[Senate Hearing 107-590]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 107-590
 
                           AGRICULTURE CREDIT
=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION


                               __________

                              MAY 16, 2001

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry


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           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                   RICHARD G. LUGAR, Indiana Chairman

JESSE HELMS, North Carolina          TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAT ROBERTS, Kansas                  THOMAS A. DASCHLE, South Dakota
PETER G. FITZGERALD, Illinois        MAX BAUCUS, Montana
CRAIG THOMAS, Wyoming                BLANCHE L. LINCOLN, Arkansas
WAYNE ALLARD, Colorado               ZELL MILLER, Georgia
TIM HUTCHINSON, Arkansas             DEBBIE A. STABENOW, Michigan
MICHEAL D. CRAPO, Idaho              BEN NELSON, Nebraska
                                     MARK DAYTON, Minnesota

                       Keith Luse, Staff Director

         David L. Johnson, Chief Counsel/Deputy Staff Director

                      Robert E. Sturm, Chief Clerk

     Mark Halverson, Staff Director/Chief Counsel for the Minority

                                  (ii)






                            C O N T E N T S

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                                                                   Page

Hearing(s):

Agricultural Credit..............................................    01

                              ----------                              

                        Wednesday, May 16, 2001
                    STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, 
  Committee on Agriculture, Nutrition, and Forestry..............    01
Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, 
  Committee on Agricuture, Nutrition, and Forestry...............    12
Lincoln, Hon. Blanche L., a U.S. Senator from Arkansas...........    03
                              ----------                              

                               WITNESSES
                                Panel I

Conklin, Neil, Director, Market and Trade Economics Division, 
  Economic Research Service, U.S. Department of Agriculture, 
  Washington, DC.................................................    01
Cooksie, Carolyn B., Deputy Administrator for Farm Loan Programs, 
  Farm Service Agency, U.S. Department of Agriculture, 
  Washington, DC.................................................    04
Dyckman, Lawrence J., Director of Agricultural Issues, U.S. 
  General 
  Accounting Office, Washington, DC, accompanied by Charles 
  Adams, 
  Assistant Director.............................................    07

                                Panel II

Canada, Gary R., President, Bank of England, England, Arkansas, 
  on behalf of American Bankers Association......................    21
Edelman, Henry D., Chief Executive Officer, Farmer MAC, 
  Washington, DC.................................................    16
Evans, Jr., John, Chief executive Officer, D.L. Evans Bank, 
  Burley, Idaho, on behalf of Independent community Bankers of 
  America........................................................    19
Penick, Jay B., President and Chief Executive Officer, Northwest 
  Farm Credit Services, Washington, DC, on behalf of the Farm 
  Credit Council.................................................    14

                               Panel III

Brost, Frank, Rapid City, South Dakota, Chairman, Tax and Credit 
  Committee, National Cattlemen's Beef Association...............    30
Carter, David, President, Rocky Mountain Farmers Union, on behalf 
  of the National Farmers Union, Washington, DC..................    28
Hoefner, Ferd, Washington Representative, Sustainable Agriculture 
  Coalition, Washington, DC......................................    32
                              ----------                              

                                APPENDIX

Prepared Statements:
    Harkin, Hon. Tom.............................................    40
    Brost, Frank.................................................   139
    Canada, Gary.................................................   119
    Carter, David................................................   130
    Conklin, Neil................................................    43
    Cooksie, Carolyn B...........................................    51
    Dyckman, Lawrence J..........................................    56
    Edelman, Henry D.............................................    72
    Evans, Jr., John.............................................   108
    Hoefner, Ferd................................................   145
    Penick, Jay..................................................    64
Document(s) Submitted for the Record:
    Baucus, Hon. Max.............................................   170
    Letter to Dan Glickman, Secretary of Agriculture from Hazell 
      Reed, Chair USDA Advisory Committee on Beginning Farmers 
      and Ranchers Delaware State University.....................   172
    Letter to Hazell Reed from Dan Glickman......................   176
    News from ICBA, Independent Community Bankers of America.....   171



                     HEARING ON AGRICULTURAL CREDIT

                              ----------                              


                        WEDNESDAY, MAY 16, 2001

                                       U.S. Senate,
         Committee on Agriculture, Nutrition, and Forestry,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:16 a.m., in 
room SR-328A, Russell Senate Office Building, Hon. Richard G. 
Lugar, Chairman of the Committee, presiding.
    Present or submitting a statement: Senators Lugar, Harkin, 
Conrad, and Lincoln.

    STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM 
  INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND 
                            FORESTRY

    The Chairman. The hearing will come to order.
    The chair now calls on Mr. Neil Conklin, Director of the 
Market and Trade Economics Division of the Economic Research 
Service, United States Department of Agriculture; Ms. Carolyn 
Cooksie, Deputy Administrator for Farm Loan Programs at the 
Farm Service Agency of USDA; and Mr. Lawrence Dyckman, Director 
of Agricultural Issues at the General Accounting Office, who 
will be accompanied by Mr. Charles Adams.
    Ms. Cooksie and gentlemen, we much appreciate your coming 
to the committee today to offer testimony.
    Let me just say at the outset--and this will be true for 
each of our three panels--that the prepared testimony that you 
have submitted to the committee will be published in full in 
the record of the committee, so you will not need to ask 
individually for that permission; and we will ask each one of 
you to try to summarize your testimony in five minutes so that 
we can proceed rapidly through those initial summaries that you 
have and the questions by members of the committee who are very 
much interested in the credit area.
    I will ask you to testify in the order that I called upon 
you, which would be first of all Mr. Conklin.

STATEMENT OF NEIL CONKLIN, DIRECTOR, MARKET AND TRADE ECONOMICS 
                  DIVISION, ECONOMIC RESEARCH 
           SERVICE, U.S. DEPARTMENT OF AGRICULTURE, 
                         WASHINGTON, DC

    Mr. Conklin. Thank you very much, Mr. Chairman, members of 
the committee.
    Thank you for this opportunity to provide an overview of 
the current credit conditions facing America's farmers and farm 
lenders. The overall financial health of farmers and their 
lenders remains solid, despite low prices for major farm 
commodities over the last several years.
    Generally favorable farm economic conditions from 1990 
through 1998 contributed to this financial strength. In 
addition, large Federal payments to farmers have mitigated the 
negative effect of lower prices on farm financial conditions 
and have played a key role in stabilizing farm income and 
balance sheets.
    Much of the financial viability of the farm economy 
continues to rest on its sound balance sheet. Throughout the 
1990's and especially since 1992, asset value growth has been 
strong, and equity positions have generally improved. Balance 
sheet improvement can largely be attributed to the strength of 
farm real estate markets.
    The recent strength in farm real estate markets suggests 
that farmers and lenders do not believe that farm incomes will 
decline precipitously in the near future.
    For the majority of family farmers, off-farm income is at 
least as important to creditworthiness and overall financial 
health as farm income. The ability of small farm operators to 
repay debt is primarily determined by off-farm economic 
conditions. Even for large family farms, close to half of total 
household income comes from off-farm sources. Government 
payments not only contribute to farm income but also impact 
farm debt and assets. The value of most agricultural land 
depends largely on its expected future earnings, and a rise in 
available cash from Government payments or other sources can 
impact the overall amount and composition of debt. Government 
payments also help farmers to meet debt repayment obligations.
    To illustrate the importance of Government payments, I 
would like to talk a bit about one indicator of farmers' 
financial health, one that we call ``debt repayment capacity 
utilization.'' The term sounds a little bit intimidating, but 
as most of us know from our own personal experience, as we use 
more of our borrowing capacity as defined by our credit cards 
or our line on our home equity loan, our financial options 
become more limited.
    Today, farmers are using an estimated 65 percent of their 
borrowing capacity. This is substantially above the low levels 
of the mid-1990's. If it were not for Government payments, they 
would be using even more of their borrowing capacity--around 80 
percent.
    Not all farm operators are frequent users of borrowed 
capital. USDA's Agricultural Resource Management Study showed 
that only 42 percent of all farms carried debt from 1999 into 
2000. Large farms are much more likely to borrow, and their 
borrowing needs are greater. Over 70 percent of large farms 
have debt. For these larger operations, which produce two-
thirds of the Nation's food and fiber, credit availability and 
costs are a significant issue.
    The position of commercial agricultural lenders reflects 
the generally healthy state of farmers' finances in recent 
years. Lenders continue to have ample funds to lend to 
creditworthy borrowers, and farm debt has continued to grow. 
Major groups of farm lenders, including the Farm Credit System, 
commercial bankers, and insurance companies, as well as the 
Farm Service Agency, continue to enjoy historically healthy 
loan portfolios.
    Just as Federal payments have been important to farmers, 
they benefit farm lenders. Federal payments increase the size 
and reduce the risk of cash-flows associated with farming and 
the ownership of farm land. By increasing and stabilizing these 
cash-flows, Federal payments enable lenders to offer farmers 
credit on more attractive terms than they would otherwise be 
able to.
    Just as lenders profit from Federal farm payments, they may 
be vulnerable to decreases in payments and any ensuing fall in 
land values.
    In conclusion, farmers and their lenders continue to 
benefit from strong balance sheets bolstered by high levels of 
Government support. Thanks largely to this support, there 
remains no widespread evidence of financial distress even as 
the sector experiences its fourth year of low prices for many 
farm commodities. For most small farms and even many larger 
farms, the non-farm economy and the current unprecedented 
economic expansion have become more important sources of 
prosperity than farm markets and Federal payments.
    An important issue, however, is the divergence between low 
levels of market receipts and rising farm real estate values. 
Already, ERS estimates that on average, 25 percent of the value 
of U.S. farm land represents capitalized Government payments. 
If more than a short-term idiosyncracy, this divergence may 
lead to an unsustainable dependence on Federal payments which, 
if curtailed, could precipitate a painful period of adjustment 
for farmers, farm land owners, rural communities, and their 
lenders.
    That concludes my summary, Mr. Chairman. Thank you again 
for the opportunity. I will be happy to answer any questions.
    The Chairman. Thank you very much for that testimony.
    [The prepared statement of Mr. Conklin can be found in the 
appendix on page 43.]
    The Chairman. Let me intrude in the batting order for just 
a moment to recognize Senator Lincoln.

STATEMENT OF HON. BLANCHE LINCOLN, A U.S. SENATOR FROM ARKANSAS

    Senator Lincoln. Thank you, Mr. Chairman. I appreciate, and 
welcome to all of our witnesses here today.
    I just want to say thank you for coming and testifying 
before the committee today on such a very important issue and 
also to thank the chairman and say how much I appreciate him 
holding this hearing on a matter of critical importance to 
farmers in Arkansas, especially on the state of agricultural 
credit.
    I would also like to welcome someone who is going to 
testify on the second panel who is a constituent of ours. I 
could share many stories on the issue of agricultural credit, 
but I am going to let one of my constituents, Mr. Chairman, 
tell the tale.
    Gary Canada is here today on behalf of the American Bankers 
Association and will testify on the second panel. I want him to 
know how delighted I am and how proud I am that he is here.
    Gary is president of the Bank of England and has a 
wonderful grasp of issues facing agriculture and agricultural 
lenders. I rely on Gary's insight often, and I am glad that he 
is with us today to share his perspective on the state of 
agricultural credit.
    Mr. Chairman, our farmers and our ag lenders need 
certainty, and that is probably something that we may hear 
echoed from many of the individuals who testify today. The 
agricultural economy is dismal in my home State, and many of 
our farmers could not even cash-flow a loan this year without 
the guarantee of increased emergency assistance.
    Unfortunately, a press release promising assistance does 
not always convince the banker to grant a loan, because he is 
ultimately left holding the bag if Washington does not come 
through in the end.
    Many of our Arkansas farmers were left with no choice but 
to sell the family farm this year. I visited with one last 
Saturday when I was home for an event.
    Prices are dismal, and input costs are skyrocketing for our 
farmers, and the mood is as bad as I have ever seen it in the 
farming community of Arkansas. Farmers just are not optimistic 
about the future.
    I know a little bit about farmers. I grew up with one in a 
seventh-generation Arkansas farm family, realizing that farmers 
always think it is too hot or too cold or too wet or too dry--
but ultimately, they are great folks, and they depend upon us a 
great deal.
    I am very pleased that we have many distinguished witnesses 
with us here today to discuss the various issues facing our ag 
lending community. I apologize if I do have to excuse myself 
for another meeting.
    I want to thank all of the witnesses here and especially 
thank Gary Canada for coming from Arkansas and sharing with 
many of you all what he shares with me on a routine basis.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Lincoln, for 
those thoughtful comments.
    Ms. Cooksie, please proceed with your testimony.

            STATEMENT OF CAROLYN B. COOKSIE, DEPUTY 
          ADMINISTRATOR FOR FARM LOAN PROGRAMS, FARM 
              SERVICE AGENCY, U.S. DEPARTMENT OF 
                  AGRICULTURE, WASHINGTON, DC

    Ms. Cooksie. Good morning, Mr. Chairman, Senator Harkin, 
and members of the committee.
    I am pleased to appear before you today to review the 
status of the FSA farm loan portfolio, discuss the impact of 
certain provisions of the 1996 Farm bill, and point out some 
issues of concern for the future.
    FSA offers direct and guaranteed farm ownership and 
operating loans to farmers who are unable to obtain private 
commercial credit. The goal of FSA's farm loan program is to 
assist eligible individuals and families through outreach, 
technical assistance, and supervised credit so that they can 
become successful farmers and ranchers. Regardless of the type 
of loan, FSA's financial assistance provides a safety net for 
borrowers who have reasonable prospects for economic viability 
in agriculture.
    Mr. Chairman, I would like to begin by reviewing the 
present status of the FSA loan portfolio. I am pleased to 
report that the FSA farm loan portfolio is showing its best 
performance in many years. All programs are performing well. 
Direct loan delinquency is the lowest in over 20 years at 12.3 
percent; the direct loan loss rate is the lowest since 1987; 
and we have made progress in reducing the number of delinquent 
million-dollar-plus direct loan accounts from 748 at the end of 
fiscal year 1995 to only 180 at the end of fiscal year 2000. In 
addition, inventory property numbers are the lowest since 1980. 
The guaranteed loan portfolio is also performing well. 
Delinquency is at an all-time low of 1.83 percent, and dollars 
losses have remained low despite continuing growth of the 
portfolio. In fiscal year 2000, losses paid were only seven-
tenths of one percent of the principal outstanding.
    Mr. Chairman, this is particularly noteworthy because at 
the same time, the FSA loan volume has increased 
significantly--more than 65 percent in recent years. In fiscal 
year 2001, demand for FSA's farm loan assistance remains 
strong. The lending season is currently at its busiest and most 
critical time, and FSA is working hard to rapidly process the 
thousands of applications coming into county offices.
    I believe there is no single factor, but a combination of 
several different factors, which lead to these achievements. 
First, in the 1996 Farm bill there were instituted provisions 
which created strong incentive for FSA borrowers to repay their 
loans. The 1996 Farm bill included provisions which instituted 
prohibitions on further FSA loan assistance to borrowers who 
are delinquent or who have received debt forgiveness and a one-
time, $300,000 limit on debt forgiveness. These limitations 
have caused FSA borrowers to more carefully consider the 
consequences of failure to repay their FSA loans.
    Provisions of the Debt Collection Improvement Act have also 
been beneficial. The possibility of offset of FSA program 
payments and Federal income tax refunds, and bars on 
participation in other Federal credit programs, provide 
additional incentives for borrowers to repay their FSA loans.
    Obviously, Mr. Chairman, borrowers cannot pay if they do 
not have the money to make payments. The significant amount of 
Government farm payments over the past few years is also a 
major factor in portfolio performance. Also, I cannot overstate 
the importance of the tremendous amount of hard work by FSA 
field staff in implementing the numerous program changes and in 
working to help borrowers avoid or resolve delinquencies. FSA 
employees have logged many long, hard hours working to assist 
borrowers. This is a difficult, often frustrating task; 
borrowers are under stress; there are no easy solutions, and 
sometimes the answer is not the one the farmer would like to 
hear. It is also important to note, Mr. Chairman, that the 
increase in FSA loan volume and reduction of delinquencies has 
been achieved with no increase in farm loan staffing levels.
    Faced with a heavy work load and limited staff, we have 
developed ways to decrease the paperwork burden for both staff 
and program customers. Both the guaranteed and direct loan 
programs now have abbreviated applications for loans of less 
than $50,000. In February 1999, we published regulations which 
simplified and streamlined the loan guarantee process. Within 
the next few months, we will publish final regulations to 
dramatically streamline and simplify the emergency loan program 
for both farmers and FSA staff.
    We have also undertaken a major initiative to streamline 
all loan program regulations. When this project is complete, 
1,200 pages of text will have been deleted, and the number of 
required forms reduced by almost 30 percent.
    Now to the future. Any discussion of the future of 
agriculture must include beginning farmers, since they are the 
future of farming. There is keen interest in this issue and 
rightfully so. FSA is not able to loan all the funds the law 
requires to be targeted to beginning farmers. This should come 
as no surprise given the current state of the farm economy. 
When even established farmers are struggling financially, it is 
extremely difficult for someone with modest financial resources 
to get started in farming.
    Mr. Chairman, as you consider a new farm bill, there are 
two areas from the 1996 Farm bill that should be brought to 
your attention. One of them imposes a lifetime ban from FSA 
loans for anyone who had a farm loan debt forgiven. Certainly, 
there must be limitations to avoid program abuses such as the 
revolving door situation. However, you may wish to consider 
whether a different approach is possible--one that will prevent 
the abuse targeted by the 1996 change, but allow farmers 
another opportunity to become successful farmers.
    The second provision from the 1996 Farm bill that I mention 
is operating loan term limits. That is a limitation on the 
length of time a person may receive FSA farm operating loans. 
Since the agricultural economy is increasingly volatile, the 
committee may wish to review this provision further. It is 
possible that a farmer reaching the term limit under economic 
conditions like these today may have done everything right and 
still be unable to get private sector financing.
    Mr. Chairman, I would like to alert the committee to a few 
other issues that warrant attention as the new Farm bill is 
developing.
    One is the requirement that FSA accept an applicant's 
projected repayment ability as collateral for emergency loans 
if the available collateral is not adequate to secure the loan. 
The result is that FSA is making emergency loans without 
adequate tangible collateral. This marks a return to past 
policies which resulted in multi-billion-dollar losses.
    Second, the issue of shared appreciation agreements is one 
that I am sure most of the committee members are familiar with. 
These agreements were entered into as a part of the process of 
writing down or writing off debts under the provisions of the 
Farm Credit Act of 1987. A significant number of these 
agreements are now coming due. Under the current economic 
conditions, many farmers may not be able to pay the amount due 
under their agreement. However, some farmers will not be able 
to keep the agreement and will face liquidation. Any additional 
relief from the requirements of these agreements will require 
legislation.
    Third, there is another situation I want to bring to the 
committee's attention. As we help borrowers deal with financial 
problems, one action taken to help farmers through tough times 
it the deferral of a loan installment to the end of the loan. 
This is an action that has been taken primarily to help 
borrowers through weather-related cash shortfalls. As of March 
31 of this year, 15,862 borrowers have these deferrals on one 
or more loans. Unfortunately, with the prolonged period of low 
prices we are experiencing, it is likely that many of these 
borrowers will not be able financially to cope with the 
remaining balance when the loans mature. Current plans are to 
utilize the existing loan servicing authorities in the 
regulations to address these situations.
    However, if economic conditions do not improve, the result 
could be a significant number of account liquidations. It is 
important that the committee be aware of this situation.
    In summary, Mr. Chairman, the loan programs have come a 
long way, but success is a journey, not a destination, and we 
still have a long and challenging trip ahead. We look forward 
to working with the committee as you wrestle with the issues 
that I have raised today and other complex farm lending issues 
as well.
    This completes my statement. I will be glad to answer any 
questions.
    The Chairman. Thank you very much, Ms. Cooksie. We 
appreciate that testimony.
    Mr. Dyckman.
    [The prepared statement of Ms. Cooksie can be found in the 
appendix on page 51.]

         STATEMENT OF LAWRENCE J. DYCKMAN, DIRECTOR OF 
         AGRICULTURAL ISSUES, U.S. GENERAL ACCOUNTING 
            OFFICE, WASHINGTON, DC, ACCOMPANIED BY 
               CHARLES ADAMS, ASSISTANT DIRECTOR

    Mr. Dyckman. Good morning, Mr. Chairman and members of the 
committee.
    With me is Chuck Adams, an assistant director, who has done 
much of our farm loan program work.
    I want to thank you for this opportunity to testify on the 
Department's farm loan portfolio which is administered by FSA. 
We do have encouraging news to report, and you have heard it 
from Ms. Cooksie and Mr. Conklin. The condition of the farm 
loan portfolio has significantly improved over the last several 
years.
    With this comes a cautionary note. While we, the General 
Accounting Office, have removed farm loan programs from our 
high-risk list, the program will still need to be continuously 
monitored.
    I will not go into much background on the loans. We have 
heard that. I just want to indicate that FSA does face somewhat 
conflicting tasks in managing these programs. They are to 
provide high-risk borrowers with temporary credit so that they 
can stay in farming until they are able to secure commercial 
credit, but at the same time, they have the responsibility of 
ensuring that the taxpayers' investment is adequately 
protected.
    As the chairman and members know quite well, these programs 
are not without significant costs to the Government. FSA's 
losses totaled almost half a billion dollars during fiscal year 
2000, although this is far less than the $1.2 billion of losses 
in 1996--and if we go back to 1990, the losses exceeded $3 
billion. We have made progress.
    The loan portfolio has improved, although it still contains 
many delinquent loans. The outstanding principal owed on direct 
and guaranteed loans totaled more than $16 billion as of 
September 30, 2000. Of this amount, about $2.1 billion was owed 
by delinquent borrowers, and most of this, about $1.8 billion, 
was owed on direct loans.
    This past year, we removed the farm loan programs from our 
high-risk list for two reasons. First, as I have indicated, the 
financial condition of the programs had improved since we first 
designated them as high-risk in 1990. Second, the actions taken 
by the Congress and the FSA have had a significant positive 
impact on the programs.
    We had identified the farm loan programs as high risk 
because there were billions of dollars in losses stemming from 
loan defaults primarily made in the 1980's and because more 
losses were likely to occur, and they actually did occur.
    The programs had evolved into a continuous source of 
subsidized credit for thousands of borrowers, and the problems 
that the program experienced, some of which were 
congressionally directed, contributed to financial risks. 
Because the Department field office officials had not been 
complying with existing loan and property management standards, 
these risks continued.
    Since the mid-1990's, FSA has addressed many loan 
management change and problems, and the Farm bill has altered 
the programs' policies to reduce risk. For example, the Farm 
bill prohibited borrowers who were delinquent on FSA loans from 
obtaining additional direct farm operating loans and limited 
borrowers to one instance of debt forgiveness. It also required 
borrowers to have or agreed to obtain hazard insurance, and it 
limited the length of time that FSA loan assistance is 
available.
    These and other changes improved the financial condition of 
the programs. For example, the amount of principal owed by 
borrowers who were delinquent on their direct loans and the 
percentage of debt owed by such borrowers declined each year, 
from $4.6 billion, or about 41 percent of the outstanding 
principal in fiscal year 1995, to $1.8 billion, or about 21 
percent of the outstanding principal in fiscal year 2000. The 
figure on page five of my full statement graphically displays 
the improvements in those programs.
    While we have removed the farm loan programs from our high-
risk list, USDA and the Congress need to continue to monitor 
their performance, and we will help them. This is particularly 
important since more recent legislation has eased some lending 
restrictions that had been put in place by the Farm bill. You 
have heard that from the witnesses prior to myself today.
    These impacts, as well as any additional changes in 
economic conditions that increase risk, will need close 
monitoring so that adjustments can be made if the integrity of 
the loan programs comes under pressure.
    Mr. Chairman and members, this concludes my statement. I 
will be happy to answer any questions.
    [The prepared statement of Mr. Dyckman can be found in the 
appendix on page 56.]
    The Chairman. Thank you very much.
    I appreciate the fact that each one of you has traced the 
history from at least 1990 with some allusion to the problems 
that the committee faced in the 1980's, which were horrendous. 
Many days have been consumed in thinking about how would any of 
this money ever be collected and what kind of write-offs would 
occur year by year in the budget. You, Mr. Dyckman, pointed out 
that in 1990, about $3 billion was assessed to the budget that 
year. It could have been much more. The question, 
philosophically, was how much burden could the deficit take at 
that stage.
    We have come to a point now where about half a billion 
dollars is currently reflected in the budget that we just 
passed, which is still a lot of money, but at the same time 
very different, and of course, the Federal Credit System was 
resurrected in the process of all of this.
    Now, each of you has reflected the dilemma that the 
committee and the Congress face as we take a look at the Farm 
bill. Essentially, you point out that there were fewer 
delinquencies, and that the balance sheet of American 
agriculture has been strengthened. You, Mr. Dyckman, say that 
you are wary about this, that you have taken agriculture out of 
the high-risk situation but at the same time, you are casting 
an eye out there, because all of you have reflected essentially 
large governmental payments, with cash-flow to a good number of 
farms, making it possible for not only the systems that you are 
reflecting, but country bankers generally, to be repaid.
    At the same time, Ms. Cooksie, you point out that even more 
applicants are coming in; more farmers are availing themselves 
of credit. For those who are not acquainted with farming, as 
you pointed out to begin with, essentially, the large farmers 
do the most borrowing, and they are presumably sophisticated in 
the use of credit, but these are large sums that are involved, 
and they are continuing to know and gaining some profit, I 
suppose, from leveraging those situations, or from necessity.
    Let me ask each of you as banking observers--I have 
reflected from my own experience, and it is generally true of 
American agriculture, that well-managed farms in this country 
over the course of time may earn four percent on invested 
capital. This is a figure that many farmers do not use as a 
part of their analysis, but as they become familiar with our 
analysis in the committee, they begin to think through that. 
Almost every other business in our society is deeply interested 
in return on capital.
    Four percent is a very low figure in comparison to most 
other areas in which credit flows or investment flows in this 
country, and it means that that is an average for a well-
managed farm situation--there are a good number of farms that 
are at 3, 2, one, or zero.
    The problem for you issuing credit is that you are going 
into an industry that has at least this particular profile or 
outlook as opposed to one in which the possibility of higher 
return seems to be, if not everywhere, at least more promising.
    I just wonder, given this predicament, in which essentially 
the Congress has almost deliberately filled in the gap of net 
farm income, and the reason, clearly, why farms as a whole have 
a higher net worth, is because this has occurred; why land 
values reflect this--and you suggested that 25 percent of farm 
payments may be capitalized into those land values. This is 
obviously an abnormal situation.
    Finally, anecdotally--and we could argue theoretically 
about this--some would say that Government payments in fact 
encourage production and some would even say overproduction, 
which encourages low prices, and which brings a circular 
problem to this. If we were not to have the payments, however, 
you have testified that probably land values might come down, 
and payments are capitalized into that, thus making everybody 
who is involved in the credit business less creditworthy, or at 
least you would be somewhat more suspect as you took a look at 
the situation.
    We have, at least if I am correct in my assumption, a 
pretty low rate of return business to begin with in all of 
this.
    What advice do you have for us, given that analysis?
    [Laughter.] Or, if you have a different analysis, please 
speak now or forever hold your peace, because this is an 
important period that we are coming into.
    Mr. Conklin.
    Mr. Conklin. Mr. Chairman, I do not think I would be as 
presumptuous as to give you or the committee advice about what 
we can do about the situation, but I do think that you have put 
your finger on what, as an economist, I feel is a growing 
longer-term challenge for the farm sector.
    As I pointed out, our best analysis at ERS shows that about 
25 percent of the current value of farm land--that is for farm 
land outside of urban areas--may reflect capitalized Government 
payments.
    Now, to the extent--and this is one of the dilemmas of 
payments--to the extent that those payments get capitalized, 
and asset values increase over time, that actually drives down 
the rate of return on assets, because there is a higher asset 
base against which we have whatever level of market earnings 
farmers are obtaining.
    Although we are dealing now with a set of farm programs 
where we are making payments on a different basis than we did 
prior to 1996, I think that at least the evidence to date as we 
look at what real estate values have done is that that change 
did not completely move us away from that kind of dilemma or 
that kind of potential trap that existed prior to 1996; it 
seems still to continue to exist.
    The Chairman. Ms. Cooksie, do you have any analysis of this 
situation?
    Ms. Cooksie. No. I wish I did. What I want to say is that 
by definition, as you know, we are the lender of last resort, 
which means that if an applicant or a farmer can get commercial 
credit anywhere else in the world, he cannot get credit from 
us.
    We also by definition are only supposed to make loans to 
small family farms, which means that we tend to deal with 
smaller farms, who also tend to get smaller farm payments. I 
can tell you from our portfolio and when we talk to our staff 
in the field and what I hear around the country that if it were 
not for these farm payments, as you said earlier, there is a 
huge percentage of our borrowers who would not have been able 
to cash-flow for the last couple of years. As we are seeing 
cash-flows this year, the same thing is true, that they would 
not be able to stay in business and have any kind of cash-flow 
without the farm payments.
    The Chairman. Of course, that makes very astonishing, 
although true, your statement in the second paragraph that 
delinquencies are at an all-time low and your lending----
    Ms. Cooksie. Is up.
    The Chairman [continuing]. You are the lender of last 
resort for people who are small, who have the most difficulty--
and even more interesting, I suppose, is that only seven-tenths 
of one percent of principal outstanding resulted in losses, 
which is a remarkable banking figure given the group that you 
have described.
    Now, as you point out, then, the payments are the plug in 
this situation, and for those who have not followed our dilemma 
here before, for example, the committee often takes a look at 
USDA's report--it is almost AGA-type--but it says that at some 
point, net farm income--not cash, but net farm income--has been 
roughly $45 billion, at least at the 1997-1998 level. If the 
prediction is going to fall to $41 billion, ipso facto, $4 or 
$5 billion is suggested as a plug. It may come in the form of a 
second AMTA payment or various other variations that the 
committee and appropriators have thought of, but we get it back 
up to $45 billion again, essentially. There is almost a ``hold 
harmless'' situation here. Now, that does not mean that it 
spreads evenly over all of American agriculture, because some 
are up and some are down, and this is a total aggregate. The 
effect of this has been to produce a net worth of all of 
agriculture which is higher each year, almost counter-intuitive 
to all the testimony coming before our committee describing 
chaos, bankruptcy, and difficulty.
    It finally comes down to the fact that the farm program has 
become a careful analysis, really, of this AGA-type of what is 
required to keep things afloat.
    Now, as you are pointing out, one effect of this, however, 
is growing capitalization of this in land values, so young 
farmers come to us and say it is getting more expensive every 
year to buy this land--even though things may be low price and 
high inputs, as Senator Lincoln was saying, why is land going 
up?
    Well, you have described why land goes up, why the net 
worth of those in the business cumulatively, at least, 
increases. Without getting into any more analysis--the Sparks 
Corporation analysis of the structure of American agriculture 
explains a lot of this, and we will have to examine that 
carefully, too--namely, that about 150,000 farms, eight 
percent, do 72 percent of the business. This is a very 
concentrated group of people in production agriculture--or 15 
percent more, about 87 percent of the whole group, and this is 
only 300,000 farms out of 2 million, which makes for an 
interesting dilemma for the other 1.7 million, who have a zero 
outcome from agriculture on a net basis; some make money, but 
most lose, and almost all the income comes from off-farm. As 
you pointed out, that plays into this, too; some of that off-
farm income has been important to the growth of our whole 
economy, including parts of rural America.
    Well, I appreciate this information. It is extremely 
helpful, and the details that you have will be very helpful to 
us.
    Now I would like to recognize my colleague, Senator Harkin.

         STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR 
            FROM IOWA, RANKING MEMBER, COMMITTEE ON 
              AGRICULTURE, NUTRITION, AND FORESTRY

    Senator Harkin. Thank you very much, Mr. Chairman.
    I have listened with interest to your comments and 
questions, and we are in a dilemma, as you have stated, Mr. 
Chairman. It just seems to me that if we continue on the same 
path, we further capitalize in land values Government programs 
to the point where the disparity becomes wider and wider and 
gets bigger and bigger all the time, and where we really do 
blank out the prospects for young farmers getting involved at 
all in agriculture, unless they inherit the land--if you 
inherit it, that is one thing, and I assume we are going to do 
something about estate taxes here very shortly in the tax bill. 
That is just about the only way they are going to be able to 
get involved.
    On the other hand, if we cut it off, there could be a 
terrible sort of wrenching movement in all of agriculture in 
terms of its capital assets and the debt-to-equity ratio, and 
everything could come crashing down.
    That somehow, it seems to me we have got to find a way out 
of this with--what is the term--a soft landing somehow down the 
pathway. Certainly, the 1996 Farm bill did not do that, our 
challenge in the next Farm bill is to find out how we can do 
that. We cannot fall off the edge of the cliff, but there has 
got to be some glidepath down to a softer landing on this thing 
so that we do not keep increasing the fact that Government 
payments are capitalized in land costs.
    The other thing is that of late, I have become aware that 
many of these payments that have gone out really do in fact do 
the opposite of what we always talk about around here. We want 
to keep a family sized structure of agriculture out there, 
healthy rural areas, and yet many of our programs going back 
many years have had just the opposite effect of concentrating 
land. It was simplified by one farmer who said the bigger you 
are, the higher your payment rate, and the higher your payment 
rate, the bigger you are, it means you can bid up the price of 
land more than the smaller farmer down the road, and therefore, 
you just bid up the price of land and add it into your base. We 
have got a perverse effect on land consolidation and 
concentration agriculture other than what we have said we 
wanted to do here. That is a challenge for us in how we are 
going to work this out in the next Farm bill.
    That is just a musing on this and sort of a further 
extension of what the Chairman was just talking about.
    More specifically to an issue that came up in the 1980's, 
we were here in the 1980's when we had the Farm Credit Act of 
1987 in which we restructured a lot of farmers to keep them in 
business. One of those you mentioned was the shared equity 
agreements that farmers made, and those 10 years and more are 
up now, and a lot of them are coming due, and farmers are now 
being startled by that--they either forgot about it or did not 
pay attention to it. You mentioned it briefly in your comments. 
You said that ``FSA has taken extensive administrative action 
to mitigate the impact of these agreements. However, even with 
deferral of payments and development of longer-term repayment 
schedules, some farmers will not be able to keep the agreement 
and will face liquidation.''
    However, it seems that these farmers, according to what I 
heard Mr. Conklin and you say, are basically doing all right 
now; they are making a living. I assume that many of them 
probably have good off-farm income, obviously, either from a 
spouse and/or the actual farmer during the wintertime up in our 
area getting a job someplace and having additional income.
    [The prepared statement of Senator Harkin can be found in 
the appendix on page 40.]
    Senator Harkin. Why would they face liquidation if they are 
doing all right? You said that even with deferral or 
development of longer-term repayment schedules they will face 
liquidation. Why would that be?
    Ms. Cooksie. Well, I am not sure that I quite agree that 
most farmers, particularly small farmers, are doing all right. 
They are on the edge. They are making it, but I am not sure 
that they are doing all right that they could take on this 
additional debt.
    What we have seen in the shared appreciation agreement is 
something that not many people thought would happen, that the 
land values we have talked about have gone up, so they owe 
quite substantially on their shared appreciation agreements. 
Most of the borrowers that we have have such a debt structure 
out there now, they cannot take on any more additional debt, 
plus they do not have cash money to pay the shared appreciation 
agreements.
    There is a problem for farmers we have seen who are not 
going to be able to pay. Farmers are holding on by their teeth, 
some of the small farmers that we deal with who are in these 
shared appreciation agreements, but I do not think they could 
take on the additional debt that it would take to pay these 
shared appreciation agreements.
    Senator Harkin. You are saying that, basically, they are 
making it, but they are not banking any money.
    Ms. Cooksie. I do not think they are banking money; we do 
not see banked money in our cash-flows.
    Mr. Dyckman. If I could just add a comment, Senator, as you 
know, another thing to consider is whether or not these farmers 
are getting direct payments, and many of the small farmers do 
not. When we talk about the apparent prosperity in farming, a 
lot of that has to do with direct payments from Uncle Sam, and 
many of the small farmers do not receive those.
    Ms. Cooksie. Or very little.
    Mr. Dyckman. Or very little.
    Senator Harkin. In proportion to how much a larger farmer 
would get.
    Mr. Dyckman. Right. As you know, we are doing a study for 
you and will be issuing a report in about a month that 
documents the details of that.
    The Chairman. Who gets what.
    Senator Harkin. Yes, who gets what and how much and what 
the proportion is.
    Do you have any advice on these shared agreements? I would 
hate to force them out. If we are going to make changes that 
might inure to their benefit down the pike, it would be a shame 
to force them out. If they are there, and they are making it--
you are right, they may not be banking a lot of money--but at 
least they are making some form of a living. I know a lot of 
these former farmers, and I know they are not in good shape, 
but it would not require much to keep them in business and keep 
them going.
    Ms. Cooksie. That is why I mentioned it. It is one of the 
things that we are going to have to look at, because there is a 
substantial number of farmers out there who are in that 
situation. We have done, as I said, everything administrative 
that we can do with the law. We have had them defer payments up 
to three years; we have changed and lowered the interest rate 
on the non-program loan; we have even allowed them to take out 
any capital improvements they have made on the property. We 
have done everything administratively, and something is going 
to have to be done with the statute if we are going to actually 
do something to help them out.
    Senator Harkin. It is just apparent to me that if a farmer 
were in those dire straights in the 1980's on the credit 
crunch, and they got in and restructured, as many of them did, 
and got into these shared equity agreements, if they are still 
alive and farming today, they are probably pretty good 
managers.
    Ms. Cooksie. Exactly. I do not want to say that shared 
appreciation agreements were not a good idea. Obviously, it 
kept them in business for an additional 10 years, because we 
did write down and restructure loans so they could stay in 
business. I do not think anybody thought land values would go 
up the way they have; I am not sure anybody could have foreseen 
the commodity prices. Those are the combinations that make it 
pretty unworkable for most farmers right now.
    Senator Harkin. Thank you very much.
    Thanks, The Chairman.
    The Chairman. Thank you very much, Senator Harkin.
    We thank each of you for your expert testimony, the papers 
and preparation.
    The Chairman. We call now upon a second panel to assist us, 
and that will include Mr. Jay Penick, President and CEO of 
Northwest Farm Credit Services; Mr. Henry Edelman, CEO of 
Farmer Mac; Mr. John Evans, Jr., CEO of D.L. Evans Bank; and 
Mr. Gary Canada, President of the Bank of England in England, 
Arkansas.
    Gentlemen, as I mentioned to the prior panel, all of your 
statements will be published in the record in full, and we will 
ask that you summarize your thoughts in five minutes if you can 
do that.
    I will ask you to testify in the order I introduced you, 
and that would be first of all, Mr. Penick.

         STATEMENT OF JAY PENICK, PRESIDENT AND CHIEF 
EXECUTIVE OFFICER, NORTHWEST FARM CREDIT SERVICES, WASHINGTON, 
               DC, ON BEHALF OF THE FARM CREDIT 
                            COUNCIL

    Mr. Penick. Thank you, sir.
    Good morning, Mr. Chairman and members of the committee. 
Thank you for inviting me to testify here today and present the 
Farm Credit System's view of current credit conditions.
    I am Jay Penick, president and CEO of Northwest Farm Credit 
Services. We have 44 branches and 460 employees who provide 
$3.3 billion in loans to more than 14,000 producers in 
Washington, Oregon, Idaho, Montana, and Alaska.
    I want to provide the committee with an update on Farm 
Credit's mission and our success in achieving it. I will 
provide an assessment of the rural and agricultural credit 
markets, and finally, I will identify legislative changes 
needed if Farm Credit is to continue to fulfill its role.
    First, let us take a look at Northwest agriculture. Serious 
stress continues for many agricultural producers due to low 
prices and increased operating costs. Producers who started 
into this downturn in sound financial condition are now 
suffering from the ongoing difficult period. In addition to low 
prices, we head into 2001 with low snow pack, a dry spring, and 
increased energy costs.
    In addition to that, 1,400 farmers in Oregon's Klamath 
Basin had their irrigation water cutoff and diverted to 
preserving water levels for the endangered suckerfish and 
salmon. Without irrigation water, farmers will not be able to 
plant, and the impact on their operations and the communities 
they live in will be enormous.
    Farm Credit is determined to do all that we can to help our 
affected customers. We urge Congress to also assist these 
troubled producers.
    Farm Credit has a specific but critical mission--to help 
ensure the health and well-being of American agriculture by 
providing a dependable and competitive source of financing. For 
85 years now, Farm Credit has successfully fulfilled that 
mission.
    Mr. Chairman, as you well know, Farm Credit is not the 
lender of last resort. Congress has assigned that duty to the 
FSA. Farm Credit uses FSA's guaranteed programs aggressively to 
help both young and disadvantaged as well as seasoned producers 
get through difficult times.
    The preferred lender program in which we are an active 
participant has also been successful.
    Mr. Chairman, we are pleased to announce numbers just 
received from the Farm Credit Administration on Farm Credit's 
service to beginning producers. During 2000, Farm Credit made 
almost 27,000 loans that benefit beginning farmers and 
ranchers. At a point of comparison, during a 7-year period 
between 1993 and 1999, USDA's Farm Service Agency guaranteed a 
total of 5,000-plus loans to beginning farmers.
    When Congress addressed the law governing the Farm Credit 
Act in 1971, it stated Farm Credit's mission very clearly--``to 
encourage farmers' and ranchers' participation in the 
management, control, and ownership of a permanent system of 
credit for agriculture responsive to the credit needs of all 
types of agricultural producers having a basis for credit.'' 
Each association and bank has a board of directors, farmer 
director, to fulfill this mission.
    Subchapter T structures are also used in nearly two-thirds 
of the farm credit associations. In the past six years, 
Northwest has returned over $122 million of our profits to our 
customers.
    In summary, Farm Credit has been a success story. Congress 
authorized the Nation's farmers and ranchers to build a 
privately owned system linking the resources of Wall Street to 
agriculture and rural communities, and we are doing that.
    Farm Credit's financial condition remains strong, but this 
financial strength is due in large measure to the level of 
Government payments to producers over the past several years.
    On behalf of our customers, I want to thank this committee 
for its efforts to assist producers through this difficult 
period.
    It is important to note that in the Northwest, like many 
other parts of the country, we have a large percentage of 
agriculture concentrated in commodities not traditionally 
supported, like potatoes, fruit, nursery, and vegetables. It is 
easy to see the impact of your support as we compare the 
balance sheets and earnings of supported commodities and the 
financial stress evident in nonsupported commodities. We expect 
that additional Government assistance will again be necessary 
in 2001 and beyond. We urge continuation of your recent work to 
assure adequate assistance.
    Despite our current financial strength, Farm Credit 
institutions see problems in the future. Fifty-five percent of 
our associations expect an increase in troubled loans in the 
coming year. In addition, we note financial difficulties in 
farm-related businesses and coops, particularly input suppliers 
and marketing firms. We encourage the committee to closely 
examine this area.
    U.S. agricultural credit markets have changed dramatically 
in the past decade. In addition to expanding the authorities of 
commercial banks, Congress awarded them nearly unfettered 
access to funding from GSEs. Commercial banks have in effect 
become GSEs with virtually unlimited operating authority. 
Meanwhile Farm Credit's authorities remain basically unchanged.
    Farm Credit's charter needs updating. It has not changed 
materially since 1971. A few areas that might be considered are 
value-added agribusiness lending, increased community size and 
rural cooperatives, equity capital for rural businesses, and 
elimination of unduly burdensome and costly regulations.
    In summary vigorous competition between Farm Credit, 
commercial banks, and other lenders is benefiting U.S. 
agriculture. Producers have choices, and that is critical. In 
short, pricing is competitive, service is better because Farm 
Credit ensures competition in agricultural and rural credit 
markets. The more intense the competition, the greater the 
benefit for American agriculture.
    Thank you, Mr. Chairman, for allowing us to give you our 
views on serving agriculture.
    The Chairman. Thank you very much.
    Mr. Edelman.
    [The prepared statement of Mr. Penick can be found in the 
appendix on page 64.]

STATEMENT OF HENRY D. EDELMAN, CHIEF EXECUTIVE OFFICER, FARMER 
                      MAC, WASHINGTON, DC

    Mr. Edelman. Thank you, Mr. Chairman.
    Mr. Chairman, distinguished members of the committee, my 
name is Henry Edelman. I am President and Chief Executive 
Officer of Farmer Mac.
    It is an honor to appear before this committee to offer 
testimony on an important and timely subject--the state of the 
delivery system for financial credit to farmers and ranchers in 
the United States and Farmer Mac's role in that process.
    I appear before you today on behalf of a company rapidly 
advancing in its congressional mission of operating an 
efficient secondary market for agricultural mortgages. Our 
recent successes and strong current condition derive from the 
foresight of this committee and the consequent passage of the 
Farm Credit System Reform Act of 1996.
    Today, thousands of farmers and ranchers have more than 
$3.1 billion of agricultural mortgages that back securities 
guaranteed by Farmer Mac. We actively support mortgage lenders, 
large and small, in all sectors of the agricultural credit 
industry, with effective programs and products.
    Since 1996, Farmer Mac has contributed to lender liquidity, 
capital adequacy, and increasingly competitive rates and loan 
products for farmers and ranchers seeking mortgage funds.
    Over the same period, Farmer Mac increased its capital from 
about $12 million at the end of 1995 to over $100 million at 
the end of 2000, and satisfied every condition set forth by 
Congress in the 1996 legislation to ensure its continuing safe 
and sound operation.
    Over the last five years, we have not only put together 
programs that have appealed increasingly to both agricultural 
lenders and the farmer borrowers they serve, but also broadened 
the acceptance of Farmer Mac to all sectors of the agricultural 
credit industry.
    We believe that we have made a great deal of progress, yet 
we know there is much more to be done before the industry 
reaches the level of efficiency and financial sophistication 
that exists today in the residential home market.
    The year 2000 was the third consecutive year that prices 
for core agricultural commodities were at levels that promoted 
Congress to provide additional income support to farmers to 
avert serious economic stress. Conditions likely to place 
continued stress on the U.S. agricultural economy persist in 
2001.
    Despite the low prices for agricultural commodities, the 
value of good farm land was stable or slightly higher in most 
regions of the Nation during 2000. Each commercial lending 
sector maintained or increased its share of the agricultural 
mortgage market during 2000, and agricultural lenders reported 
profitable performance, good loan quality--with some recent 
increases in delinquency and nonaccrual loans--and liquidity 
adequate to support lending activities during 2000.
    As I noted in my opening comment, the 1996 reform 
legislation dealt very effectively with the statutory 
limitations that had constrained our development up to that 
time and provided the authorities Farmer Mac needed to move 
forward aggressively in the development of an efficient 
secondary market for agricultural mortgages.
    The 1996 legislation enabled Farmer Mac to develop and 
offer to agricultural lenders mortgage credit enhancement 
programs that have contributed materially to lender 
competitiveness and mortgage availability. The relationships 
that we have established with those lenders, including the Farm 
Credit System, commercial banks, and insurance company lenders, 
should continue the expanding use of the Farmer Mac secondary 
market. That process should ultimately move lenders away from 
dependence on mortgage portfolio management strategies and 
toward greater reliance on mortgage securitization, which 
permits borrowers greater choice and allows lenders to reduce 
credit concentrations.
    As has been proven in the residential sector, this process 
will benefit both lenders and borrowers in the agricultural 
sector. Farmer Mac is proud to be an intermediary in this 
beneficial evolution.
    On a related matter, I would also like to comment on the 
USDA guaranteed loan programs, which were extensively revised 
by Congress in the 1996 Farm bill. As you know, we purchased 
FSA guaranteed loans in our Framer Mac II program. In most 
respects, we believe that the changes made in 1996 have 
contributed to a more streamlined and financially sound FSA 
guaranteed loan program. Many of the lenders we work with 
report that the processing of guaranteed loans has improved and 
that changes in loan limits and the allocation of funds have 
added flexibility to the programs. Nevertheless we believe that 
the programs could be reformed further to provide eligible 
borrowers with greater access to long-term fixed-rate loans at 
more competitive rates of interest.
    The primary policy goal for agricultural credit over the 
next decade should be for the entire industry to achieve a 
level of parity with the residential mortgage market with 
regard to financing techniques and structures supporting highly 
competitive mortgage products for farmers and ranchers.
    Credit legislation could be framed to support the 
continuing evolution of the agricultural credit industry toward 
these goals. This might be accomplished by reference to the 
Farmer Mac secondary market rates and the sale and 
securitization of loans that are already in the USDA. As 
applied to those loans, an approach of that kind would open 
opportunities for borrowers to have greater access to long-term 
fixed-rate loans and for variable interest loans to be 
standardized and tied to published indices.
    At the same time, adequate lender profits must be preserved 
to ensure effective competition among lenders and provide 
borrowers with ready access to multiple lending sources.
    Adjustments to Farmer Mac's statute with a view toward 
reducing or eliminating certain limitations devised some 12 
years ago would also be useful. We think that this could 
include, for example, expanding the definition of loans 
eligible for the Farmer Mac secondary market to include rural 
development loans or rural small business loans in rural areas 
so far as there is no efficient secondary market for them 
today.
    These are preliminary ideas, but we are submitting them for 
examination by the members and staffs of the committee. We 
welcome the opportunity to discuss our ideas further with you, 
Mr. Chairman, and thank you for having us here today.
    The Chairman. Thank you very much, Mr. Edelman.
    [The prepared statement of Mr. Edelman can be found in the 
appendix on page 72.]
    The Chairman. Mr. Evans, I pointed out, but there was a din 
of transition between the panels, that you are from Burley, 
Idaho, and you are coming in on behalf of Independent Community 
Bankers of America in addition to your own experience at the 
Evans Bank.
    Please proceed.

         STATEMENT OF JOHN EVANS, JR., CHIEF EXECUTIVE 
      OFFICER, D.L. EVANS BANK, BURLEY, IDAHO, ON BEHALF 
          OF INDEPENDENT COMMUNITY BANKERS OF AMERICA

    Mr. Evans. Thank you very much, Mr. Chairman, for letting 
me testify this morning.
    My name is John Evans, Jr. I am CEO of D.L. Evans Bank in 
Burley, Idaho, a small community of less than 10,000 people in 
the heart of potato, sugar beet, small grain, and livestock 
country. Our family owned bank has served our community for 
nearly 100 years and has survived agricultural disasters, the 
Great Depression, and the recent downturn in the farm economy.
    I am vice-chairman of ICBA's Agricultural-Rural America 
Committee.
    Last year, ICBA sent President Bush and the new Congress a 
special report entitled, ``Community Banking Issues and Answers 
Brief: A Community Bank Agenda,'' which included some of the 
farm policy-related recommendations I will mention today.
    Next week, ICBA's Agricultural-Rural America Committee will 
be meeting here in Washington to discuss the farm policy and 
related issues. A specially appointed Farm and Rural Credit 
Policy Task Force will also be reviewing these issues to 
present additional recommendations.
    Mr. Chairman, unfortunately, farmers today face a triple-
whammy of despairingly low prices, sharply rising energy and 
input costs, and an unlevel playing field in the international 
trade arena. Our recommendations are as follows.
    First, we support the adoption of another farm aid package. 
Congress may need to adopt a package similar in size to last 
year's package. We urge ample funding flexibility be provided 
for the next two years so that farm aid payments can be front-
loaded if necessary, especially if the new Farm bill is not 
adopted in a timely fashion next year.
    Our second key recommendation is to pass a new farm bill 
that includes countercyclical income mechanisms that 
automatically provide farmers more assistance in years when 
prices fall to unacceptable levels. From a lender standpoint, 
we value predictability and profit in the farmers' income and 
cash-flow statements. We hope a new farm bill will allow 
farmers and lenders to plan at least 3 to 5 years in the 
future.
    In regard to income mechanisms, we are not currently wedded 
to one particular approach, but the structure of the next Farm 
bill could include not only fixed payment mechanisms, such as 
AMTA payments if they are continued, but also countercyclical 
mechanisms. The latter would provide supplemental income 
payments when farm prices fall. Also, tax-deferred individual 
savings accounts could work with and supplement the other 
income mechanisms, for example, by creating a ``Farmer 401(k)'' 
or quasi-retirement program for at least part of the individual 
savings account.
    Some goals for this type of savings account program are, 
No. 1, maximize farmer participation by allowing some portion 
of Government payments to be funnelled into accounts, and allow 
farmers to match a portion of the Government payments from his 
other income; second, include a tax deferral component that can 
work over long periods of time to generate significant savings; 
third, limit withdrawals to hardship or other specific 
criteria; fourth, target participation to insured financial 
institutions; and fifth, improve producers' finances by 
allowing long-term accumulation of assets to eventually free 
farmers from dependence on Government payments.
    Our third key set of recommendations are to fully fund the 
USDA loan guarantee programs. A few ideas include: provide a 
permanent source of contingency funds to prevent disruptions in 
the financing of guaranteed loans; permanently eliminate the 
15-year limit on eligibility; provide some flexibility to raise 
the loan size limit.
    Our fourth recommendation is to adopt policies that help 
diversify rural America. Mr. Chairman, one important aspect of 
strengthening the farm safety net involves helping rural 
communities diversify their economic base. More farm families 
appear to be relying on off-farm income to support farming 
enterprises. USDA indicates that 90 percent of farm household 
income came from off-farm sources and averaged $60,000 last 
year. Yet trends indicate that counties relying largely on 
agriculture as a main industry lost significant population in 
the last decade. The recent 2000 Census revealed that while the 
general population grew 13 percent in the 1990's, 676 primarily 
rural counties lost population.
    Diversifying our rural economy will help people in rural 
America and will help farm families have additional sources of 
income, thereby reducing the need to rely solely on farm 
programs for survival. Rural economic diversity will also keep 
small businesses thriving on Main Street and help sustain the 
rural community banks that finance them.
    We offer these suggestions. First, increase deposit 
insurance, and index it to inflation. Deposit insurance was 
last increased in 1980, and its value has been eroded by one-
half. A much higher level is needed to adequately ensure the 
retirement needs of the aging rural population and to attract 
new deposits, to provide more security for large financial 
transactions conducted by larger farms and rural businesses, 
and to keep money in our rural communities so that it can be 
recycled into new investments and new opportunities for the 
communities' rural residents.
    Second, increase funding for USDA's Business and Industry 
Program. Last year, Congress increased the B and I guarantee 
program by 50 percent, but that was not enough. About 400 banks 
now use the program. There was still excess demand of $1 
billion that was not funded. More funds for B and I would be a 
very cost-efficient way to strengthen the rural safety net and 
the farm economy.
    Finally, we need policies to spur greater investment in 
telecommunication technologies in rural America to help us 
bridge the digital divide between our rural and urban areas.
    Thank you, and I will be happy to answer any questions.
    The Chairman. Thank you very much, Mr. Evans.
    [The prepared statement of Mr. Evans can be found in the 
appendix on page 108.]
    The Chairman. At this point, since the chair is the only 
surviving Member present on the Senate side, and a roll call 
vote is underway, as you can tell by the white light, I will 
call a short recess, vote and do my duty, and then return.
    I am sorry for the interruption, but we look forward to 
hearing from you, Mr. Canada. You will have an opportunity to 
catch your breath and prepare for your testimony.
    We will adjourn for just a moment.
    [Recess.]
    The Chairman. The hearing will resume.
    Mr. Canada, you were introduced as from the Bank of 
England. A number of our members asked me about that, and I 
explained that you are from England, Arkansas.
    Mr. Canada. Yes, sir. I have had that problem more than 
once.
    The Chairman. I suspect so. It is good to have you here, 
and please proceed.

        STATEMENT OF GARY R. CANADA, PRESIDENT, BANK OF 
         ENGLAND, ENGLAND, ARKANSAS, ON BEHALF OF THE 
                  AMERICAN BANKERS ASSOCIATION

    Mr. Canada. Mr. Chairman and members of the committee, I am 
pleased to be here on behalf of the American Bankers 
Association to participate in this important hearing to examine 
the state of credit in agriculture.
    I am Gary Canada, President of the Bank of England in 
England, Arkansas, and I am chairman of the ABA's Agricultural 
and Rural Bankers Committee.
    The Bank of England was chartered in 1898 and has provided 
credit to farmers, businesses, and others in and around England 
since that time. Over half of our loans are to producers. For 
most of my banking career, I actively farmed in the England 
area.
    We wish to thank you, Mr. Chairman, and this committee for 
your prompt and effective response to the critical needs of 
farmers and ranchers. You helped to avert a serious and 
extended period of economic disruption.
    At the end of 2000, banks had nearly $75 billion in loans 
outstanding to farmers and ranchers. For every dollar of 
agricultural credit outstanding, 41 cents is loaned by banks. 
Loan quality remains strong and losses on all farm loans have 
been low. However, continued low commodity prices and the 
uncertain nature of future Federal assistance to agriculture 
has heightened our concern about the continued viability of our 
farm and ranch customers.
    From early January to early May of this year, staff of the 
ABA Center for Agricultural and Rural Banking conducted 19 
listening sessions in 14 States. Nearly 1,000 bankers and other 
stakeholders participated in these sessions. In the sessions, 
we talked about a wide range of topics, from Federal support 
for agriculture to trade to FSA programs to recommendations for 
the 2002 Farm bill.
    Of the many policy options that we discussed during our 
listening sessions, there was consensus about the need to 
create a farm policy that is consistent and allows for some 
level of certainty for both producers and the bankers that 
finance them.
    The guaranteed farm loan programs offered by FSA are some 
of the most cost-effective tools that Congress can provide to 
farmers and ranchers during difficult economic times. Because 
these programs are such an important part of access to credit, 
we urge you to make funding for these loan programs a priority.
    We also strongly recommend that Congress permanently repeal 
the 15-year term limit on guaranteed loan eligibility.
    In 1992, Congress approved a low-documentation loan program 
for FSA guarantees. At that time, the loan limit was set at 
$50,000. We recommend increasing the ceiling to $150,000 on 
these applications.
    Many USDA services still require direct farmer contact by 
the FSA, but guaranteed lending is not one of them. Because 
many program delivery problems stem from the highly localized 
structure that USDA maintains, FSA should consolidate 
guaranteed loan-making and loan servicing in specialized 
offices to ensure consistency of program delivery.
    For the past three years, Congress has approved emergency 
assistance to farmers. USDA determined that the additional 
payments could not be assigned with an existing assignment form 
even if a producer had assigned to the bank payments from all 
programs. FSA should create a blanket assignment form for USDA 
benefits that would attach to all program benefits now and in 
the future.
    Bankers are very aware of the work that this committee and 
others have done to improve the Federal Crop Insurance Program 
in recent years. We urge you to seek additional ways to make 
crop insurance a more effective tool for producers to manage 
production and price risk.
    Bankers are enthusiastic about FFARRM accounts. FFARRM 
accounts would encourage producers to save cash when they have 
a surplus and would allow them to balance their cash-flow when 
their earnings are down. Additionally, FFARRM accounts would 
provide a new source of deposits to banks which would then lend 
these funds back to businesses and individuals in their 
communities.
    One of the best sources of low-cost funds for beginning 
farmers is loans that are originated by banks using State 
industrial revenue bonds. ``Aggie bonds'' allow banks to use 
the bonding authority of the participating States to fund 
qualified beginning farmer loans. More credit could be made 
available by banks to more beginning farmers if aggie bonds 
were exempted from Federal revenue bond volume caps.
    Bankers support efforts to stimulate economic development 
in rural America by lending to the businesses that support in 
some way or add value to the crops and livestock produced by 
farmers and ranchers.
    One of the most widely used non-farm credit programs is the 
Business and Industry Guaranteed Loan Program. B and I 
guarantees allow us to make loans to retain existing businesses 
in our communities and to help attract new businesses.
    There have been some problems with the program in the past. 
Prudent steps have been taken to control loan losses and 
address other program problems. Unfortunately, the damage has 
been done, and all future borrowers are being asked to pay the 
price through increased loan fees. We oppose increasing loan 
fees on B and I guarantees.
    The banking industry has a substantial commitment to 
agricultural and to rural America. Bankers will continue to 
work with their customers to restructure debt, to provide 
credit to operate, to find ways for beginning farmers to get 
started, and to provide the financial services and stability 
that rural communities need.
    The ABA looks forward to working with you as you address 
the challenges facing our Nation's farmers, ranchers, and rural 
communities.
    I am happy to answer your questions.
    Thank you, Senator.
    [The prepared statement of Mr. Canada can be found in the 
appendix on page 119.]
    The Chairman. Thank you very much, Mr. Canada.
    Let me ask this question of you to begin with. Staff has 
pointed out to me that columnist Tom Mertons of Agriculture On 
Line Magazine recently noted that there are fewer and fewer 
experienced agricultural bankers who understand the business of 
farming in the commercial banks of this country, and his fear 
was that commercial banks lacking those persons or that 
expertise would move away from lending.
    What is your observation--not necessarily from the Bank 
England's standpoint, but in your overall role this morning, 
looking at it from the standpoint of American Bankers? Is this 
the case, that there are fewer and fewer persons who understand 
agriculture?
    Mr. Canada. Yes, sir, but that does not mean they cannot 
learn to understand agriculture. We do have fewer and fewer 
agricultural lenders just like we have fewer and fewer farmers.
    The Chairman. The banks are not moving away from making 
loans.
    Mr. Canada. In my observations, I have noticed that as far 
as several of the larger banks, as they buy up smaller banks in 
our area, agriculture is not one of their primary goals.
    The Chairman. This has, of course, been a long-time quest 
of the committee to try to make certain that there are 
opportunities available, preferably competitive opportunities, 
so that borrowers have some options. It is a mild concern, and 
I simply raise it because I suspect you would be as 
knowledgeable as any in this overall purview.
    Mr. Evans, let me pick up a point that you made, I think as 
your fourth recommendation, or at least an important one, about 
the diversifying of rural America. This is an observation that 
a number of witnesses have made today, that as off-farm income 
has increased for America's farming families, except for the 
eight percent that I cited earlier that the Sparks people 
identified, the 150,000 and so forth, a majority of income in 
each of the other groups comes from off the farm. In fact, they 
identify 100 percent for about 1.3 million, with farming coming 
and going in the process, but the income that keeps the bread 
and butter on the table really comes from off the farm. This 
implies some other job opportunities.
    When we come to that part of the Farm bill that somehow 
gets into this business of rural development--which is always a 
very broad subject and sometimes so broad that we lose track of 
any comprehensive plan--what suggestions do you have for us? 
Who, at least in your shop or among the bankers in your 
dealing, has done some fundamental research? Have you worked 
with think tanks or universities or others to take a look at 
America comprehensively at what this should be ideally?
    Mr. Evans. My feeling is that farmers cannot make it just 
farming anymore, the margins are so tight or nonexistent. We 
are seeing wives going out to find full-time jobs where they 
had previously been helping out on the farm. The men who have 
worked primarily on the farm have gone out and gotten part-time 
jobs to supplement that income.
    I cannot stress enough how tight those margins are. The 
input costs are increasing. In Idaho, we have a drought 
situation where the power company is actually paying farmers 
not to turn on their pumps. This is going to have a drastic 
impact on southern Idaho, where we bank, and it is probably 
going to happen all through the West and might even go further 
East.
    The Chairman. I grant that premise, so my question is how 
can we go about getting a more comprehensive view of 
diversification to supplement these incomes.
    Mr. Evans. I do not really have an answer to that question 
right now, but I would be happy to----
    The Chairman. If you could go back to your organization, 
because this is a very serious problem. You have certainly 
given the background very accurately, and the off-farm income 
situation is an acute need if people are continuing in the 
large majority of farms in America. This gets scattershot 
treatment as to what is to be done. Certain communities try to 
solve it on an ad hoc basis with chambers of commerce or 
business councils or others coming together to provide some 
relief. The committee is trying to take a look at all of 
America and the moneys that are provided for so-called 
agricultural development and what should be our priorities, or 
who ought to help us with the blueprint. We are incapable of 
really doing that. We can provide the legal framework or some 
of the moneys. If you would help us in that respect--and that 
would be true of any of the panel members today--if you could 
share that kind of expertise, it would be very helpful.
    Mr. Evans. I would be happy to.
    The Chairman. Mr. Edelman, I am curious--is your secondary 
loan business stronger in some States than in others? How would 
you describe, if you were to take a look at a map of America, 
where you are doing business, or reasons why you are not doing 
business in some sectors if that is not happening?
    Mr. Edelman. Certainly. The most competition and the most 
sophistication about the use of secondary markets is on the 
West Coast. The combination of those two has led to a large 
proportion of our business coming from the States basically 
west of the Mississippi and in fact west of the Rockies. When 
you look at it, those are the places where the use of Fannie 
Mae and Freddie Mac is most common among the smaller lending 
institutions, which tends to be a factor.
    Another thing is the relative sophistication of the lenders 
and the borrowers. What you were referring to earlier today 
about return on investment is exactly in point here. What we 
see is more of a focus on return on equity among lenders and a 
focus on return on investment among the borrowers. The 
borrowers are more inclined to leverage their operations, which 
improves the return on investment you referred to earlier 
today. The use of a secondary market program tends to increase 
return on equity at the lending institution.
    The level of competition in the Western States has fostered 
this partly, and also the nature of farming. Less dependence on 
support payments is certainly a factor in that whole process, 
because those are the States that are less dependent on the 
very sorts of payments that you have had some consternation 
over. That has also been a factor.
    Another consideration, of course, is that the Farmer Mac 
concept is still relatively new in certain places, and people 
tend to follow the early adopters, and we have seen more 
progress in certain areas of the Nation than others. Perhaps 
the slowest process has been in the Southeastern United States, 
but we see that part of that also has to do with the crops and 
commodities grown. When you are talking about commodities and 
crops that are dependent, for example, on integrators and 
growers and the structure there, where you really are shifting 
the emphasis on credit upstream to an integrator, it is more 
difficult to securitize those loans and see them as stand-alone 
loans.
    The Chairman. You make several interesting points. Let me 
follow-up in this way. In California, for example, we have had 
testimony from a number of farmers who are not involved, as you 
have suggested, in corn and wheat or cotton or rice; rather, 
they are in vegetables, for example. People in vegetables 
sometimes do well, sometimes do badly--but they have suggested, 
at least anecdotally, that some of these people are doing 
better than the four percent on invested capital, and this then 
leads to an interesting colloquy that we have had with some of 
these people as suggestions have been made that we might 
incorporate them in support payments of some sort, either a 
loan deficiency payment or a loan rate of some type or a safety 
net. Some of them have reacted very adversely to this, and have 
said ``Leave us alone,'' that in essence, because they don't 
have all the apparatus that attends wheat and corn; as a matter 
of fact, they have a market that is more vital, and those who 
are in it do better. People are not over-encouraged to get into 
it, nor are they kept in it, whether they are doing well or 
not. As a result, in essence, they are suggesting that we ought 
to keep arm's-length out of this business.
    Now, you are suggesting that in addition to whatever 
returns might be better than this proverbial four percent, by 
these loan mechanisms, they can further leverage their return, 
which some have testified that they do. Then, farming becomes a 
very different proposition than what we are talking about when 
we take a look at the whole situation.
    That is why I am intrigued that you would have much greater 
success in this particular sector, but I know that you are not 
surprised given the explanation you have given.
    Mr. Edelman. That although it is not a perfect market, it 
is a more efficient market and a truer economic model when you 
see free enterprise operating in that way, and the participants 
do appreciate that.
    The Chairman. Mr. Penick, mention has been made of the 
crisis of the 1980's in the Farm Credit System generally, and 
all of us who were on the committee then remember those days, 
and I am sure you do, too, vividly, because it was a disaster. 
It was predicted to be much worse than it turned out, and that 
was because some of the legislative suggestions that came 
through were sound, and the Farm Credit people really worked, 
and they were a smaller group than the savings and loans, for 
example, which were simultaneously going along a track of 
disaster throughout that period of time.
    At the same time, it was a very frightening period for 
producers who were borrowers, quite apart from those who were 
making the loans, and the changes that occurred in Farm Credit 
were profound.
    I wonder, because I have not heard anything in the 
testimony today--it is much more optimistic--that would give 
any hint that somehow we are missing something going on out 
there in the Farm Credit System. I would ask you if there is 
there something--or is the system essentially sound, and the 
elements, not only in the Northwest that you have talked about 
but generally in your experience, in the overall system, 
something on which there is no particular cause for alarm, but 
as you have suggested, some incremental changes, and these 
largely in arrangements with farmers rather than structurally 
with the institutions.
    Mr. Penick. When I went through the 1980's with the Farm 
Credit System--I did that in Ohio, Indiana, Kentucky, and 
Tennessee--the land values dropped out from under the 
foundation of the system. Tied to that were, as you know, 
radical changes in interest rates, which really started the 
process.
    As we take a look at what is going on in the 1990's, we 
have some of the same issues with low prices and challenges 
from that. We do have a very favorable interest rate market, 
and for agricultural producers that are leveraged and those 
that have grown, the interest rate environment becomes a very 
significant part of their repayment issues.
    I also believe that Congress and in total, the programs for 
agriculture now, are targeted more to filling in the gaps with 
the additional supplemental payments, and I think that that has 
been a benefit. In my testimony, I made the comment that there 
is a significant difference between the balance sheets of 
commodity producers who receive payments and those who do not.
    Actually, what you get and what has occurred is that you 
really have kind of a subsistence level going on, where the 
Government is involved with payments in the commodities of 
corn, wheat, and those; where, when you take the other 
commodities, they really fluctuate rapidly with the market, and 
those producers are prepared for that--much different than they 
were back in the 1980's.
    The system has also done a tremendous number of things 
internally from the standpoint of capital regulations, from the 
standpoint of contractual agreements and CIPA scores, things 
that you are aware of, that really have provided the basis for 
early detection of any entities within the system that are 
starting to show stress. Those things have really been the 
difference between what is going on now and what was going on 
them.
    If the Government programs were not in place, we would have 
a significantly different discussion on this panel today than 
we are having.
    The Chairman. That is apparent, but that is an interesting 
way of looking at it, that the payments by and large fill in 
gaps, and there is a sharp difference, as you note, between, at 
least as a group, the commodity people who are receiving the 
payments and those who are not, in terms of market fluctuations 
and perhaps returns, as we were talking about with Mr. 
Edelman--they are sometimes very high and leveraged and 
sometimes much lower, depending on shifts in the market. As you 
said, this may be better preparation for the fact that it will 
not go on like a brook; you really have to be alert to the 
changes in the market signals.
    Mr. Penick. They react much more quickly to the market 
pressures than do the other group.
    The Chairman. You were saying that during the earlier 
period of your career, or during this crisis, you were out in 
the Indiana, Ohio, and Tennessee markets and so on. I remember 
in this committee in the late 1970's, agricultural land prices 
was rising rapidly. I could see that with regard to my own 
farm. I tracked it throughout all that period of time. Then, of 
course, we hit the wall of the prime rate going to 20 percent 
and all the long-term rates in double digits, and Paul Volcker 
drawing a halt to the inflation at the time, and the wheels 
came off. Then, the 1980's were a terrible reverse in which 
land values in many parts of the country, as testimony here 
will indicate, fell by 50 percent and in some cases by more, 
stripping the gears altogether, which changed the credit 
picture markedly for anybody making loans to see all that 
collateral washed out.
    As we are talking about here today, we have had an 
incremental increase in land values in the last 3 or 4 years, 
even in the face of all the rest of the crises that we are 
discussing, which is almost counterintuitive to the 
rollercoaster that we saw in the late seventies and the 
downslide in the eighties, and the beginning of tracking in 
parts of the country as the nineties came, with increases, and 
these have been more substantial as we came through the end of 
the decade and remain, as you say now.
    This is instructive, and hopefully, we will not have to 
make all the same mistakes again. This is why some 
institutional memory is useful, and I appreciate your 
supplementing it.
    Well, thank you all very much for coming. We appreciate 
your testimony and look forward now to still a third panel.
    The Chairman. The chair would like to call Mr. David 
Carter, President of Rocky Mountain Farmers Union, representing 
the National Farmers Union, from Washington, DC; Mr. Frank 
Brost, a rancher and Chairman of Tax and Credit Committee of 
the National Cattlemen's Beef Association, from Rapid City, 
South Dakota; and Mr. Ferd Hoefner, Washington representative 
of the Sustainable Agriculture Coalition, from Washington, DC
    Gentlemen, we thank you for your patience and endurance, 
and even more importantly, your presence today. As I mentioned 
to the previous panels, for your testimony will be published in 
the record in full, and I would ask that you attempt to 
summarize your comments in five minutes, and we will then 
proceed to questioning.
    Mr. Carter.

          STATEMENT OF DAVID CARTER, PRESIDENT, ROCKY 
           MOUNTAIN FARMERS UNION, ON BEHALF OF THE 
             NATIONAL FARMERS UNION, WASHINGTON, DC

    Mr. Carter. Mr. Chairman, members of the committee, good 
morning, and thank you very much.
    I am Dave Carter. I am President of the Rocky Mountain 
Farmers Union, a general agricultural organization representing 
independent producers in Colorado, Wyoming, and New Mexico. I 
am testifying this morning on behalf of the 300,000 family 
farmer and rancher members of the National Farmers Union.
    On paper, as we have heard several folks say this morning, 
the appearance of the farm credit portfolios and the 
availability of farm credit does not look too bad. We in the 
Farmers Union are very concerned, though, that this is a house 
of cards. There is a real patent disconnect, we feel, between 
the performance of the portfolios and the realities of 
production agriculture today.
    There are two factors. One has been discussed a lot this 
morning--underwriting the health of the ag-based financial 
institutions has been $69 billion worth of farm program 
benefits and emergency and disaster payments since 1996, and we 
thank you very much. It has been very helpful in stabilizing 
the land values.
    In many areas, there is the additional impact of growth, 
sprawl, and nonagricultural pressures on land values which have 
essentially given farmers a line of credit that they will never 
be able to repay by growing wheat, corn, or cattle.
    There has been a lot of discussion comparing now and the 
1980's. In the 1980's, land values plummeted at the time 
commodity prices fell, and that triggered the waves of 
foreclosures and liquidations. Now, even though we have low 
commodity prices, the land values have remained stable. Farmers 
are not going into foreclosure bankruptcy; they are simply 
selling out and walking away.
    We feel there are two issues at work--No. 1, the sources of 
credit, and No. 2, the distribution of that credit. Let me go 
through some of these very briefly.
    First, the Farm Credit System that provides 20 percent of 
all farm operating debt in the United States. We are very 
concerned that now, more than one-third of that operating 
capital has gone to operations with more than $500,000 in 
annual sales--it is going to the larger producers.
    The Farm Credit Administration proposal for a national 
charter purports to increase market competition, and in the 
short term, this could be very beneficial in that it would 
increase competition and lower interest rates. As we have seen 
happen in the airline industry and the energy industry, that is 
not always the long-term benefit of deregulation. What it could 
actually contribute to is the ongoing consolidation in 
agricultural financing. That is very troubling.
    There was a producer in our area, for example, who related 
to me that he was told by his farm credit institution that 
unless his operating loan this year was $100,000 or more, he 
could not expect to talk personally with a loan officer. This 
is a very troubling trend.
    In the commercial banking sector, we have seen a 25 percent 
decline in the number of commercial agricultural banks, since 
1992.
    The mergers and consolidations are very disturbing. In our 
area, we have had First National become United become Norwest 
and now become Wells Fargo. As was discussed earlier, as they 
move into these larger banks, the expertise and the background 
and even the interest in providing ag credit diminishes.
    We have seen that there is a real concern that as the 
consolidations go on, there is more interest in providing a 
small number of loans to very large operators than a large 
number of loans to smaller operators.
    The philosophy is being played out as the larger 
consolidated banks simply try to clean out their ag portfolios 
in many instances. We are very troubled in our region that we 
have heard many examples from Wells Fargo and other banks that 
they are simply trying to reduce the number of ag borrowers.
    As this has happened, there has been an interesting and 
disturbing trend toward more credit being provided by suppliers 
and input providers. Machinery dealers, seed companies, input 
suppliers are willing to fill that vacuum and provide credit at 
a cost, with interest rates up to 17 percent in some instances 
by those input suppliers.
    We are very concerned that in the American countryside, we 
are creating a modern version of the company store.
    We in Farmers Union urge Congress to authorize a study and 
seek recommendations from a qualified outside third party on 
the impact and effect of concentration in the farm credit and 
commercial lending sectors on No. 1, the availability of farm 
credit and No. 2, the growing scale bias of those resources.
    Then, let me talk just very briefly about USDA and FSA, and 
there is more detail in my written testimony. We need adequate 
funding for all loan programs--direct, guaranteed, emergency 
and disaster, non-emergency loans for socially disadvantaged 
and beginning farmers. The Secretary of Agriculture needs 
broader flexibility in transferring funds from program and 
program and State to State.
    The Secretary also needs greater emergency short-term 
borrowing authority from the CCC to address temporary 
shortfalls.
    We would also like to see USDA loan guarantee programs 
expanded to encourage farmers to invest in value-added 
enterprises, particularly in producer-owned cooperatives and I 
would be glad to discuss later on in the questions and answers 
some thoughts on diversifying agriculture.
    Finally, in the area of Chapter 12, we are pleased that 
Congress passed legislation extending Chapter 12 effective 
through the end of this month, but we feel that this needs to 
be made a permanent part of the Bankruptcy Code. We ask that 
this continue to be extended until that happens.
    Finally, in conclusion, let me just say that credit will 
never serve as a substitute for real farm income. One of the 
problems that we have seen, for example, with the shared 
appreciation program, is that the basis on which that was built 
in 1987 was that if commodity prices are down, land values 
would be down, and if commodity prices came up, the equity 
would go up. The problem is that with the decoupling of the 
farm program payments, we have had the payments go out while 
commodity prices have stayed down. The land values have been 
capitalized by program payments and we have had that 
disconnect. We need to make sure that our commodity prices are 
more relative to the land values.
    Thank you very much, Mr. Chairman.
    The Chairman. Thank you very much, Mr. Carter, for your 
testimony.
    Mr. Brost.
    [The prepared statement of Mr. Carter can be found in the 
appendix on page 130.]

 STATEMENT OF FRANK BROST, RAPID CITY, SOUTH DAKOTA, CHAIRMAN, 
TAX AND CREDIT COMMITTEE, NATIONAL CATTLEMEN'S BEEF ASSOCIATION

    Mr. Brost. Thank you, Mr. Chairman.
    My name is Frank Brost. I am a second-generation South 
Dakota cattle rancher. I am also on the board of directors and 
a member of the Loan Committee of a very aggressive, $80 
million bank in central South Dakota that does a lot of ag 
lending.
    I am here today on behalf of the National Cattlemen's Beef 
Association. I thank you for the opportunity to testify.
    I am chairman of the NCBA's Tax and Credit Committee, and I 
hope that my testimony will be able to express and represent 
the views of the nearly 250,000 members of our organization. I 
look forward to providing some insight into the importance of 
sound and reasonable policies regarding 1) the availability and 
2) the use of credit in the United States beef industry.
    Cow-calf stocker and feeder operations generate $150 
billion in economic activity. The chart included in my written 
testimony reflects the great, wide swings in returns on the 
average cattle operation from a profit perspective--around $80 
per head loss during the bad times to a similar amount of 
profit during the good times.
    Like many others in agriculture, we have been successful in 
fine-tuning our production. In 1996, NCBA refocused itself on 
the marketing and the demand side. We are seeing successes and 
growing consumer demand. We feel the focus on demand is largely 
responsible for the recent profitability that we have enjoyed.
    As margins, however, become smaller and capital needs grow, 
a solid financial partner becomes even more important. Sound 
financial partners that operate with the spirit of a 
partnership agreement are critical to our success and 
sustainability. The very segments of our industry must be 
capable of dealing with constant fluctuations and variations in 
both prices and profitability.
    We have three major concerns, the first being our new 
producers. The average age of beef producers is nearly 60 years 
of age. I am among them. As a result, we must focus on young 
producers just starting out in the business or inheriting the 
family operation and continuing it. The availability of capital 
to make it through the high and low cycles is critical.
    The industry has evolved from a labor-intensive way of life 
into a capital-intensive business. Management and capital have 
become critical ingredients. Our banks and our financial 
institutions need the tools and the flexibility to be that 
partner in helping develop young producers into profitable and 
sustainable operators. We have to be prepared to help that 
producer and that lender make the change from a producer of a 
commodity into a partner in the production of a product. We 
agree with the aggie bond concept that one of the prior 
speakers talked about.
    The second area of concern is our existing producers. 
Cattle feeding has become high-tech. With lower margins and 
increased capital needs, there is little margin for error.
    Significant environmental capital cost improvements are 
required. Current operating credit lines do not provide room 
for these new regulatory capital costs. We must find ways to 
finance the costs of these new regulations.
    The environmental standards will also begin to apply to 
broad bases of cattlemen, cow-calf operators like myself, and 
feeder operations, many of whom lack the equity to make these 
kinds of long-term capital investments.
    The third major area we would like to address is the area 
of the value-adding concept which has also been discussed 
previously. As stated earlier, industry-wide, we are evolving 
from producers of a commodity into producers and partners in 
the production of a product. This has brought about the banding 
together of producers in new business structures, in turn, 
cooperatives, as you have discussed.
    The cattle business out of necessity needs to prepare for 
its place in tomorrow's marketplace. This requires more focus 
on marketing, more focus on operators' strategic plans and 
strategic objectives. To quote a Yogi-ism, ``You cannot get to 
where you are going unless you know where you are going.'' All 
of this requires a strong, well-financed partnership between 
the producer and the financial partner.
    In summary, I have outlined three major concerns--how we 
finance the next generation, how we finance existing producers 
into an evolving business, and how we finance value-adding 
components of an ever-changing business.
    NCBA recommendations are, first, that beginning farmer and 
rancher programs should be continued and expanded to allow for 
higher ceilings and reductions in filing requirements for 
guaranteed loans. New and stronger incentives should be 
developed that make it easier for young and beginning farmers 
to get a solid footing.
    This committee and those with related oversight must ensure 
that new and existing regulations are not hampering growth and 
development. Technical assistance, when needed, should be part 
of any and all new regulations.
    The United States must remain free of foot and mouth. There 
has been discussion of this, and we request and urge increased 
funding of R and D facilities.
    The emphasis on value-adding will require even more 
vigilance on the part of regulators. We need to ensure that 
technical assistance is helpful and not a hindrance. The repeal 
of the death tax and the creation of farm accounts will permit 
producers to better manage their limited resources.
    Finally, the Congress in its efforts to provide a safety 
net should not allow one segment of the industry to benefit at 
the expense of others.
    I appreciate the opportunity to testify, Mr. Chairman, and 
I will be happy to answer any questions. On a personal note, my 
friend, Senator Abdnor, offers his greetings to you from South 
Dakota.
    The Chairman. Thank you for bringing the greetings of Jim 
Abdnor. We appreciate it.
    Mr. Hoefner.
    [The prepared statement of Mr. Brost can be found in the 
appendix on page 139.]

             STATEMENT OF FERD HOEFNER, WASHINGTON 
            REPRESENTATIVE, SUSTAINABLE AGRICULTURE 
                   COALITION, WASHINGTON, DC

    Mr. Hoefner. Thank you and good morning, and thanks for 
this opportunity to testify.
    I am Ferd Hoefner, Washington representative of the 
Sustainable Agriculture Coalition. The focus of my remarks 
today is on the beginning farmer provisions of the credit 
title.
    I am currently starting a second term on the USDA Advisory 
Committee on Beginning Farmers and Ranchers and have submitted 
for the record some of the correspondence between that group 
and the Secretary that might be of some interest.
    Credit programs are the only area in which Congress has 
addressed beginning farmer issues directly in any substantial 
way, and thus, existing programs deserve careful review.
    First, I would call attention to targeted Federal credit 
assistance for beginning farmers. Congress embarked on a 
reorientation of credit programs to prioritize beginning 
farmers in 1992 and continued this effort in the 1996 Farm 
bill. My written statement contains details about these 
targeting provisions, but the bottom line message is that the 
targeting provisions are working.
    Targeting has resulted in a profound shift in the focus and 
resource allocation within FSA credit, although more so with 
regard to direct lending than guaranteed lending, and more so 
in some regions of the country than others.
    One clear example of the success of targeting is the 
combined total of over 11,000 beginning farmer farm ownership 
loans of all types that have been made since these provisions 
went into effect in 1994.
    Our recommendation for the Farm bill credit title is to 
retain the existing targeting features without change. The 
possible exception might be some modification to the guaranteed 
operating loan target, which is the only program which has not 
come close to reaching its goal.
    The Beginning Farmer and Rancher Down Payment Program has 
been very successful and should be continued. The Down Payment 
Program was authorized in 1992, started in 1994, and was 
bolstered in the 1996 Farm bill. Under this first-time purchase 
program, the borrower supplies 10 percent of the purchase 
price, FSA 30 percent of the purchase price, or on a 10-year 
loan at 4 percent, and commercial lenders or the seller 
provides the other 60 percent. This program been very heavily 
used across the Midwest and more lately in other regions of the 
country. It has helped to create over 2,100 new farming 
opportunities in its seven years.
    The Down Payment Program has an excellent track record. The 
delinquency rate at the end of 2000 was just 2.3 percent, which 
compares very favorably with the 12.4 percent for regular 
ownership loans. I would also stress that with the Down Payment 
Loan Program, you get three to four times the number of 
borrowers served when compared with regular 100 percent 
financed loans, which is obviously very important in times of 
limited funding availability.
    To make the Down Payment Program more flexible and to 
increase its applications to other regions of the country where 
it is currently underutilized, we recommend that the new Farm 
bill establish a broader range of both the size of the down 
payment required from the borrower and of the length of time 
for the FSA loan.
    At the same time, we would recommend the establishment of 
performance goals for each State with significant farm 
ownership lending.
    These recommendations are consistent with the 
recommendations of the USDA Advisory Committee and I believe 
would extend the programs to all regions of the country while 
maximizing the number of beginning farmer loans per dollar 
appropriated.
    Let me briefly touch on funding levels. As recent year 
program levels have hopefully made clear, farm bill 
authorization levels for direct operating and especially for 
direct farm ownership loans need to be increased significantly. 
In the current year, where appropriated dollars are 
significantly higher than the authorized levels, the direct 
farm ownership program was out of money before spring started. 
It currently has $25 million only because of a recent transfer 
from unused guaranteed operating loans.
    Both the general and the beginning farmer specific transfer 
authorities need to be continued--they have been very 
important--but we should also look to increasing direct loan 
fund availability directly.
    We believe that no single change in law would do as much to 
spur down payment loans and the Federal-State partnership on 
beginning farmers as would a change in the Tax Code and a 
parallel change in the credit title to allow guarantees in 
conjunction with aggie bond loans at the State level.
    FSA provides loan guarantees for private sector loans, but 
under the IRS Code cannot provide guarantees for aggie bond 
loans facilitated by State beginning farmer programs. We 
strongly urge a tax change and a parallel credit title change 
to allow guarantees on aggie bond loans. Together, these 
provisions would expand the pool of participating lenders and 
reduce interest rates for beginning farmers.
    We also note our support for Senator Grassley's bill to 
exempt aggie bonds from the volume cap on industrial revenue 
bonds.
    We recommend a substantial reworking of the Interest Assist 
Program so that the full interest rate break is targeted to 
moderate-scale loans for beginning, minority, and limited-
resource farmers.
    Finally, we would encourage the enactment of two new 
programs. We believe the credit title could establish a pilot 
project that would test the benefits of switching funds from 
debt financing to equity assistance. A revenue-neutral program 
for qualified beginning farmers and ranchers could provide seed 
money to help them build equity while encouraging lower-cost 
approaches to farming, reducing risk, and creating incentives 
for saving and investment.
    We would also propose the establishment of a direct 
participation loan program with a limited-duration Federal loan 
to assist beginning farmers and ranchers getting a stake in 
value-added agricultural coops.
    I would close by saying that we have many other ideas for 
beginning farmers that do not relate to the credit title; 
sometimes, in the past too much of the beginning farmer focus 
has just been on credit. There are other ideas that pertain to 
research, rural development conservation and other titles that 
we would love to pursue further with the committee at a later 
date.
    Thank you for the opportunity to testify, and I will be 
happy to answer questions.
    [The prepared statement of Mr. Hoefner can be found in the 
appendix on page 145.]
    The Chairman. Thank you very much, Mr. Hoefner, and I 
appreciate your final paragraph where you mentioned that there 
are other things beyond credit that are involved, and I invite 
each of you and your organizations to help us in each of those 
areas. Farmers Union has testified with regularity at our 
conservation hearings, and likewise our hearings on export and 
various other titles that we have been taking up seriatim. Your 
organization, Mr. Hoefner, is likewise a very valuable 
resource.
    Mr. Brost, let me start, because you have stressed the 
problems for beginning farmers and therefore credit for them--
more fundamentally, although this changes anecdotally from time 
to time as I visit Purdue University or other university 
agriculture departments, there are a fair number of people 
enrolled, and in some years even increases, but only a very 
small percentage of these, sometimes fewer than one in ten, are 
considering going into production agriculture, that is, out on 
the farm. The other nine-tenths plus are in agribusiness or in 
some background dealing with rural America. There is a lot of 
interest in rural America but not necessarily in being farmers.
    One of the reasons, I suppose, as you know, why cattlemen 
have a 60-year-plus age average, and for most other sectors, it 
is at least high 50's, and maybe in some sectors, more than 
that, is because, as a matter of fact, these are the folks who 
are still around. The number of people coming in at entry level 
still remains very few.
    Leaving that aside for a moment, those who do, at least 
that I have observe in my home State, are very aggressive and 
sometimes have the benefit of inheriting land, or they have 
other relatives who have been involved in agriculture; but bit 
by bit, they put together, at least in a typical Indiana 
situation, 2,000 or 3,000 acres. They are bits and pieces of 
acreage from the States or from elderly farmers who no longer 
want to farm or whatever. That often, these people will have 25 
or 30 properties, and it is a very complex business moving the 
equipment around, but it gives them the opportunity to amortize 
the purchase of sophisticated equipment as well as their 
expertise over a lot more territory, and they have a lot of 
energy. They are young people who want to expand their 
operations; they are highly leveraged as a rule; I am sure they 
are imbibers in, if not the credit programs we are discussing 
today, somebody's credit program. There are not many of them. 
They are conspicuous because they are relatively successful, 
and they are young, as opposed to those who are old and who are 
most involved in the situation.
    Is this likely to change? In other words, as you take a 
look at the prospects for either enhancingthe system--and you 
have made some excellent suggestions for ways in which we can 
do more than tweak the system; there are some substantial 
changes that can be made but the problem exists that I 
discussed earlier this morning of the relatively low return in 
this area, which means, translated for a young farmer, a 
middle-class income enough to put his children through college 
or other things that people do in our society--is this a 
competitive outlook for a young person? Looking at this with 
some realism, how many people are going to be involved, and are 
the programs that we have not only sufficient for them but 
attractive enough so that many more might be invited?
    Does anybody have a ``blue sky'' prospect that you would 
like to share with us?
    Mr. Brost. I would comment on that. As one of my other 
experiences in life, I practiced law for 25 years out in Jim 
Abdnor's country, where I was his attorney. What you talk about 
is also true in South Dakota, Senator. Young, aggressive people 
have to have a fire in their belly, and they have to have some 
financial backing of some kind, whether it is a partner, an 
equity partner, or whether it is an inherited partner, to get 
into this business--not unlike wanting to run a bank or 
anything else. You have to have capital because it is a 
capital-intensive business.
    I do not see it changing, and I do not think Government can 
make it change. You need to be there to support financially 
those young people who really want to do that, with technical 
assistance, with good bankers providing good credit advice. The 
ones I saw get in trouble over my years in the law practice and 
my years on the bank board--my neighbors and friends and 
relatives in this business got in trouble because they made 
some bad decisions in terms of where to put that equity and how 
to manage their marketing and other aspects of this business.
    Good advice and good sound banking counseling in a 
partnership mode we talked about are terribly important, but I 
do not see it changing.
    The Chairman. Mr. Hoefner, do you have a comment?
    Mr. Hoefner. Yes, I would just add one comment. Regardless 
of the four percent figure, the beginning farmer conferences 
that have been happening around the country and the beginning 
farmer programs that are beginning to spring up at the State 
level through extension and through private organizations are 
getting record numbers of people to come into the programs--for 
whatever reasons. It behooves us to make sure that the programs 
that we do have and the resources that we do have are serving 
their needs as flexibly and as efficiently as possible. That 
some of the recommendations that we are making in terms of the 
Beginning Farmer Down Payment Program can certainly help; 
having a new Federal program that is focused on beginning 
farmer development programs could also help--there is a lot 
going on at the State and local level that I believe could be 
supported through the next Farm bill.
    The Chairman. Mr. Carter, do you have any thoughts about 
this subject?
    Mr. Carter. Yes, very much so. We have to take a look and 
ask is the status quo inevitable. I was concerned when I came 
back from the USDA Agricultural Outlook Conference a couple of 
months ago that a number of folks got up, and if you did not 
know better, you would think that the word ``low cost 
efficient'' was one word, because they tend to use that 
interface.
    We think that if we take a look at where we are headed 
right now, with fewer producers and high-volume/low-margin 
production--in Colorado, for example, we have 18 operations 
that produce 51 percent of the value of agricultural 
commodities in our State; it is very heavily concentrated--what 
does that mean for the other 28,000 operations in the State?
    When we look at the marketplace, though, we see that there 
is the misconception that the consumer just wants to go in and 
buy the cheapest thing and does not care where it is produced. 
In reality, more than half of the consumers are bringing other 
values to the grocery store with them, particularly concerns 
about health, wellness, food safety, as has been discussed 
considerably this morning. If we provide more opportunities for 
farmers to move forward and to put the value-added attributes 
on their products to market to those consumers, we can get more 
income back to agriculture.
    That is where, when we take a look at the credit that could 
provide new opportunities not only in diversifying the rural 
economy, not to bring in businesses to replace agriculture, but 
let us talk about some businesses to enhance the stability of 
agriculture. When, out of the $1 trillion, the food and fiber 
sector, less than 6 percent goes to the producers of the 
commodities, and 60 percent is going to the processing, 
manufacturing and retail side, it seems to me that part of the 
answer here is let us provide producers with the ability to 
capture some of that added value, and let us do it through the 
loan guarantee programs, the B and I, as you said, enhancing 
the aggie bond programs, to help producers make their equity 
investment into these new value-added cooperatives.
    We administer a cooperative development center through our 
foundation--USDA has been very helpful in providing support--
and we see that it is very important not only to have new 
businesses that producers sell their commodities to, but to 
have producers be owners of those businesses so they can share 
in the rewards and the profitability of that business.
    The Chairman. Is this one of a kind? In other words, is 
this something that can be replicated, this extension of 
producers into value-added production and so forth?
    Mr. Carter. It can be--I do not want to say replicated, 
because each success is not something that you can take a 
cookie-cutter and replace it, because each one is unique--but 
there are lessons to be learned there, and we would see that 
there is a combination of resources--loans and loan guarantees, 
but also grant programs through USDA to help farmers do the up-
front work, the feasibility studies, and the technical 
assistance that can be brought to bear to help us move into 
these new value-added markets.
    I happen to also serve on the National Organic Standards 
Board, and when we take a look at the phenomenal growth in 
organic agriculture and organic market, there are some real 
opportunities there, but we have got to make sure that the 
producers get the rewards from it.
    The Chairman. Yes, Mr. Brost.
    Mr. Brost. Mr. Chairman, during my life, I served on the 
National Institute of Corrections--I was on a State corrections 
board--which is a marvelous governmental organization that is 
set up to provide technical assistance to prisons, to jails, 
and to community corrections. It does not have a lot of full-
time employees, but it has a body of technical assistance 
experts that you can call upon to come in and help.
    I really believe that in many of these instances as we 
progress into value-adding agriculture, if we had an 
organization with a body of those kinds of people available, 
where young fireball people in groups could call in to help 
them get their business plans to help them get their business 
plans and how to fund and how to market, that it might be 
something that would be quite beneficial.
    That is a good organization that you might look at to do 
something from the governmental perspective.
    The Chairman. Well, the idea of farmers being involved in 
the other aspects, as you have all pointed out the problem that 
six percent or so goes to producers and 60-some percent to 
processors, manufacturers, and what-have you, on the surface is 
a great idea.
    The question is will farmers be willing to organize 
themselves and their efforts, or a portion of their time in 
these ways. Maybe the answer is yes of necessity, but this is 
going to require a lot of leadership on the part of farm 
organizations, people like yourselves, who try to offer some 
business plan or a way of doing this, and it will require 
support from the Federal Government to help in the financing of 
it. We all pray that within our lifetime, this will occur, or 
better still, within the next decade or so, because this kind 
of rescue mission, it seems to me, is necessary; otherwise, we 
will have a continuing dialog about the aging of the population 
of American agriculture, and people will stick to being corn 
farmers and not manufacturers or marketers or what-have-you, 
which will not be good enough, I am afraid, given what I see to 
be continuing low returns from that type of thing per se. Now, 
if you enhance in other ways, you get into a different story.
    Well, I appreciate your heightening our imagination through 
your testimony. Likewise, the basic papers that you have 
presented are very helpful. We look forward to working with you 
on other aspects of the Farm bill, and any additional thoughts 
that you have on credit today.
    Having said that, the hearing is adjourned.
    [Whereupon, at 12:30 p.m., the committee was adjourned.]
      
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