Thank you for the invitation to meet with you today.  When first invited, I jumped at the chance to come, mainly for selfish reasons.  No, it is not what you think–I do not need a loan.  I wanted to join you all today because I want to learn more about the facts of the farm economy from those who keep the books on U.S. agriculture.  You have a front row seat, and because of that, we value your perspectives highly at USDA.
   There is a lot of uncertainty in agriculture today.  There are worries over the world economy, the effects of hurricanes and droughts, low prices, trade barriers, the acceptability of GMOs, the effects of technology, structural change and concentration, and so on.  Your business–agriculture banks–looks healthy.  But we know bank problems strike with a couple of year lag to farm problems, and we know loan carryovers levels and loan-to-asset ratios are up, both of which mean you must watch the uncertainties in production agriculture very closely.
   Being on guard requires a strong foundation in the trends and facts of the farm economy.  Mark Twain’s advice should be taken to heart.  He said, “Get your facts first, and then you can distort them as much as you please.”  Today, I want to sort through some of the facts and misconceptions by assessing the agricultural outlook in three dimensions–first, by examining U.S. indicators, second, by reviewing prospects for a turnaround in key commodity markets, and third by taking a look at the farm policy environment for 2000.

Aggregate Indicators of The State of the Farm Economy
   Starting with the overall state of the farm economy, farm problem #1 is low prices.  In crop agriculture, wheat prices were the first to experience a sizeable drop in 1997 and other major crop prices followed in 1998.  We now well into the second year of the most severe financial downturn of this decade, caused by two primary factors.  First, farmers in many areas suffered crop production losses the past two years mainly due to natural disasters.  This year alone, we estimate that the value of crop losses nationally is about $4.5 billion, including losses due to the drought in the east estimated at $1.3 billion and the losses due to Hurricane Floyd placed at $650 million.  Second, there are “imbalances” in commodity markets brought about by large U.S. production, despite the bad weather, and by lower exports.  The export growth expected in the mid 1990's has not materialized.
  I want to focus on farm exports for a moment because they get much of the blame for the faltering farm economy.  We project they will be only $50 billion this fiscal year, after reaching a record high of $60 billion in 1996.  In 1996, we exported $26 billion in farm products to Asia; this year, we expect to export only $18 billion, a drop of $8 billion.
 For exports of  bulk products, like wheat, corn, and soybeans, the value of exports  is down 35 percent since 1996.  But we must be careful not to overstate the role of exports in causing the weak farm economy.  Yes, the drop in the value of bulk exports is large, but most of the drop is due to lower prices.  Since 1996, the drop in prices accounts for 80 percent of the decline in bulk export value and lower tonnage accounts for only 20 percent.  And this year, we forecast that the volume or tonnage of exports for bulk products will actually be above the average of mid-1990's--1993-97.
   There is no doubt exports are well below where most everyone thought they would be by now.  I looked back at the Department’s projections made after the 1996 Farm Bill was enacted, and we projected that total farm exports would be $64.5 billion in the year 2000, compared with our current forecast of $50 million, and most of that difference was due to higher volume.
   So the impact of the global slowdown the past 2 years is not so much a sharp drop in export volume, but the elimination of the growth expected in exports happening at the very time of strong U.S. production.  What are the prospects of export growth returning? I think the answer is that we can expect growth to return but only modestly and over a several year period.
   One reason is for a slow recovery is that we may not see for some time the 3.5-percent world GDP growth enjoyed in 1996 and 1997.  World GDP fell to only 1.9 percent in 1998 and is now estimated at 2.6 percent for 1999, which is better than we thought it would be at the start of the year.  Much of the improvement is in Asia, where Japan, Indonesia, Malaysia, Thailand and the Philippines all were in recession in 1998 and all are expected to have positive growth in 1999.  And China has not had as rapid a GDP drop as once expected, and their merchandise exports have been strong, which makes China more likely to maintain currency stability in 1999.  In total, Asian GDP growth is expected to rise over 6 percent this year.  While that is not the 8 to 9 percent rates seen in the early and mid 1990's, it is an important first step to steady-state recovery.
   While the Asian recovery has begun, crisis has rotated to South America where GDP is expected to drop 1 percent this year, compared with 4 to 5 percent yearly increases in the early 1990s.  GDP is dropping in all the major South American countries.
   Another factor for our exports is the exchange value of the dollar, which last year, on an agricultural trade weighted basis was 20 percent above its value in the early 1990s.  This year, the value has come down about 6 percent, again, helpful, but not back to where we were.
   So as we look out to the future, overall farm exports are likely to resume an upward trend helped by stronger foreign GDP and a weaker dollar, but unless there are significant weather problems, exports are not likely to see $60 billion again for several more years.
   I now want to turn to a second major indicator of farming’s fortunes:  cash flow.  For 1999, we expect farm cash receipts to fall to $192–that’s $16 billion below just 2 years ago.   It is this drop in what is earned in the market that leads me to say that the 1999 farm economy is in recession.  There is no definition of a farm recession–it is a term of art.  But if you calculate farm cash receipts for each year and compare them to the average of the previous 5 years, you will see that 1999 cash receipts are expected to fall below the previous 5-year average.  That has only happened once before since 1957 and that was in 1986, the height of the farm credit crisis.
   Despite very weak, recessionary farm markets, national cash flow looks pretty good.   Net cash farm income for 1999 is forecast to be the third highest ever.   The reason of course is the emergency assistance legislation of 1998 and 1999.  With the supplemental government payments, the cash flow picture would be far bleaker, and the fate of farm cash flow in the future, and the health of ag. banks, will probably hinge on whether such payments will continue.  Total government payments to producers are expected to increase from $7.5 billion in 1997 to $22.5 billion in this calendar year, eclipsing by almost $6 billion the record set in 1987.
   The balance sheet for agriculture also is reasonably sound and illustrates that the financial stress today is not as bad as the 1980's.  This year’s overall farm debt levels are about 10 percent below the peak levels of the 1980s, and asset values are substantially higher.
   The fate of the balance sheet hinges on farmland values.  As this audience knows well, the value of an asset is the discounted stream of expected earnings, which means land values depend on two key factors:  expected earnings and the interest rate.  In the 1980's, expectations of future earnings fell and interest rates soared; together they killed land prices.  Today, earnings expectations for the longer run are coming down but the readiness of the government to step in may sustain expectations.  Interest rates are increasing–the 30-year T-bond is 6.35 v. 5.19 in January, but rates remain well below rates of the 1980's.
   These factors mean some drop in farm land values in the key production areas but probably no drop nationally in 1999.  The emergency farm legislation should help support cash rents land prices, but we can expect some further pressure on land prices, particularly in the Mid-west and south in the coming year.
   The reasonably good national cash flow picture also shows up in our farm household survey data.  For example, at the start of 1999, we had 4.7 percent of U.S. farms in what we call a “vulnerable” position, not much different than in recent years.  Vulnerable means they had negative farm income in 1998 and ended the year with debts equal to or greater than 40 percent of their assets.  In addition, the percent of farms expected to have serious debt repayment problems is expected to drop from 13 percent in 1998 to 11 percent in 1999.  Stress is greater for certain regions and sizes and types of farms.  The regions with the highest percentage of vulnerable farms were in the Northern and Southern Plains states at the start of the year and both regions are expected to have average farm incomes up 15 percent or more in 1999.
   Regarding types of farms, the two categories that stand out as facing the greatest pressure on household incomes are what we call limited resource farms and farms were the primary occupation of the operator was farming and annual sales were less than $100,000.  The limited resource farms by definition have low incomes, sales and assets.  The 150,000 farms in this category had household incomes averaging only $9,900 in 1998.  The small primary occupation farms number 420,000 and had average household incomes of $35,000 in 1998, well below the U.S. average of $49,000.  Thirty percent of the nation’s vulnerable farms are in these two categories of farms and because of their  smaller size are difficult address with traditional farm programs.

The Prospects of a Market Turnaround
   At this point, I would like to examine the prospects for a turnaround in the market fundamentals and look at just a few key commodities.
   Crops.  Last spring, wheat was the one crop we thought might see price improvement this year.  U.S. producers planted the lowest acreage since 1972 and EU and Canadian production was expected to be down.  But, this summer we had the third year in a row of  record-high winter wheat yield, and Canada, Australia and Argentina all had larger crops.  Farm prices sunk.  In July, with harvest and LDP activity great, wheat prices averaged only $2.15 per bushel, the lowest monthly average price in 22 years.   For October, prices averaged only $2.49 per bushel.  Over the next 18 months, without weather disruptions, I see little chance for sharply higher prices and are likely to will stay fairly flat.  Export competition will be intense, and unfortunately, total world wheat trade is stagnant.  World trade has stayed close to 100 million tons for the past 6 years straight.  For the 2000/2001 crop year, U.S. wheat planted area is likely to drop another 1-2 million acres.  But with little growth in total demand, carryover stocks will stay large keep pressure on prices.
   For corn, our current yield estimate is a strong 134 bushels per acre for the second consecutive year, and carryover stocks next September are forecast at 2 billion bushel. Exports have been very strong over the past year and the outlook is promising.   South Korea has bounced back and import demand will be strong in Latin America, the Middle East and North Africa.  Even though exports are improving, growth will still be limited by Argentina where yields are soaring with more inputs and better seeds, and by China where production and stocks are large.  Despite better exports, we must remember they account for only 20 percent of U.S. corn production.   In fact, feed use has been the biggest source of demand growth, rising over 25 percent between 1989 and 1997.  But with declining cattle numbers, feed use will probably show little change over the next year or two.  The problem for corn is that production is trending up 125 to 150 million bushels a year as yields improve, so for prices to rebound there must be weather problems or stronger demand than we now foresee.
   The price story is similar for soybeans, as record-high soybean acreage and reasonably good growing conditions have driven prices down and expected carryover stocks up.  We have raised our price forecasts over the past couple of months as yield fell, and strong global protein demand has brightened export prospects, but farm prices are still likely to average below $5.00 for the 1999 crop.  Export growth could be strong over the next 3 to 4 years as protein demand grows and production increases slow in Europe and South America.  Nevertheless, large U.S. acreage and production in 2000/2001, is likely to once again mean weak prices and rising soybean stocks.  Next year, the soybean loan rate will again be an important factor, and although it could decline a little, it will still favor soybean plantings, which may mean yet another record high of 75 million acres or more.
   Cotton is another crop facing a very weak market.   Perhaps no other crop has been hit harder by global developments.  The Asian slowdown and currency devaluations had the double impact of  reducing demand for U.S. raw cotton and increasing textile and apparel exports to the U.S.  On top of that, China, with its high producer support prices, has switched from being a large net importer to a large net exporter.  The result was the 1998/99 U.S. cotton exports were the second lowest in past two decades.  This year, positive factors for exports are the resumption of Step 2 user subsidies provided in the emergency bill and this year’s much larger crop.  Unfortunately, stocks will still rise and keep average U.S. prices in the low 50-cent-per-pound range.  And with cotton prices plus LDPs comparing favorably to other crops, I think we should expect large U.S. acreage and production in 2000 which would keep U.S. farm prices weak.
   Livestock.   On the livestock side, meat and poultry production is record large this year.  Americans will eat an amazing 220 pounds per person, up from 200 pounds at the start of the 1990's.  The large supplies explain the pressure livestock and poultry prices have been under.  And weak exports have not helped.  Seventy-five percent of U.S. meat exports go to 6 countries: Japan, Korea, Hong Kong, Russia, Mexico and Canada.  Asia is recovering, but Japanese demand is flat and Russia remains very unsettled.
   The hog market is still the most troubling area in the livestock sector.  Hog prices rebounded to $30 to 35 per cwt, but that is still below breakeven for many producers.  The prospects for much price recovery are limited because pork production is still running large.  After an astonishing 10-percent production increase in 1998, pork production in 1999 is going to be up another 1 percent.  Low prices are affecting production and we predict a 3-percent drop in pork production in 2000, based on recent farrowing intentions surveys, but that may not move prices into the high $30's per cwt in a sustained way until the second half of 2000.
   Cattle prices have recently strengthened, as the liquidation of the nation’s cattle completes its fourth consecutive year.   But sooner or later, fewer animals will mean even stronger prices and we think that means during the year 2000.  The nation’s calf crop during 1999 was the lowest since 1952.  As for hogs, productivity is also a factor in beef production.  You may have seen that beef production for September was record high, surpassing the previous record set in 1976 when the nation’s cattle inventory at the start of that year was 128 million head, about one-third more than today’s herd.
   Broiler and milk returns have fared better than other areas in the livestock sector this year and production of both has expanded sharply.  So, as might be expected, prices have weakened for broilers, and that will slow production, but we still expect a 5 percent increase in 2000.  For milk, cheese prices have dropped sharply from record-high levels and the October BFP that will be announced on Friday will probably show the second largest decline in history.  With low feed costs and large production gains in the west, we appear to be entering a period of weaker prices for milk over the next marketing year.

The Legislative Response
   My description portrays a weak farm economy–not a 1980's-type economy–but an economy strained by weak markets, particularly for crops and hogs, with no prospect of a substantial near-term recovery in fundamentals.  Facing low prices and a budget surplus, Congress and the administration both decided that the 1996 farm bill does not provide enough support and stepped forward with over $14 billion in supplementary assistance over the past two years.  So now what?  I will conclude my remarks on that question.
   No one can predict how global weather next year, but as I have outlined today, the odds are that markets will continue weak for the next 1 to 2 years.  It is possible that nothing will be done, but if I assume that, my speech is over.  So, let’s assume that doing nothing is out and that Congress and the administration will try to do something.  Here are a four questions that must be answered.
   First–Should there be another emergency package in 2000 or legislation to address more permanently the farm safety net?  An emergency bill is a band aid that provides income support to offset perceived deficiencies in the 1996 farm bill, namely a high enough safety net when markets are weak.  A permanent solution would be to amend the 1996 Farm Bill.  But a new farm bill would be tough to enact nest year.  It is a presidential election year, which means time will be limited and bipartisanship may be hard to find.  And, there appears to be no consensus in either party on what to do.  A new farm bill would also probably require budget offsets, while an emergency bill would not.  And an emergency bill in 2000 could be bid up to even more than this year’s $8.6 billion.
   Second–should payments be countercyclical and tied to prices and production?  This issue came up as a way to calculate and distribute the emergency payments this year, and this idea is on the table for consideration as a change in the farm bill.  Moving away from the fixed farm bill payments to payments that offset down markets creates some thorny issues.  What commodities would be covered?  Even if limited to the traditional ones, the distribution of payments would change, creating winners and losers, and that always creates problems.  But more importantly, tying payments to prices and production is very damaging to flexibility.  When a producer switches crops, the producer would lose payments, so production decisions would once again be distorted by payments.  And, sanctioning production and trade distorting payments is at odds with what we have been advocating in trade talks for the past 13 years.  If widely adopted by other countries, coupled payments could do great damage to future U.S. export prospects.
   Third–Should payments be targeted to low income farms or smaller farms?  Nearly one half of payments go to the 6 percent of farms having annual sales of $250,000 or more and one quarter go to farms have sales of $500,000 or more.  Many believe large payments facilitate consolidation and argue that payments should be directed at smaller farms and those with low incomes.
   Fourth–What do we do with crop insurance?   Congress allocated $6 billion for 2001 to 2004 to fix the problems of crop insurance.  The House passed a bill but the Senate has not yet.  Farmers need an effective risk management tool.  But even a reformed crop insurance program will not enhance income, it will help stabilize income.  So should crop insurance be merged with the direct payment system to provide income enhancement?  Can this be done as revenue protection or some other product and still be a decoupled program and not cause undue production distortions?
   There are many other questions I could raise, which like these, do not have clear answers.  They are food for thought as we wrap up 1999 and begin to chart the policy agenda for 2000.   As bankers,  you have a special role in our farm economy; you make the tough choices about where and to whom capital will flow.  We  need you to keep your eye closely on the markets.  And we need  you need to keep your eye on the policy dilemma.   Your help is sorely needed to report your views on the problems in agriculture, the successes in agriculture and the policy direction that will do the most good for American agriculture, rural areas and society at large in the 21st century.