate role for the producer, the federal government and private insurers must be established. Primary delivery of catastrophic (CAT) crop insurance should be through the Farm Service Agency. Buy-up coverage should be available through insurance companies, in conjunction with federal government underwriting and subsidies. Premiums must be affordable and should provide incentives for producers to carry higher rather than lower levels of coverage. Crop insurance programs should be developed on a regional and/or state basis. The states should have a role in crop insurance programs as they are uniquely positioned to handle the administration of the federal portion of the crop insurance program. To improve efficiencies, the USDA and state departments of agriculture should consider cooperative agreements where appropriate.

Additional elements of a crop insurance program to consider are cost of production insurance, whole farm revenue insurance and long-term reserve accounts. A cost of production insurance policy would allow producers to insure a percentage of actual production costs. Cost of production insurance could be expanded to all commodities and possibly become a preferable base insurance program. Whole farm revenue insurance would allow producers to purchase insurance guaranteeing a certain percentage of revenue for the whole farm. It would provide protection against unavoidable losses of production and low prices. Long-term reserve accounts are a way for farmers to save, on a tax-deferred basis, during good times for poorer years.

Disaster Situations — Farmers do not have access to the same types of federal assistance as other businesses following a natural disaster. Emergency loans are provided to help cover production and physical losses in counties declared as disaster areas by the President or the Secretary of Agriculture. Unfortunately, the emergency loan program has not been an effective tool for most farmers. Generally, in order to be eligible for an emergency loan, producers must have suffered a qualifying physical loss, or a production loss of at least 30 percent. Producers are only eligible for an emergency loan if they cannot obtain commercial credit. The loan limit is 80 percent of actual loss with a maximum loan amount of $500,000.

NASDA urges a revised FSA emergency loan program, similar to assistance provided to small businesses, that provides measurable assistance to agricultural producers in disaster situations. We recommend that appropriate loan amount caps be provided in the new program and that eligibility for the program be expanded to producers who may not currently be eligible for Farm Service Agency (FSA) emergency loans. Further, NASDA recommends that the entire amount of actual loss demonstrated by the farmer be covered up to the limit of repayment capability, and that the program’s review process for both producer qualifications and agency screening/loan determinations be simplified.

When a federal natural disaster has been declared, we recommend that the Federal Emergency Management Agency (FEMA) be given the authority to make grants immediately available to agricultural producers in order for them to make emergency repairs. In addition, farmers should be eligible for low interest loans from the Small Business Administration and other appropriate agencies for assistance following the disaster.

Disaster situations in agriculture are inevitable. The challenge for lawmakers and the federal government is to develop a program or plan to lessen the impact of such disasters. However, until crop insurance/risk management programs are established that are capable of totally replacing ad hoc disaster assistance, producers and the federal government should have a consistent way of coping with disasters. Federal disaster assistance should not undermine the intent of crop insurance programs. NASDA supports planning for emergencies involving states, together with any legislative changes. NASDA further recommends that the Federal Emergency Management Agency (FEMA) be given agricultural emergency authority to react to agriculture disasters with expediency as they are accustomed to dealing with other emergency situations.

Any disaster relief program must provide assistance to producers of food and fiber that is commensurate with production losses resulting from drought and other natural disasters; disaster assistance should not be a disincentive to purchasing crop insurance; and it should not result in profitting from disaster assistance greater than income expected during a normal year.

NASDA believes the USDA and the United States Congress should review the effectiveness of risk management tools and explore all options to provide farmers with improved risk management tools.

Providing a Safety Net for Producers — NASDA’s farm income safety net proposal fosters financial viability and maintains planting flexibility through a combination of cost of production-based commodity insurance and counter cyclical price assistance, both of which comply with the United States’ commitments under the World Trade Organization. Furthermore, in keeping with the principles outlined above, NASDA’s proposal is also designed to be truly a “safety net,” under which producers would still be exposed to economic risk, but not ruin. The plan is based on goal of supporting prices at 90 percent of the cost of production. It provides a counter cyclical payment that would be triggered by a price drop below 90 percent of the national average cost of production (1998-1999), augmented with an insurance program that allows producers to re-coup up to 90 percent of their individual cost of production.

By targeting a national average cost of production, the counter cyclical program is truly responsive to the state of the national farm economy. The cost of production insurance allows farmers to address their individual circumstances. And, at the 90 percent level, the marginal costs to the federal government of underwriting the insurance policies are capped in a fiscally responsible manner. Further, fraud and abuse are prevented; farmers would have to lose money, out-of-pocket, to receive a payment; thus the system can’t be “gamed.” Finally, and perhaps most importantly, the 90 percent level for both the counter cyclical and the cost of production insurance programs wouldn’t encourage overproduction of covered commodities.

Cost of Production Insurance — NASDA believes that an effective commodity insurance program, with accountability to the American taxpayer, should be the backbone of commodity support policy. Cost of production-based insurance would provide protection for up to 90% of a producer’s documented costs of production. It would add to the existing array of crop insurance products an additional risk management tool that farmers currently do not have. Cost of production insurance coverage provides the participating producer with a true “safety net” allowing him to rest assured that he will have no more than a 10 percent out-of-pocket loss in any given year. Farmers would be individually rated in terms of premium levels; beginning farmers without a production history would receive a greater premium discount.

One of the benefits of cost of production-based insurance is its relatively straightforward structure. A participating farmer would be required to document all production expenses. Then, he would determine his gross income from sales of his crop and any government assistance payments he may have received. If that total income exceeded 90% of his documented cost of production, the producer would receive no indemnity payment. If, due to market conditions, weather, disease, or other events beyond the producer’s control, his total gross income is less than 90% of his cost of production, he would receive an indemnity payment for the difference between his actual receipts and 90% of his cost of production.

Although cost of production insurance was included in the Agricultural Risk Protection Act of 2000, NASDA recommends that an additional $1 billion be provided annually to expedite the development of cost of production policies. Initial commodities to be covered by the cost of production policy should include fruits and vegetables, nursery, vineyard, seed and tree crops, livestock and milk. We also recommend that additional premium subsidies be provided to growers of these crops, recognizing the fact that no counter cyclical assistance program exists for them though they are experiencing the same market difficulties as growers of major field crops.

Counter Cyclical Assistance — NASDA supports efforts to increase baseline agricultural spending over the next ten years in order to provide a reliable and effective safety net. However, we recognize that the U.S. must balance such support with its obligation under the WTO’s “amber box” spending classification not to exceed $19 billion. To best accomplish this balance, NASDA proposes a counter cyclical (CC) payment plan for major field crops and milk.

Counter cyclical payments would replace the current system of fixed payments to producers of major field crops that have been supplemented with annual, off-budget ad hoc economic disaster payments. Predictable payments would be made at times when market prices are inadequate and would be triggered if prices were below 90% of the average of the 1998 and 1999 economic cost of production. NASDA’s members believe government assistance should be counter cyclical in nature to protect producer’s incomes when prices are low, yet minimize market distortion and save taxpayers’ money when prices are stronger. Counter cyclical payments allow government support to be adjusted quickly, up or down, in response to market conditions. NASDA’s counter cyclical program is designed to meet all U.S. commitments under the so-called “amber box” of the WTO. NASDA members remain convinced that this program is a necessary step not only for the economic stability of domestic producers, but to demonstrate to our trading partners that the U.S. is serious about using all the tools available under WTO to, at a minimum, maintain U.S. market share.

The proposed Counter Cyclical Payment plan would (1) provide stability by supporting U.S. producers at a sustainable farm revenue; (2) be available to producers of corn, wheat, sorghum, barley, oats, rice, cotton, soybeans, and milk; (3) consist of both a fixed, and a variable payment; (4) replace AMTA payments; and (5) fulfill all WTO Amber Box commitments.

Counter cyclical payments would be made on a 90/90 basis; they would cover 90 percent of a national average economic cost of production (as defined by USDA/ERS) and be comprised of two components: variable and fixed. Up to 90 percent of the total payment would be variable and counter cyclical to the market; the remaining 10 percent of the payment would be fixed and based on an updated five year history (from 1996 to 2000) of base crop acres and yield. The variable payment would be paid on actual production of each producer. It would be calculated as the difference between actual average market prices and 90 percent of 90 percent (81%), of the total average cost of production. NASDA also recommends that the restriction on planting fruits and vegetables on acreage eligible for counter cyclical assistance be maintained.

Specialty Crops — An additional $1 billion should be provided annually to accelerate development of cost of production insurance policies for fruits and vegetables, nursery, vineyard, seed, citrus, tree crops, livestock, and milk. Additional premium subsidies (above the 50% level) would be provided since no counter cyclical assistance program currently exists for these crops.

The state block grant program for support of specialty crops created by the Emergency Agricultural Economic Assistance Act (P.L. 107-25) should be permanently authorized. Producers of specialty crops would be eligible to participate in the Agricultural Stewardship Program (conservation block grant) based on state-determined priorities.

Dairy Policy — The 1996 FAIR Act maintained the federal milk marketing orders by reorganizing and consolidating them into the current twelve orders. While the federal orders are designed to respond to changes in milk production patterns and marketing and pricing systems, they have not been able to eliminate the frequent and significant drops in milk prices paid to dairy farmers.

NASDA has attempted to gain consensus on a national dairy policy. In keeping with the development of a program that would provide counter cyclical price support for dairy farmers, NASDA supports federal dairy policy that would establish a counter cyclical payment program through federal and state milk marketing orders to ensure that revenues received by dairy producers from sales of Class III and Class IV milk are no less than 90 percent of nationwide cost of production, or $11.08 per cwt, whichever is less. Total payments are not to exceed $1 billion per year. Moreover, in addition to direct payments, NASDA supports the States’ right to create multi-state marketing agreements in order to enhance milk prices within their regions, though such authority would not be intended to erect trade barriers. States participating in regional compacts would not be eligible for direct dairy payments. The policy would also extend the dairy price support purchase program at the current price of $9.90 per cwt; maintain the current CCC purchase prices for nonfat dry milk and butter at their current rates; and extend the Dairy Export Incentive Program (DEIP).

Education — Education is an important component of any risk management plan. The USDA should educate producers and lenders about risk management strategies. Education must extend beyond basic crop insurance/risk management programs. Education should provide basic management training, financial management accounting/bookkeeping, human resources, organizational development, and domestic and international marketing. Educational forums should be positioned as incentives for obtaining lower crop insurance premiums from the federal government.

The Risk Management Agency’s dairy options pilot program concept should be expanded to other traded commodities. By combining crop insurance and risk management tools, farmers can develop a total risk management plan. This approach enables a farmer to move into a more market-oriented world.

Beginning Farmers — As the average age of the American farmer rises, Congress must find ways to attract younger farmers into the business. Without a generation to pass the farm onto, the United States leaves itself vulnerable. Possible incentives are lower farm revenue insurance premiums, targeted risk management programs, and tailored training and education programs. Free CAT coverage is offered to limited resource farmers and a greater premium subsidy should be provided for the beginning farmers. The federal government should provide incentives for increased participation by younger generations.

Beginning farmers often have difficulty in securing adequate financing. Start-up farm operations are typically highly leveraged with minimal cash-flow margins. These financial conditions increase risk and loan positions for lenders. The loss risk may also be a deterrent for some to enter the business.

In many cases, beginning farmers do not own farmland. Those who do own farmland often have the real estate financed by one lender and look to another lender for annual operating financing. Operating losses pose the greatest risk for highly leveraged operations since equity in secondary collateral sources is not usually available for the refinancing of operating repayment shortfalls. Cost of production insurance would greatly reduce the risk of operating losses to both beginning farmers and their lenders. Lenders would be much more comfortable and willing to provide adequate operating loans to beginning farmers if a true Cost of production insurance plan were in place to help ensure the repayment ability of the loans.

Small and Disadvantaged Farmers — A 1997 USDA report on “Civil Rights and Small Farmers” concluded that small and disadvantaged farmers were being neglected by USDA assistance services, and instead, these services were directed to larger farm operations. Even without government assistance, however, a number of these small family and disadvantaged farms have managed to survive the numerous adversities facing agriculture. Indicators show that their future survival, however, will no longer be possible without some form of government intervention. With assistance, these farms could modernize operations, increase efficiency, and become better prepared for unexpected disasters.

The National Commission on Small Farms, in 1998, sent to USDA a report on small farms in the United States. The report was the product of considerable discussion and deliberation based upon extensive testimony, both oral and written, from across the country. NASDA recognizes the significance of the report and adds that American agriculture depends on its diversity of crops and cultures to thrive and grow. NASDA supports policies and programs that recognize American agriculture excels because of its cultural diversity that encourage the sustainability of small farms. NASDA further recommends increased awareness of the needs of limited resource producers.

Farm Business Succession — The economic future of our nation’s agriculture depends on the ability of a new generation to enter farming. The barriers faced by the next generation are significant, and merit immediate attention by policy makers. These barriers include:

       Insufficient farm entry strategies

       Insufficient farm exit strategies

       Inability to acquire the initial capital investment

       Difficulty of identifying viable farm entry opportunities

       Obtaining appropriate financial, managerial, and production training and assistance

       Obtaining appropriate community support.

The National Farm Transition Network has assisted in the development of programs that link retirement and farm exit approaches with farm entry strategies. Nineteen programs representing twenty-four states have established Farm Link programs to “link” beginning and retiring farmers. Many of these programs provide educational seminars, publications, and technical assistance to assist farmers in discovering ways to successfully transition viable farm business from one generation to the next. Programs that help create the opportunity for young people to begin a career in agriculture, particularly by addressing farm access, must be part of the rural and agriculture development agenda of government as well as the private sector, including farm organizations.

Indeed, new business succession and farmland tenure models must be developed. These models must facilitate the entry of the next generation and the exit of the existing farmer in a equitable manner. These models must be regionally appropriate and respond to the unique needs of the full range of beginning farmers and farm owners.

State departments of agriculture are uniquely positioned to respond to the need to promote farm and ranch business succession planning. State departments of agriculture should sponsor and/or support existing and new farm linking programs and sponsor state legislative efforts to:

       Provide income tax incentives to existing farmers who are assisting a beginning farmer

       Provide for property tax incentives to existing farmers who are assisting a beginning farmer

       Establish a beginning farmer loan program in the states where they do not currently exist

       Establish a guarantee for lease payments.

Farm Viability Programs — Recognizing that keeping farms profitable and viable is the most effective means of maintaining working farmland in productive agriculture, several states have developed farm viability programs. These programs provide financial assistance to farms to undertake projects that will improve the efficiency, competitiveness, and market reach of their operations. For example, a farm looking to market a new product might use financial assistance from such a program in developing a feasibility study. Program funds could also be used to fund agricultural economic development specialists at the local level. In some states, the assistance is tied to easement limitations that restrict development on the land. In other states, funding is contingent upon the applicant having completed a farmland viability plan that details how the applicant is seeking to achieve greater profitability.

Since the profitability and survival of farms is crucial to the well-being of the surrounding communities, farm viability programs can be an important part of overall rural economic development strategies, particularly in densely populated areas where pressures to convert agricultural land to development are increasing. The federal government has expressed its intent to foster appropriate development in rural areas of the United States, most notably through the USDA Rural Development program.

This program, however, has become known mostly for funding water and wastewater infrastructure projects in rural areas. While these are important projects, providing cost-share dollars to states that have established farmland viability programs would allow USDA Rural Development to more closely fulfill its mission of facilitating economic development in rural areas. NASDA recommends that $150 million be allocated annually for state departments of agriculture to administer farm viability block grants.

12.9 Producer Security
Warehouse Regulation — States are very concerned about the final rules to the U.S. Warehouse Act of 2000 which were published in the Federal Register by USDA on August 5, 2002. These final rules were released without opportunity for comment on the language that was added in subsection(c), Part 735.1 which reads, “Compliance with state laws relating to the warehousing, grading, weighing, storing, merchandising or other similar activities is not required with respect to activities engaged in by a warehouse operator in a warehouse subject to a license issued in accordance with this part.” The U.S. Warehouse Act should not preempt state authority to provide protection to producers doing business with federally licensed warehouses. NASDA endorses the immediate formation of a task force to resolve issues while USDA observes a 90-day moratorium on issuance of new federal warehouse licenses, except peanuts. Appropriate legislative action to amend the U.S. Warehouse Act should be pursued, based on Board approval.

Mandatory state warehouse programs have been established in many states to both adequately serve agricultural commodities and to protect farmers from suffering financially if a warehouse experiences inventory shortages or financial insolvency. The optional federal warehouse program also serves agricultural commodities, but lacks many protections for farmers.

All warehouses that store agricultural commodities for the public are licensed either by the USDA via the United States Warehouse Act (USWA) or by the respective state in which the warehouse operates. Further, 23 states also regulate the merchandising of grain through grain dealer laws. These state programs serve the agricultural community well in terms of cost efficiencies and regulatory oversight.

USDA has never regulated the merchandising of grain and they claim they do not want to, however, the USDA has taken the position that the USWA covers the merchandising of agricultural commodities and that the industry is not required to follow state law. States are very concerned about the USDA’s interpretation that the federal law supersedes state law in the area of merchandising. This interpretation could not only lead to zero protection for farmers who merchandise agricultural commodities at a warehouse licensed under the USWA, but also put in jeopardy state programs where commodity producers have chosen to pay into indemnity funds for their own protection.

USDA has drafted changes to the USWA which include among other things the allowance of issuing electronic warehouse receipts. The states are supportive of the concept of electronic warehouse receipts and agree that there should be a standard format; however, the states would like to provide input into this process to assure that the state needs and requirements are being addressed. Further, this USWA rewrite needs to address the old concept of cooperative agreements between states and the USDA. A cooperative agreement between the state and the USDA would benefit the producer, the industry, and most importantly the taxpayer.

NASDA believes that the USDA should cooperate with the state departments of agriculture in the regulation of agricultural commodities’ warehouse activities to provide producers with the best protection possible while subjecting the industry to the minimum amount of regulatory oversight necessary at the least cost to the taxpayer.

NASDA believes that legislation should be passed which supports a policy or plan of insurance that includes quality loss adjustment coverage. Under this legislation samples shall be taken and analyzed by a grain grader licensed under the authority of the United States Grain Standards Act or the United States Warehouse Act or the Uniform Grain and Rice Storage Agreement, or by a laboratory approved by the USDA Risk Management Agency.

NASDA urges the administration and the U.S. Congress to direct the USDA to collaborate with state agencies and to recognize the states authority to license and regulate grain dealer and merchandising activities of federally licensed grain warehouses and examine all agricultural warehouses within their states irrespective of their license status under the U.S. Warehouse Act.

National Dairy Producer Security—The establishment of a dairy industry security reserve fund would help to protect American dairy producers from losses resulting from bankruptcy of a processor/handler. This fund could be funded through assessments on processors not to exceed two cents per hundredweight. Producers who suffer a loss because of the bankruptcy of their processor/handler could make a claim against the fund for unpaid milk shipments to that handler.

Currently, the issue of dairy producer security is left to each individual state; however, only about half of the states have dairy producer security laws. NASDA believes that the absence of adequate protection in many states, together with the confusion that is created for processors who have operations in several states with a variety of different producer security laws, requires that this problem be resolved at the federal level.

The National Association of State Departments of Agriculture
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