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Congressional Testimony

Statement of Peter Thomas
Administrator, Business and Cooperative Programs

Before the House Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies
March 17, 2005


Mr. Chairman and Members of the Subcommittee, thank you for the opportunity to present the fiscal year 2006 President's Budget for USDA Rural Development's business and cooperative programs.

This is my first opportunity to appear before you as administrator of the rural business and cooperative programs USDA Rural Development. I am honored to serve in this position, and to have the opportunity to work with you to carry out Rural Development's fundamental mission to increase economic opportunity and improve the quality of life in rural America. Everyday, we bring people and resources together.

Mr. Chairman, the programs and services of Rural Development, in partnership with other public and private sector businesses, continue to improve the economic climate of rural areas through the creation or preservation of sustainable business opportunities and jobs. Rural Development programs help close the gap in opportunity for under-served rural areas and populations, moving them toward improved economic growth by providing capital, technology, technical assistance, and an improved quality of life. The $1.279 billion program level requested in this budget for the rural business and cooperative programs will assist in creating or saving 56,400 jobs.

Business Programs

Business and Industry Guaranteed Loan Program

For the business and industry (B&I) program, the FY 2006 budget includes $44 million in budget authority to support $900 million in guaranteed loans. We estimate that the funding requested for FY 2006 will create or save about 24,560 jobs and provide financial assistance to 489 businesses. Through the lender's reduced exposure on guaranteed loans, they are able to meet the needs of more businesses at rates and terms the businesses can afford. B&I guaranteed loans may also be used by individual farmers to purchase cooperative stock in a start-up or existing cooperative established for value-added processing.

I would like to share a story to illustrate how this program partners with a local lender. Aztec Environmental of Panama City, Florida, is an environmental remediation (asbestos and lead abatement; microbial and remediation) company formed in 1993. The company experienced rapid growth in recent years, particularly in military and other government contracts. B&I guaranteed loan funds of $994,450 are being used for working capital and refinancing of some short-term debt. This type of business generates sustainable jobs, and increases economic activity in a rural area of Florida.

This business is locally owned and operated, in addition to being environmentally friendly. Hazardous materials extracted through remediation contracts are disposed of or recycled in strict compliance with Federal, State and local standards.

Intermediary Relending Program

The Fiscal Year 2006 budget includes $14.7 million in budget authority to support $34 million in loans under the intermediary relending program (IRP). The proposed level of funding will create or save an estimated 26,172 jobs over the 30-year period of this year's loans.

Participation by other private credit funding sources is encouraged in the IRP program, since this program requires the intermediary to provide, at a minimum, 25 percent in matching funds. To illustrate the benefits IRP provides to rural America, I would like to share with you a success story from rural Maine.

Wrabacon, Inc. was established in 1986 to design and build food and drug packaging systems for customers throughout the United States. It is located in a rural community with a population of less than 6,000 and a 5.8 percent state unemployment rate and a 7.1 percent town unemployment rate. Wrabacon, Inc. employs about 13 highly skilled engineers and technicians with an annual payroll in excess of $600,000. The economic slow-down of 2001 had a deep effect on the company's sales and cash flow. Recently, with the economic recovery, the company is experiencing increased orders and sales.

Using IRP funds received from Rural Development, the Kennebec Valley Council of Governments provided a $150,000 gap loan to bring Wrabacon's accounts payable under control and to fund a part of the company's operations. As a result of the loan, Wrabacon was able to approach a commercial lender and received a $245,000 line of credit. The combination of financing tools enabled Wrabacon to obtain needed working capital, continue its growth, and maintain its level of success. While retaining their existing employees, Wrabacon is now anticipating the construction of a 30,000 square foot addition to their existing facility for storage and expanded manufacturing. This is expected to produce an additional 10 to 15 new jobs.

Rural Business Enterprise Grant Program and Rural Business Opportunity Grant Program

No funding is requested for the rural business enterprise grant and rural business opportunity grant programs. For grants like these that are for community organizations to stimulate economic development, the President's FY 2006 Budget proposes to consolidate them into a new economic and community development program to be administered by the Department of Commerce. The new program would be designed to achieve greater results and focus on communities most in need of assistance.

Rural Economic Development Loan and Grant Programs

The Fiscal Year 2006 budget includes $25 million in rural economic development Loans (REDL) and $10 million in rural economic development grants (REDG). These programs represent a unique partnership, since they directly involve an Rural Development electric and telecommunications borrower in community and economic development projects. We provide zero-interest loans and grants to intermediaries, who invest the funds locally. The return on our equity from rural America is strong.

The following is an example of how one REDLoan was utilized to expand capacity and create jobs with higher than average wages in Kentucky. P.J. Murphy Forest Products Corporation received a $250,000 loan through the South Kentucky Rural Electric Cooperative Corporation. The family owned business, located in Bowling Green, produces bedding for laboratory animals and wood flour which is used as filler in the plastics industry. Demand for the company's products exceeded its production capacity. The company built a new facility in Wayne County, a designated Empowerment Zone, with an unemployment rate of 6.6 percent at the time of the loan, as compared to the national unemployment rate of 6 percent at the time of the loan. The $250,000 loan will be used to purchase new equipment for the new facility. By locating the new facility in the Empowerment Zone, the company will reduce its transportation and shipping costs and create up to 15 new jobs in Wayne County. These new jobs are expected to pay up to 1.8 percent above the current average per capita income for the county, demonstrating the Administration's commitment to increasing economic opportunities in isolated rural areas.

Renewable Energy Grants Program

The Fiscal Year 2006 budget for the renewable energy systems and energy efficiency improvements program proposes $10 million of budget authority to support a $5 million grant program and a $286 million guaranteed loan program. Fiscal Year 2006 will be the first full year of implementation of this combined loan and grant program. We anticipate publishing a final rule to implement the program on a permanent basis by April 2005. To date, we have relied on annual notices of available funding, a procedure that is generally limited to grant making.

These programs support the President's Energy Policy by helping to develop renewable energy supplies that are environmentally friendly. In addition, they contribute to local rural economies through the creation of jobs and the provision of new income sources to rural small businesses, farmers, and ranchers. We anticipate 292,000 households will be served, and 3 million-kilowatt hours of energy generated while reducing greenhouse gasses by 6.3 metric tons.

In 2004, for example, three grants were approved to dairy farms in Sacramento County, CA., to install anaerobic digesters. The Sacramento Metropolitan Utility District (Utility District) was a valuable partner in the process, assisting the dairies with the application process and providing some of the financial assistance required to match the grants and develop the systems. Upon installation of the digesters, the electricity generated will be fed into the Utility District grid. Not only will the grants assist the dairy farmers in reducing their utility costs, they will actually show earned income. In addition, the Section 9006 grants authorized under the Farm Bill are assisting the Utility District in meeting the California State requirements whereby utility providers must obtain at least 10 percent of their power from renewable energy sources by the year 2010.

Cooperative Programs

The cooperative form of organizational governance continues to be a cornerstone of business development in our rural communities. From the large agricultural marketing cooperatives that bring additional value to its members' products, to the small rural telephone cooperative that brings broadband technology to its community's businesses and residents, cooperative organizations provide our rural residents with new and exciting job opportunities, enhanced educational and health care opportunities, and the products and services that enable viable rural communities to compete with their urban and suburban counterparts.

The participatory, self-help foundation upon which cooperative organizations are based is evidence of the very grass roots effort that made our Nation great and continues to serve our rural communities well. The mission of Rural Development's cooperative programs is "to promote the understanding and use of the cooperative form of business as a viable organizational option for marketing and distributing agricultural products." Cooperative program staffs successfully carry out their mission by providing an array of educational and technical assistance, research, and funding services to cooperatives, their members, directors, and managers. Cooperative program staffs identify and respond to the opportunities and challenges facing rural cooperatives and agricultural producers, with a special emphasis on helping its cooperative clientele adjust to the continually changing economic forces in which they operate and compete in today's global marketplace. The cooperative programs are relatively modest in size, yet provide opportunities to encourage farmers and rural residents to organize cooperatives as a way to expand their income base.

Value-Added Producer Grant Program

For Fiscal Year 2006, the budget requests $15.5 million for the value-added producer grant program. The value-added producer grant program encourages independent agricultural commodity producers to further refine or enhance their products, thereby increasing their value to end users and increasing the returns to producers. Grants may be used for planning purposes such as conducting feasibility analyses or developing business plans, or for working capital accounts to pay salaries, utilities and other operating costs. Program revisions were made in FY 2005 that target grant funds to smaller, more economically challenged independent producers. In so doing, not only is Rural Development poised to infuse capital to meet rural America's most critical needs, but it is able to assist more producers by funding additional projects. With this budget request, Rural Development will be able to fund approximately 60 projects.

The successful blending of modern technology with age-old tradition is evident in Northern Iowa and Southern Minnesota where Amish dairy farmers are producing and marketing blue cheese. With a $500,000 value-added producers grant for marketing expenses, the Golden Ridge Cheese Cooperative was able to turn a first place tie at the American Cheese Society's 2004 contest into a profitable business opportunity. After winning for its Schwarz und Weiss natural rind blue cheese at one of world's most prestigious contests for specialty cheeses, "Cheese is now flying out of here." Forming a cooperative to produce cheese in a modern plant was a difficult decision for the group because Old Order Amish do not use modern machinery. However, the group went forward with the modern cheese plant in order to preserve their way of life for their families to enjoy. The plant now uses about 5,000 pounds of milk a day that is purchased from the cooperative members and processed into the Schwarz und Weiss cheese, as well as two other brands of blue cheese. The plant employs about 20 full-time staff.

Since the passage of the Farm Bill in 2002, funding for the Agricultural Marketing Resource Center (AgMRC) has been set at 5 percent of the funding made available to the other value-added programs. Therefore, $775,000 of the $15.5 million budget request will fund the AgMRC's activities. AgMRC is an electronically based information center that creates, processes, analyzes, and presents information on value-added agriculture. The center is housed at Iowa State University and has partners at Kansas State University and the University of California-Davis. The center provides producers, processors, and other interested parties with critical information necessary to build successful value-added businesses.

Rural Cooperative Development Grant Program

For Fiscal Year 2006, the budget requests $5.0 million for the rural cooperative development grant program. The rural cooperative development grant program provides funds to establish and operate centers for developing new cooperatives and improving the operations of existing cooperatives, with the primary goal of improving the economic conditions of rural areas. This program complements our national and State office technical assistance efforts by increasing outreach and developing feasibility studies and business plans for new cooperatives and assisting existing cooperatives in meeting the demands of today's ever-changing global economy. With this budget request, Rural Development will be able to fund additional 3 or 4 centers.

A rural cooperative development grant made in 2003 enabled a rural Missouri cotton growers' cooperative to participate in today's emerging global markets. With assistance from the Missouri Enterprise Business Assistance Center in Rolla, Missouri, Delta Fibers, located in Caruthersville, Missouri, was introduced to Porter Tech, a Mexican import company. After visiting the Delta Fibers site, officials from Porter Tech entered into an agreement with Delta Fibers and in the summer of 2004, Missouri cotton began shipment into Mexico.

Cooperative Research Agreements

For Fiscal Year 2006, the budget requests $500,000 for cooperative research agreements to encourage the study of those issues essential to the development and sustainability of cooperatives. Because so much of rural America's business endeavors are cooperatively formed, their continued success is critical for the continued sustainability of the Nation's rural communities. Through cooperative research agreements, Rural Development can continue to develop and maintain the information base vital for innovative, creative, and prudent decision making.

Conclusion

Mr. Chairman, and Members of the Subcommittee, this concludes my testimony for the Rural Development FY 2006 budget for rural business and cooperative programs. I look forward to working with you and other Committee members to administer our programs. I will be happy to answer any questions the Committee might have.

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