[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 Available via the World Wide Web: http://www.agriculture.senate.gov U.S. GOVERNMENT PRINTING OFFICE 81-040 WASHINGTON : 2002 _____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001 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 ---------- 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.] ======================================================================= A P P E N D I X May 16, 2001 ======================================================================= [GRAPHIC] [TIFF OMITTED] 81040.001 [GRAPHIC] [TIFF OMITTED] 81040.002 [GRAPHIC] [TIFF OMITTED] 81040.003 [GRAPHIC] [TIFF OMITTED] 81040.004 [GRAPHIC] [TIFF OMITTED] 81040.005 [GRAPHIC] [TIFF OMITTED] 81040.006 [GRAPHIC] [TIFF OMITTED] 81040.007 [GRAPHIC] [TIFF OMITTED] 81040.008 [GRAPHIC] [TIFF OMITTED] 81040.009 [GRAPHIC] [TIFF OMITTED] 81040.010 [GRAPHIC] [TIFF OMITTED] 81040.011 [GRAPHIC] [TIFF OMITTED] 81040.012 [GRAPHIC] [TIFF OMITTED] 81040.013 [GRAPHIC] [TIFF OMITTED] 81040.014 [GRAPHIC] [TIFF OMITTED] 81040.015 [GRAPHIC] [TIFF OMITTED] 81040.016 [GRAPHIC] [TIFF OMITTED] 81040.017 [GRAPHIC] [TIFF OMITTED] 81040.018 [GRAPHIC] [TIFF OMITTED] 81040.019 [GRAPHIC] [TIFF OMITTED] 81040.020 [GRAPHIC] [TIFF OMITTED] 81040.021 [GRAPHIC] [TIFF OMITTED] 81040.022 [GRAPHIC] [TIFF OMITTED] 81040.023 [GRAPHIC] [TIFF OMITTED] 81040.024 [GRAPHIC] [TIFF OMITTED] 81040.025 [GRAPHIC] [TIFF OMITTED] 81040.026 [GRAPHIC] [TIFF OMITTED] 81040.027 [GRAPHIC] [TIFF OMITTED] 81040.028 [GRAPHIC] [TIFF OMITTED] 81040.029 [GRAPHIC] [TIFF OMITTED] 81040.030 [GRAPHIC] [TIFF OMITTED] 81040.031 [GRAPHIC] [TIFF OMITTED] 81040.032 [GRAPHIC] [TIFF OMITTED] 81040.033 [GRAPHIC] [TIFF OMITTED] 81040.034 [GRAPHIC] [TIFF OMITTED] 81040.035 [GRAPHIC] [TIFF OMITTED] 81040.036 [GRAPHIC] [TIFF OMITTED] 81040.037 [GRAPHIC] [TIFF OMITTED] 81040.038 [GRAPHIC] [TIFF OMITTED] 81040.039 [GRAPHIC] [TIFF OMITTED] 81040.040 [GRAPHIC] [TIFF OMITTED] 81040.041 [GRAPHIC] [TIFF OMITTED] 81040.042 [GRAPHIC] [TIFF OMITTED] 81040.043 [GRAPHIC] [TIFF OMITTED] 81040.044 [GRAPHIC] [TIFF OMITTED] 81040.045 [GRAPHIC] [TIFF OMITTED] 81040.046 [GRAPHIC] [TIFF OMITTED] 81040.047 [GRAPHIC] [TIFF OMITTED] 81040.048 [GRAPHIC] [TIFF OMITTED] 81040.049 [GRAPHIC] [TIFF OMITTED] 81040.050 [GRAPHIC] [TIFF OMITTED] 81040.051 [GRAPHIC] [TIFF OMITTED] 81040.052 [GRAPHIC] [TIFF OMITTED] 81040.053 [GRAPHIC] [TIFF OMITTED] 81040.054 [GRAPHIC] [TIFF OMITTED] 81040.055 [GRAPHIC] [TIFF OMITTED] 81040.056 [GRAPHIC] [TIFF OMITTED] 81040.057 [GRAPHIC] [TIFF OMITTED] 81040.058 [GRAPHIC] [TIFF OMITTED] 81040.059 [GRAPHIC] [TIFF OMITTED] 81040.060 [GRAPHIC] [TIFF OMITTED] 81040.061 [GRAPHIC] [TIFF OMITTED] 81040.062 [GRAPHIC] [TIFF OMITTED] 81040.063 [GRAPHIC] [TIFF OMITTED] 81040.064 [GRAPHIC] [TIFF OMITTED] 81040.065 [GRAPHIC] [TIFF OMITTED] 81040.066 [GRAPHIC] [TIFF OMITTED] 81040.067 [GRAPHIC] [TIFF OMITTED] 81040.068 [GRAPHIC] [TIFF OMITTED] 81040.069 [GRAPHIC] [TIFF OMITTED] 81040.070 [GRAPHIC] [TIFF OMITTED] 81040.071 [GRAPHIC] [TIFF OMITTED] 81040.072 [GRAPHIC] [TIFF OMITTED] 81040.073 [GRAPHIC] [TIFF OMITTED] 81040.074 [GRAPHIC] [TIFF OMITTED] 81040.075 [GRAPHIC] [TIFF OMITTED] 81040.076 [GRAPHIC] [TIFF OMITTED] 81040.077 [GRAPHIC] [TIFF OMITTED] 81040.078 [GRAPHIC] [TIFF OMITTED] 81040.079 [GRAPHIC] [TIFF OMITTED] 81040.080 [GRAPHIC] [TIFF OMITTED] 81040.081 [GRAPHIC] [TIFF OMITTED] 81040.082 [GRAPHIC] [TIFF OMITTED] 81040.083 [GRAPHIC] [TIFF OMITTED] 81040.084 [GRAPHIC] [TIFF OMITTED] 81040.085 [GRAPHIC] [TIFF OMITTED] 81040.086 [GRAPHIC] [TIFF OMITTED] 81040.087 [GRAPHIC] [TIFF OMITTED] 81040.088 [GRAPHIC] [TIFF OMITTED] 81040.089 [GRAPHIC] [TIFF OMITTED] 81040.090 [GRAPHIC] [TIFF OMITTED] 81040.100 [GRAPHIC] [TIFF OMITTED] 81040.101 [GRAPHIC] [TIFF OMITTED] 81040.102 [GRAPHIC] [TIFF OMITTED] 81040.103 [GRAPHIC] [TIFF OMITTED] 81040.104 [GRAPHIC] [TIFF OMITTED] 81040.105 [GRAPHIC] [TIFF OMITTED] 81040.106 [GRAPHIC] [TIFF OMITTED] 81040.107 [GRAPHIC] [TIFF OMITTED] 81040.108 [GRAPHIC] [TIFF OMITTED] 81040.109 [GRAPHIC] [TIFF OMITTED] 81040.110 [GRAPHIC] [TIFF OMITTED] 81040.111 [GRAPHIC] [TIFF OMITTED] 81040.112 [GRAPHIC] [TIFF OMITTED] 81040.113 [GRAPHIC] [TIFF OMITTED] 81040.114 [GRAPHIC] [TIFF OMITTED] 81040.115 [GRAPHIC] [TIFF OMITTED] 81040.116 [GRAPHIC] [TIFF OMITTED] 81040.117 [GRAPHIC] [TIFF OMITTED] 81040.118 [GRAPHIC] [TIFF OMITTED] 81040.119 [GRAPHIC] [TIFF OMITTED] 81040.120 [GRAPHIC] [TIFF OMITTED] 81040.121 [GRAPHIC] [TIFF OMITTED] 81040.122 [GRAPHIC] [TIFF OMITTED] 81040.123 [GRAPHIC] [TIFF OMITTED] 81040.124 [GRAPHIC] [TIFF OMITTED] 81040.125 [GRAPHIC] [TIFF OMITTED] 81040.126 [GRAPHIC] [TIFF OMITTED] 81040.127 [GRAPHIC] [TIFF OMITTED] 81040.128 [GRAPHIC] [TIFF OMITTED] 81040.129 [GRAPHIC] [TIFF OMITTED] 81040.130 [GRAPHIC] [TIFF OMITTED] 81040.131 [GRAPHIC] [TIFF OMITTED] 81040.132 [GRAPHIC] [TIFF OMITTED] 81040.133 [GRAPHIC] [TIFF OMITTED] 81040.134 [GRAPHIC] [TIFF OMITTED] 81040.135 [GRAPHIC] [TIFF OMITTED] 81040.136 [GRAPHIC] [TIFF OMITTED] 81040.137 [GRAPHIC] [TIFF OMITTED] 81040.138 ======================================================================= DOCUMENTS SUBMITTED FOR THE RECORD May 16, 2001 ======================================================================= [GRAPHIC] [TIFF OMITTED] 81040.139 [GRAPHIC] [TIFF OMITTED] 81040.140 [GRAPHIC] [TIFF OMITTED] 81040.141 [GRAPHIC] [TIFF OMITTED] 81040.142 [GRAPHIC] [TIFF OMITTED] 81040.143 [GRAPHIC] [TIFF OMITTED] 81040.144 [GRAPHIC] [TIFF OMITTED] 81040.145 [GRAPHIC] [TIFF OMITTED] 81040.146 [GRAPHIC] [TIFF OMITTED] 81040.147 -