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Congressional Testimony

Statement of Dayton J. Watkins
Former Administrator, Business Programs

Before the Senate Subcommittee on Agriculture, Rural Development, and Related Agencies
March 3, 1998


Mr. Chairman and members of the Subcommittee, I am pleased to appear before you today to report on our progress in rural development and to present the Administration's fiscal year 1999 Budget for the Business Programs (Business Programs).

DEMOGRAPHIC DATA ON RURAL DEVELOPMENT

As I am sure the Subcommittee will agree, we in Business Programs firmly believe that, there cannot be a strong America without an equally strong and participating rural America. The USDA Economic Research Service (ERS) in a 1995 report identified a re-shift of population from urban areas back to rural communities. This underscores an increased need for our programs. The proportion of real poverty is worse in rural areas than in the cities according to ERS data. In some areas of the rural south and on some Indian reservations, poverty and its associated ills of poor health, poor nutrition and poor educational opportunities is staggering.

The Business Programs is a component of the Rural Development Mission area and as such strives to make significant contributions to the enhancement of life for rural Americans. In partnership with the other agencies of the Rural Development Mission area, we share in the belief that a strong rural America requires a continuing investment from all levels of government and the private sector in people, education, technology, health care, infrastructure and social and community affairs. Certainly, there can be no sustainable development without employment. According to the ERS report, the unemployment rate in rural areas is 16 percent higher than in urban areas. There is energy and resources for business development in rural areas which can be harnessed to address this issue. Our efforts have been focused on leveraging this energy and investment potential to maximize employment in rural communities. The rural business programs proposed in this Budget will create and save about 83,000 jobs.

These investments will enable rural Americans to continue advancing in the economic mainstream of this great nation and help citizens build sustainable rural communities. The Business Programs contribution to this effort continues to be our ability to make our financial and technical resources available to rural America.

PARTNERSHIPS FOR RURAL DEVELOPMENT

These resources facilitate the building of partnerships within rural communities when leveraged with public, private, and non-profit resources and stimulate economic growth and development. New jobs, paying higher wages, are created or saved. This further enhances the ability of rural citizens to be able to meet the individual needs of their families for the basic necessities of life.

This is accomplished by assisting rural residents in acquiring adequate income to pay for the educational expenses of their children, meet their housing needs, and building their pride and self esteem. This means helping new entrepreneurs implement their dream of owning and operating their own businesses by providing for the credit and financing needs of rural business owners who are unable to find credit from traditional sources. Further, it means helping agricultural producers analyze alternative business forms, like cooperatives, which offer greater economic opportunities than currently found in the marketplace. Each of these efforts touches rural America in a meaningful way. Our responsibility is to provide efficient and cost effective access to our programs so that rural Americans can maximize the resultant benefit.

A paramount objective is to use this opportunity to be creative in developing new concepts and approaches to serving our customers. To ensure that rural Americans continue to have access to our programs and services, we are continuing to develop and advance new and exciting initiatives. These initiatives will focus more resources on individuals, businesses and communities that have not been traditional participants in our programs. By continuing this effort, we can and will be instrumental in increasing the contributions made to the overall growth of rural America by putting underutilized resources to better use. This is consistent with the overall strategic goals and objectives of the Rural Development Mission Area.

To meet our goals, objectives, and the growing demand for our services and resources, our strategy is to continue along the direction begun last year to increase strategic alliances through creative partnerships with other Federal departments and/or agencies of the United States Department of Agriculture, corporate America, educational institutions, non-profit organizations and others. Through strategic alliances, we can serve more people and communities because more organizations will be available as resources to rural residents.

ROLE OF AGRICULTURAL COOPERATIVES

We endeavor to enhance the quality of life for rural Americans by encouraging the use of cooperatively owned businesses as a self-help tool in the marketplace. Our programs of research, technical assistance, education/information, finance and assistance in starting new cooperatives are designed to establish viable business entities that help individual farm operators and other rural residents retain access to markets and sources of supplies and services in a sector that is rapidly becoming vertically integrated and industrialized. Cooperatives are a means for rural people, both farm and non-farm, who typically have weak market power compared to buyers and suppliers, to be treated more fairly in the marketplace.

The existence of these rural cooperative businesses is an important component to most rural communities providing jobs, opportunity for purchase of more reasonably priced supplies and services, and a market outlet and improved returns for farm products. A noticeable trend in recent years has been the attempt to add value to raw commodities by primary and further processing in the communities near the source of production. The Cooperative Services Program continues to augment these efforts by helping to determine feasibility, assistance in the development of new cooperatively owned businesses, and maintaining statistical data on aggregate trends and commodity sector developments.

Since 1926, USDA has worked as a partner to farmer cooperatives, helping interested groups of agricultural producers form new cooperatives and working with existing cooperatives to improve their efficiency and expand the scope of services to members. This work is carried out by our National Office staff who specialize in research, technical assistance, statistics and educational/informational activities and the State Rural Development Offices that are identifying Cooperative Development Specialists on their staffs to assist in starting and servicing the needs of new cooperatives. We are further aided by partnerships with universities, State departments of agriculture, and non-profit associations through various programs aimed at strengthening rural people's ability to use mutual self-help efforts to earn a decent living and to enhance their quality of life.

OUTREACH THROUGH INNOVATIVE PROGRAMS

The National Commission on Small Farms recently released its report A Time To Act which points to the role of cooperatives in assisting small farm operators to survive and prosper in a rapidly changing production agriculture. The Department is formulating a response to the recommendations in this report that will address effective marketing methods and other needs of small farmers throughout the nation. We will be an integral part of this overall effort since group action, so prominently recommended in the report, is also the focus of our programs. As part of this effort, we want to determine how under served rural Americans can utilize the cooperative form of business to help overcome market access barriers.

During the past year, we implemented a Cooperative Value-Added Program funded from the Fund for Rural America. Eligible applicants were institutions of higher learning or nonprofit associations that would provide technical assistance to specific value-added projects. We were surprised, and a bit overwhelmed, to receive 104 applications requesting a total of $19.4 million. After review, 18 projects were funded up to $75,000 each for a total of $1.1 million. We think this experience is good evidence of the expanded interest in the value-added strategy.

Another major initiative of this Mission Area is to expand the types of cooperatives serving rural America. Legislation has been developed and introduced at the Secretary's request under which we would assist rural residents interested in forming cooperatives for rural non-farm business. Based on our proven track record of success, we believe we can maximize their chances for business success. Successful nonagricultural cooperatives can assist rural residents to obtain increased access to technology, housing, rural utilities, health care and other shared services. These services will strengthen the infrastructure of many rural communities that are faltering by providing stable businesses, more reasonable prices for goods and services, and increased earnings for products sold.

RE-INVENTION OF PROGRAMS

Last year, in my testimony to the Subcommittee, I discussed the sweeping revisions we were making to the regulations for our Business and Industry Guaranteed Loan Program. The new regulations are shorter, clearer, and more logically organized. They're certainly more concise, taking up about one-half the pages of the previous regulations. The new regulations shift some responsibility for loan documentation and analysis from the Government to the lenders. We've made the program more responsive to the needs of the lenders and businesses, and createdan environment for easier and faster application processing.

This year, I'm pleased to be able to update the Subcommittee on recently published revisions to the Intermediary Relending Program regulations. These regulations were published in final on February 6, 1998. The new regulations expand the current $2 million cap on loans to intermediaries to a $15 million cap to any one intermediary in annual increments of $1 million. The regulation is more user-friendly and authorizes the Rural Development State Offices to process applications at the State level, rather than submitting applications to the National Office for processing. This change will speed up the applications process and allow State Offices to work closer with borrowers to provide immediate feedback concerning their applications. There will continue to be a nation-wide competition for funding the applications.

A revised priority scoring system will help us target more funding to the neediest communities such as those in low-income or in under served areas, those with declining population, or communities faced with economic restructuring or natural disasters. In addition, the eligible purposes for loans to businesses have been expanded.

Mr. Chairman, since the streamlined Business and Industry Guaranteed Loan Program regulations were published last December, demand for the program has increased 300 percent. This increased demand for the program will mean that the quality of the applications and the opportunity of providing funding to the communities most in need will be enhanced.

Now, I'd like to address our specific programs and their accomplishments in a little more detail.

BUSINESS PROGRAMS

To meet our goals and objectives and the growing demand for our services and resources, we have increased partnerships and strategic alliances with other Federal agencies. One example is the implementation of a Memorandum of Understanding between Rural Development and the U.S. Department of the Treasury to carry out the Community Adjustment and Investment Program under the North American Free Trade Agreement (NAFTA). We estimate that this partnership will provide for an additional $75 million in business and industry guaranteed loans in fiscal year 1998.

For all business programs, the emphasis this year is to provide program funding in our targeted areas of greatest need. This objective is supported in the Performance Goals identified in the Rural Development Strategic Plan, the Administrator's Priority Goals, and the priority selection criteria of the various regulations that are used to score and select projects. To demonstrate our earnestness, Rural Development State Directors' annual performance will be evaluated, in part, based upon how well they accomplish the program objectives of providing financial assistance to targeted areas and areas of greatest need.

The following are examples of how the Business and Industry Guaranteed Loan Program, the Rural Business Enterprise Grant Program, the Intermediary Relending Program, and the Rural Economic Development Loan and Grant Program provide economic opportunities in America:

Freshwater Farms, Inc., was originally incorporated in November 1982 under the name "Humphreys County Catfish Processing" by Mr. Robert Edwards. In September 1986, a group of nine local catfish farmers and businessmen joined with Mr. Edwards to provide new capital, new management, and increased catfish supplies. Stock in the company was issued equally to all ten stockholders, a new ten-member Board of Directors was elected, and the name was changed to Freshwater Farms, Inc. Under this leadership, the company has grown in annual sales from $4 million to $18 million, in employment from 75 to 170, and the number of stockholders has increased to 19.

The Rural Economic Development Loan Program provided a $400,000 loan to Twin County Electric Power Associate to finance the processing equipment for Freshwater Farms.

Rapid growth, requiring continuous repair and renovation, placed a considerable strain on the company facilities and resulted in inefficiencies and added expenses. Yet, even with these disadvantages, the company has proven itself to be a low-cost processor in the industry, delivering a quality product to markets in over 20 States. By relying almost exclusively on stockholders to supply catfish, the plant has been able to operate at near maximum capacity and has been profitable during varying market conditions.

In order to supply additional processing capacity for the stockholders, who have expanded their operations, the Board of Directors unanimously agreed to build a completely new facility which would accommodate future sales of $30 million, improve efficiencies, and increase employment from 170 to 235. An increase of 65 new jobs and the economic activity associated with these jobs have a very positive impact upon the unemployment rate, sales tax revenues, property tax revenues, and welfare rolls. The facility is located in the Mid Delta Employment Zone, one of only three Federally designated Rural Empowerment Zones in the United States. The new facility is a source of pride for the owners, employees, and the community as a whole. Had the new facility not been built, production would have been reduced in order to meet ever increasing environmental regulations, and employment would have been reduced by nearly 40 jobs.

A $30,000 rural business enterprise grant was awarded to the Town of Medway to develop an industrial site. The project was a cooperative effort between the town, the State of Maine, private business, and Business Programs. In addition to the $250,000 provided by the funding partners, Great Northern Paper, Inc., donated the land for the roadway.

The project enabled Medway to bring in much-needed employment. Earthgro, Inc., a manufacturer and processor of bark, wood chips, and other forest byproducts, initially provided 16 new jobs when the company started a new operation in the industrial park in 1997. The business now provides 25 jobs and is Medway's largest employer. Since this is a new operation, it did not just relocate the company's existing jobs.

Medway is an economically depressed area which has depended on the paper mills located in adjacent towns to provide jobs. Since 1990, the mills have eliminated more than 2,500 jobs, significantly affecting Medway's economy. The area unemployment rate exceed the State rate by approximately 50 percent. This project provided immediate jobs to the area, and it is expected that additional businesses will locate to the park in the future, thus further mitigating economic distress in the area.

Magnolia Home Health Services of Tallulah, Louisiana, is a family owned home health care business situated in rural Madison Parish, within the Northeast Delta Enterprise Community. The family saw the need to provide home health care services to this impoverished Delta Region and developed a plan to implement the service. After several unsuccessful attempts to obtain funding through traditional lenders, the business presented a plan to Northeast Delta Enterprise Community. The Northeast Delta Enterprise Community was not yet set up to provide business loans, and Macon Ridge Economic Development Region, Inc., stepped in and provided a loan of $112,500.

Magnolia Home Health Services has not only provided rural Madison Parish with quality home health care, but has grown well beyond the projected 10 employees to a staff of more than 20. In addition to Madison Parish, it now serves a total rural population of 12,463 including areas of Tensas Parish and Richland Parish, which are within Macon Ridge Enterprise Community.

The business has been so successful that it paid the original loan of $112,500 down to $38,000 in just over a year, $50,000 ahead of schedule. The business is still growing and has certainly boosted the economy and health care service in Madison and surrounding parishes.

A $350,000 zero-interest loan was made to the Winnebago Cooperative Telephone Cooperative for the purpose of assisting the Larson Manufacturing Company of Lake Mills with its plant expansion.

Larson Manufacturing Company produces aluminum wood core storm doors, aluminum windows, and energy saving products. The Company's overall plant expansion included the purchase of land, site preparation, building of roads, sewer and water extensions, construction of a 70,000 square foot building, parking lots, and the purchase of new manufacturing equipment. An additional $2.43 million was leveraged from other funding sources for a total project cost of $2.78 million. It was estimated that the project would increase production capacity by 25 percent and warehouse capacity by 50 percent.

It was projected that 50 new jobs would be created within two years of completion of the project. Plant representatives have indicated that, in less than one year, the employment projection had already been surpassed. The jobs created in this small rural community of 2,143 population consist of sales managers, sales persons, truck drivers, general production workers, warehouse workers, production coordinators, forklift operators, and office support staff. The new jobs have led to an increase in the long-term productivity and per capita personal income in the rural areas of north central Iowa and south central Minnesota.

A $300,000 grant was made to the Chariton Valley Rural Electric Cooperative of Albia, Iowa, to establish a revolving loan fund program. The electric cooperative provided $60,000 of its own funds and made loans totaling $360,000 to the Albia Industrial Development Corporation to renovate a vacant industrial building in Albia and to purchase 24 acres of land to expand an industrial park. These loans were leveraged with $662,000 of financing from private sources.

After renovation of the 102,000 square foot industrial building, one-half of the space was sold to a metal fabricating business which employs 33 people. The business holds the option to purchase the remaining building space. In the interim, a plastics company proposes to lease the remaining space for a period of three years. At the end of the lease term, the plastics company intends to build a 100,000 square foot building in the new industrial park.

COOPERATIVE SERVICES

The Cooperative Services Program devotes its efforts to promoting the understanding and use of the cooperative form of business as a viable option for rural residents. As government support programs are changed and encouragement is given to a more market driven policy, farm operators, ranchers and other rural residents are realizing that they need more effective forms of group action in the marketplace to represent their economic interests.

Cooperative Services conducts studies, alone or in conjunction with other Federal or state institutions, to provide farmers with information on economic, financial, organizational, legal and social aspects of cooperative activity. Technical advice assists farmer cooperatives in the development and operation of viable organizations to better serve the Nation's family farmers. Educational assistance provides farmers and other rural residents with a proper understanding, use and application of the cooperative tool.

The Nation's agricultural sector is currently experiencing rapid structural change often referred to as the "industrialization of agriculture." United States businesses involved in agriculture are finding it increasingly necessary to have a coordinated and controlled supply of a narrowly defined raw product. As previously mentioned, the report "A Time To Act" by the National Commission on Small Farms has recommended an expanded use of cooperatives as a means for smaller farm operators to access markets.

A major initiative by Business Programs has been to encourage the staffing of Cooperative Development Specialists in each State Office. These individuals, either solely or collaterally, provide a more localized source of expertise in guiding the development of new cooperative businesses and helping to determine their feasibility. We are confident they will become a more important source of assistance to emerging businesses as they gain more expertise.

Development of a sound knowledge base acquired through research is essential to offering sound technical and cooperative development assistance. This program utilizes researchers at the 1862 and 1890 universities as well as state departments of agriculture on important agricultural cooperative marketing projects. As an example, Purdue University completed research on cooperative coordination in the hog-pork sub-sector that may help maintain the status of independent hog producers.

There has been a lapse in supporting research on cooperatives in recent years, and the 1997 budget includes $2 million for the Federal/State research on cooperatives program. This money will be used in partnerships with State Departments of Agriculture and State universities and colleges to fill the void and make up for lost ground. Among the new areas for research are the role that cooperatives can fulfill as Federal farm price supports are ratcheted down and perhaps eventually terminated, the emergence of collaboration between farm operators in farm production cooperatives, evaluation of types of strategic alliances developed between cooperatives and with investor owned firms, identification of key successes and problems of "new generation" cooperatives, and operational adjustments being made by cooperatives to global competitors.

We met recently with representatives from the 1994 Native American institutions and encouraged them to develop, with our help, teaching modules on cooperatives that fit into their expanding curriculums. We also encouraged development of a Cooperative Center of Excellence at one or more of their institutions.

As an example of technical assistance, we worked with Shoreham Apple Growers of Vermont, an apple packing and warehouse operation serving the majority of apple growers in the state, to develop a plan to revitalize its organization. A business plan and financial projections were developed with the help of Cooperative Services staff to enable them to obtain bank financing required to keep in operation. The cooperative was also assisted in adopting operational and record keeping changes required for its long term survival.

The emerging alpaca industry is characterized by its geographical dispersion and its lack of organization at the producer level. This past year, Cooperative Services staff worked closely with producers throughout the western states to establish the framework for a producers' association that will facilitate development of industry strategies and orderly marketing. From a disorganized group of producers at the beginning of the year, the alpaca association has emerged with a strategic plan, experienced officers, and a sense of direction that will carry them forward as an effective marketing cooperative.

Small vegetable growers in Arkansas have been assisted in growing tomatoes to supply Burger King. The growers are attempting to structure a cooperative that will continue to provide them market access to the growing produce market. Similar efforts are being made in eastern Kentucky to assist small producers accustomed to growing tobacco to engage in vegetable production as a parallel crop and to market it through a local cooperative packing facility.

RURAL COOPERATIVE DEVELOPMENT GRANTS

Another source of assistance to developing cooperatives is the funding of new and existing cooperative centers through the Rural Cooperative Development Grant Program. This partnership with institutions of higher learning and nonprofit associations permitted us to fund 11 centers for a total of $1.7 million in 1997.

The program is used to facilitate the creation or retention of jobs in rural areas and enhance producers' incomes through the development of new rural cooperatives, value-added processing, and other rural businesses. Grants are competitive and awarded based on specific selection criteria.

APPROPRIATE TECHNOLOGY TRANSFER FOR RURAL AREAS (ATTRA)

We have also been providing extensive support for the Appropriate Technology Transfer for Rural Areas program which provides producers and agribusiness advisors information on use of the best sustainable production practices. Encouragement of such practices lessens dependence on agricultural chemicals and is more environmentally friendly.

The ATTRA program handled over 18,000 requests this past year and continues to be a major source of information on sustainable agriculture throughout the country through its 800 telephone number and the use of the Internet. We're asking for $2 million, an increase of $700,000, for the ATTRA program to accommodate expanding requests for information.

NATIONAL SHEEP INDUSTRY IMPROVEMENT CENTER

The National Sheep Industry Improvement Center was established this past year. The Center has held three public hearings, developed a strategic plan, and hired an Executive Director. This program will become operational under the Board's direction this year and will assist development of infrastructure in the sheep and goat industries through a $20 million revolving fund provided in the Federal Agriculture Improvement Act of 1996.

FY 1999 BUDGET REQUEST

The fiscal year 1999 Budget requests a program level of $1.2 billion for the Rural Business- Cooperative Service including amounts under the Rural Community Advancement Program. The Federal loan guarantee as used in the Business and Industry Program is an extremely cost effective mechanism to meet capital needs of rural businesses. Under Federal Credit Reform, business and industry guaranteed loan program borrowers or the cooperating financial institutions pay an up-front fee which is pooled as a reserve to be used in future years to cover losses in the program. This reserve remains in the Treasury and draws interest until it is needed. In this way, the participants in the program "self insure" the program against losses and minimize the cost of the program to tax payers. The result of this self insurance feature is that the loan subsidy rate, that is, the proportion of the program cost that must be provided from tax money is currently less than a penny on the dollar.

As part of the Rural Community Advancement Program (RCAP), the Budget requests program levels of $1 billion for business and industry guaranteed loans, $50 million for business and industry direct loans, and $40.3 million for rural business enterprise grants.

The Intermediary Relending Program of the Rural Development Loan Fund is requested at the $35 million level.

The Rural Economic Development Program budget proposal includes a $15 million loan level and $11 million for grants.

The total program request for Cooperative Services is $5.7 million. This includes $1.7 million for cooperative development grants and $2 million for appropriate technology transfer. Federal/State cooperative marketing research agreements are proposed at $2 million.

For administrative expenses, the budget includes $29.9 million for the Rural Business-Cooperative Service. Although this amount is slightly greater than the current level, the increase is less than the rate of inflation and will call for a reduction in employment in 1999 and belt tightening in other administrative activities.

EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES

The Business Programs continues a strong fiscal year 1999 Program in Empowerment Zones and Enterprise Communities. The Budget estimate includes a program level of $31 million to be reserved for these designated areas. We are also proposing legislation to provide for additional rural Empowerment Zones as authorized in the Taxpayer Relief Act of 1997.

CONCLUSION

Mr. Chairman, this concludes my formal statement on the fiscal year 1999 Budget. I would be happy to respond to any questions the Subcommittee may have regarding the business and cooperative development programs of the Rural Development Mission Area.

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