[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
           REVIEW THE AVAILABILITY OF CREDIT IN RURAL AMERICA

=======================================================================

                                HEARING

                               before the

       SUBCOMMITTEE ON CONSERVATION, CREDIT, ENERGY, AND RESEARCH

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 27, 2007

                               __________

                           Serial No. 110-08

                               __________

          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov











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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman
TIM HOLDEN, Pennsylvania,            BOB GOODLATTE, Virginia,
  Vice Chairman                        Ranking Minority Member
MIKE McINTYRE, North Carolina        TERRY EVERETT, Alabama
BOB ETHERIDGE, North Carolina        FRANK D. LUCAS, Oklahoma
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 ROBIN HAYES, North Carolina
DENNIS A. CARDOZA, California        TIMOTHY V. JOHNSON, Illinois
DAVID SCOTT, Georgia                 SAM GRAVES, Missouri
JIM MARSHALL, Georgia                JO BONNER, Alabama
STEPHANIE HERSETH, South Dakota      MIKE ROGERS, Alabama
HENRY CUELLAR, Texas                 STEVE KING, Iowa
JIM COSTA, California                MARILYN N. MUSGRAVE, Colorado
JOHN T. SALAZAR, Colorado            RANDY NEUGEBAUER, Texas
BRAD ELLSWORTH, Indiana              CHARLES W. BOUSTANY, Jr., 
NANCY E. BOYDA, Kansas                   Louisiana
ZACHARY T. SPACE, Ohio               JOHN R. ``RANDY'' KUHL, Jr., New 
TIMOTHY J. WALZ, Minnesota               York
KIRSTEN E. GILLIBRAND, New York      VIRGINIA FOXX, North Carolina
STEVE KAGEN, Wisconsin               K. MICHAEL CONAWAY, Texas
EARL POMEROY, North Dakota           JEFF FORTENBERRY, Nebraska
LINCOLN DAVIS, Tennessee             JEAN SCHMIDT, Ohio
JOHN BARROW, Georgia                 ADRIAN SMITH, Nebraska
NICK LAMPSON, Texas                  KEVIN McCARTHY, California
JOE DONNELLY, Indiana                TIM WALBERG, Michigan
TIM MAHONEY, Florida

                           Professional Staff

                    Robert L. Larew, Chief of Staff
                     Andrew W. Baker, Chief Counsel
           William E. O'Conner, Jr., Minority Staff Director
                                 ------                                

       Subcommittee on Conservation, Credit, Energy, and Research

                   TIM HOLDEN, Pennsylvania, Chairman
STEPHANIE HERSETH SANDLIN, South     FRANK D. LUCAS, Oklahoma,
    Dakota                             Ranking Minority Member
HENRY CUELLAR, Texas                 MIKE ROGERS, Alabama
JIM COSTA, California                STEVE KING, Iowa
BRAD ELLSWORTH, Indiana              JEFF FORTENBERRY, Nebraska
ZACHARY T. SPACE, Ohio               JEAN SCHMIDT, Ohio
TIMOTHY J. WALZ, Minnesota           TIM WALBERG, Michigan
DAVID SCOTT, Georgia                 TERRY EVERETT, Alabama
JOHN T. SALAZAR, Colorado            JERRY MORAN, Kansas
NANCY E. BOYDA, Kansas               ROBIN HAYES, North Carolina
KIRSTEN E. GILLIBRAND, New York      SAM GRAVES, Missouri
DENNIS A. CARDOZA, California        JO BONNER, Alabama
STEVE KAGEN, Wisconsin               MARILYN N. MUSGRAVE, Colorado
JOE DONNELLY, Indiana
               Nona Darrell, Subcommittee Staff Director























                            C O N T E N T S

                              ----------                              
                                                                   Page
Holden, Hon. Tim, a Representative in Congress from the State of 
  Pennsylvania, Opening statement................................     1
    Prepared statement...........................................    49
Peterson, Hon. Collin C., a Representative in Congress from the 
  State of Minnesota, Prepared statement.........................    51
Lucas, Hon. Frank D., a Representative in Congress from the State 
  of Oklahoma, Opening statement.................................     2
    Prepared statement...........................................    54
Goodlatte, Hon. Bob, a Representative in Congress from the State 
  of Virginia,...................................................
Prepared statement...............................................    55

                               WITNESSES

Keppy, Hon. Glen L., Associate Administrator, Farm Service 
  Agency, Farm Service Agency, Accompanied by Carolyn Cooksie, 
  Deputy Administrator, Farm Service Agency, U.S. Department of 
  Agriculture, Oral statement....................................     3
    Prepared statement...........................................   112
Pellett, Hon. Nancy C., Chairman of the Board and CEO, Farm 
  Credit Administration, Accompanied by Charlie Rawls, General 
  Counsel, Farm Credit Administration, Oral statement............     4
    Prepared statement...........................................   126
Pinto, Hon. Frank, President, Pennsylvania Association of 
  Community Bankers, on behalf of Independent Community Bankers 
  of American and America's Community Bankers, Harrisburg, 
  Pennsylvania, Oral statement...................................    27
    Prepared statement...........................................   142
Greenlee, Jeff, President, NBanc, on behalf of American Bankers 
  Association, Altus, Oklahoma, Oral statement...................    28
    Prepared statement...........................................   160
Stark, Doug, President, Farm Credit Services of America, Omaha, 
  Nebraska, Oral statement.......................................    32
    Prepared statement...........................................   171
Apple, Armin, Director, Agribank, McCordsville, Indiana, Oral 
  statement......................................................    30
    Prepared statement...........................................   180
Zippert, John, Federation of Southern Cooperatives, and Chairman, 
  Rural Coalition, Eppes, Alabama, Oral statement................    33
    Prepared statement...........................................   185
Stettler, Karen, Director, LSP Farm Beginnings, on behalf of Land 
  Stewardship Project, Lewiston, Minnesota, Oral statement.......    35
    Prepared statement...........................................   204

                           SUBMITTED MATERIAL

Answers to submitted questions...................................    56
Independent Community Bankers Association and Association of 
  Community Banks, submitted material............................    68
The Financial Services Roundtable, Washington, D.C., submitted 
  statement......................................................    71
The Farm Credit Council, Washington, D.C., submitted statement...    73
National Association of Realtors, Washington, D.C., submitted 
  statement......................................................    76
Kelment, Jessica, Government Affairs Director, Federal Managers 
  Association, Alexandria, Virginia, submitted statement.........    78
Horne, Savi, Executive Director, North Carolina Association of 
  Black Lawyers' Land Loss Prevention Project, Durham, North 
  Carolina, submitted statement..................................    87
Kling, Lou Anne, Project Administrator, American Indian Credit 
  Outreach Initiative, Box Elder, Montana, submitted statement...    98


























     HEARING TO REVIEW THE AVAILABILITY OF CREDIT IN RURAL AMERICA

                              ----------                              


                        TUESDAY, MARCH 27, 2007

              House of Representatives,    
                  Committee on Agriculture,
              Subcommittee on Conservation, Credit,
                                      Energy, and Research,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10 a.m., in room 
1302 of the Longworth House Office Building, Hon. Tim Holden 
(Chairman of the Subcommittee) presiding.
    Members present: Representatives Holden, Herseth, Costa, 
Ellsworth, Space, Walz, Salazar, Boyda, Gillibrand, Peterson 
(ex officio), Lucas, Rogers, Fortenberry, Schmidt, Moran, 
Graves, Bonner, Musgrave, and Goodlatte (ex officio).
    Staff present: Nona Darrell, Scott Kuschmider, Rob Larew, 
John Riley, Sharon Rusnak, Anne Simmons, Debbie Smith, Kristin 
Sosanie, Kevin Kramp, Josh Maxwell, and Jamie Weyer.

STATEMENT OF HON. TIM HOLDEN, A REPRESENTATIVE IN CONGRESS FROM 
                   THE STATE OF PENNSYLVANIA

    Mr. Holden. This hearing on the Subcommittee on 
Conservation, Credit, Energy and Research to review the 
availability of credit in rural America will come to order. I 
would like to welcome our witnesses and guests to today's 
hearing. I hope this hearing will provide a good perspective on 
how we can best help our agriculture producers and rural 
residents obtain credit and create opportunity for development. 
Farmers have opportunity for credit from several sectors. The 
Department of Agriculture's Farm Service Agency issues direct 
loans and offers guarantees on loans made by commercial 
lenders.
    But FSA is only a lender of the last resort for those who 
cannot obtain credit from the traditional market. The Farm 
Credit System like commercial banks make loans to credit worthy 
farmers and it is not a lender of last resort. The Farm Credit 
System was created to provide a permanent, reliable source of 
credit to U.S. agriculture. Back in the early part of the last 
century credit was often unavailable or unaffordable in rural 
areas. Many lenders avoid such loans because agriculture was 
such a high risk.
    So Congress created the Farm Credit System which is 
authorized by statute to lend to farmers, ranchers, and 
harvesters of aquatic products. Loans may be also made to 
finance the processing and marketing activities of these 
borrowers for home ownership in rural areas, certain farm or 
ranch-related businesses, and agricultural aquatic and public 
utility cooperatives. Commercial banks also lend to 
agricultural producers and businesses, as well as rural 
homeowners. Other sources of credit for agriculture include 
life insurance companies, individuals, merchants, and dealers.
    Together, commercial banks, life insurance companies, and 
individuals and others provide 63 percent of the total farm 
debt without federal support or federal mandate. Both the Farm 
Credit System and commercial banks also work collaboratively 
with each other and with farm and commodity groups, agri 
businesses, rural businesses, and civic leaders in search of 
financial solutions to a wide range of service and product 
needs.
    This hearing today will review the availability of credit 
in rural America. I hope we can answer the questions. Are we 
doing enough to assist beginning and young farmers and ranchers 
who obtain credit, and are our agricultural needs being met 
across America. I will ask members to submit opening comments 
with three exceptions, and only one of them is here right now, 
so I would ask the ranking member, Mr. Lucas from Oklahoma, for 
his opening statement.
    [The information appears at the conclusion of the hearing.]

STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF OKLAHOMA

    Mr. Lucas. Thank you, Mr. Chairman. For once in my life, I 
am proud to be an exception under that scenario, and thank you 
for having this hearing today which gives the members of this 
subcommittee an opportunity to learn more about the 
availability of credit to producers. Providing credit to 
American's farmers and ranchers is a necessary and serious 
undertaking for many lenders in the United States. Today's 
hearing is going to provide a venue where we can discuss the 
various sources of credit available to producers through the 
Farm Service Agency, Farm Credit System and commercial banks.
    Both the Farm Credit System and commercial banks have done 
an outstanding job of servicing their community's credit needs. 
It is Congress' job to insure that credit needs are met in a 
manner that provides fair and equitable competition. Congress 
has spent a great deal of time the last few years modernizing 
America's finance laws. We just enable rural America to keep 
pace with the rest of the world. According to the Congressional 
Research Service, commercial banks lend the largest portion of 
the farm sector's total debt at 37 percent. The Farm Credit 
System currently holds 30 percent of the farm sector's total 
debt while the Farm Service Agency provides three percent of 
the debt through direct loans and guarantees and another four 
percent of the market. These numbers reflect a healthy balance 
among our lending institutions.
    There are several policy issues for us to consider as we 
discuss the next farm bill. Should we increase the $200,000 
limit per farmer on FSA direct farm ownership and operating 
loans? What should the term limits be for producers to receive 
FSA direct and guaranteed operating loans? And should the Farm 
Credit Act of 1971 be updated? There are many questions that 
will be asked today but none more important than discussing if 
producers have access to the credit they need. Access to credit 
is critical to all businesses and agriculture is no different.
    Today's witnesses will provide us with insight as to the 
current status and the availability of credit to producers, and 
we must determine if any changes are needed regarding the 
current law. I look forward to today's hearing and its 
testimony. And I thank you, Mr. Chairman, for his hearing 
opportunity.
    [The information appears at the conclusion of the hearing.]
    Mr. Holden. I thank the ranking member. And we would like 
to welcome our first panel to the table, Associate 
Administrator Glen L. Keppy from the Farm Service Agency, 
accompanied by Deputy Administrator Carolyn Cooksie; 
Administrator Nancy Pellett, Chairman of the Board and CEO of 
the Farm Credit Administration, and she is accompanied by Mr. 
Charlie Rawls, General Counsel for Farm Credit. Administrator 
Keppy, we will begin with you, please.

   STATEMENT OF GLEN L. KEPPY, ASSOCIATE ADMINSTRATOR, FARM 
 SERVICE AGENCY, USDA, ACCOMPANIED BY CAROLYN COOKSIE, DEPUTY 
            ADMINISTRATOR, FARM SERVICE AGENCY, USDA

    Mr. Keppy. Mr. Chairman, members of the committee, thank 
you for the opportunity to review the current status of the 
Farm Loan Program or better known as FLP at the Department of 
Agriculture. It is an honor for me to be here today with my 
good friend, Nancy Pellett, and later on Carolyn Cooksie and I 
will be happy to answer questions. Before I accepted this 
position a little less than a year ago, today I was getting 
ready to plant corn and was taking care of my livestock back in 
Iowa.
    FLP is a success story. We make direct and guaranteed farm 
ownership and operating loans to family-size farmers and 
ranchers who cannot otherwise obtain commercial credit from a 
bank, Farm Credit System, or other lenders. Our current 
portfolio includes $6.2 billion in direct loans and $9.2 
billion in guaranteed loans. The quality of our portfolio has 
improved significantly. Here are just a few of the highlights. 
Losses, our direct loan program have dropped 2.9 percent. That 
is the lowest level since 1986. Losses in our guaranteed loan 
program are less than \1/2\ of one percent, and that is the 
lowest since 1985.
    Delinquency rate for direct loans are 8.1 percent and 1.4 
percent for guaranteed loans, again the lowest in more than 10 
years. Last year we graduated 2,824 borrowers out of FSA and 
into commercial credit. The direct loan case load to beginning 
and SDA farmers has more than quadrupled from 1995 to 2006. The 
guaranteed loan case load has more than doubled from 1997 to 
2006. FSA continues to help minority farmers in proportion 
greater than the demographic percentage of the total farming 
population, and we remain committed to small farms in America.
    Research at the University of Arkansas studied FSA direct 
loan originations during fiscal year 2000 through 2003 found 
that 92 percent of direct loans originated went to small 
farmers with less than 250,000 in gross sales. They also 
determined that 78 percent of FSA direct loans originating 
between 1994 and 1996 have already been paid off. Our rear view 
mirror is filled with success stories, but our attention is 
clearly focused on some of the challenging curves up ahead. 
Term limits in the present statute place quality restrictions 
for direct operating loan borrowers. That means that 7,000 
borrowers have one year left of eligibility and 11,000 
borrowers have two years left.
    The Federal work force is getting older. As many as 26 
percent of our current FSA loan officers will be eligible to 
retire within the next three years. The 2007 Farm Bill 
proposals relate to credit seeking to help beginning and 
socially disadvantaged farmers overcome some of the increased 
financial hurdles that they face in becoming established 
operators. We propose to increase direct loan funding targets 
to better focus direct funding and its special features on 
beginning and SDA farmers, modify the existing down payment 
loan program to better fit the current needs of beginning and 
SDA farmers, and increase the direct loan limits that have been 
unchanged for over 20 years to improve our ability to meet the 
increased capital requirements beginning and SDA farmers face 
in today's agriculture.
    Through modernization, a steadfast focus on farmers, and 
meeting farm loan program objectives, each enhanced by the hard 
work and dedication of FSA employees, we have made great 
strides in performance improvements. Using our farm business 
plan FSA borrowers are now processed through a real time, web-
based system. Our commitment to FLP streamlining has reduced 
direct and guaranteed loan application processing time by 
almost 30 percent, and we have developed the Farm Loan Risk 
Assessment Program, which provides risk base oversight that 
areas of potential concern within our portfolio can easily be 
identified.
    Thanks to having a rural delivery system coupled with the 
dedication and hard work of our existing team of experienced 
loan officers, FSA is well positioned to continue high quality 
delivery of existing programs and new initiatives to American 
farmers. We look forward to working with this committee so that 
together we might strengthen the livelihoods of farm families 
while ever improving the viability of rural America. As I said, 
Carolyn and I will be happy to answer questions at the end of 
the panel.
    [The prepared statement of Mr. Keppy appears at the 
conclusion of the hearing.]
    Mr. Holden. Thank you, Mr. Keppy. Administrator Pellett.

 STATEMENT OF NANCY C. PELLETT, CHAIRMAN OF THE BOARD AND CEO, 
   FARM CREDIT ADMINISTRATION, ACCOMPANIED BY CHARLIE RAWLS, 
          GENERAL COUNSEL, FARM CREDIT ADMINISTRATION

    Ms. Pellett. Chairman Holden, Ranking Member Lucas, and 
members of the subcommittee, I am Nancy Pellett, Chairman and 
CEO of the Farm Credit Administration. I would ask that the 
committee include my full written statement for the record. And 
I too am pleased to be on this panel this morning with my good 
friend, Glen Keppy. Also joining me today is my fellow board 
member, Lee Strom from Illinois. Dallas Tonsager from South 
Dakota is ill this morning and could not be here. But I must 
tell you that I am very fortunate to have the opportunity to 
work with these two very thoughtful, dedicated individuals who 
love agriculture and rural America. Also, at the table with me 
this morning is Charles Rawls, our General Counsel.
    The FCA is an independent arm's length safety and soundness 
regulator established by Congress to oversee the Farm Credit 
System. Specifically, we are responsible for approving 
regulations and examining the institutions of the Farm Credit 
System. The system is a cooperative structured government-
sponsored enterprise that Congress established to improve the 
income and well-being of American farmers and ranchers by 
furnishing sound, adequate, and constructive credit, and 
closely related services to them, their cooperatives and to 
selected farm businesses.
    We also regulate and examine Farmer Mac, who provides a 
secondary market operation for agriculture mortgage loans. Mr. 
Chairman, as you well know, the health of rural America is so 
crucial to the future of agriculture and our country. If we are 
going to continue to encourage young people and new entrants to 
get involved in agriculture rural America must be able to offer 
the basic infrastructure and amenities that will entice them to 
return to these rural areas. We believe the system has a 
congressional mandate to assist in providing credit and capital 
for these important projects and must play a meaningful role 
going forward in strengthening rural America.
    Directly linked to this is the importance of serving young, 
beginning, and small farmers. The system continues to increase 
its service to these important groups, and FCA will continue to 
closely examine the system's service to ensure that these 
important groups are served in a constructive, safe and sound 
manner. One of the ways we have encouraged system institutions 
to continue their service to rural communities has been to use 
the broad investment authority provided in the Farm Credit Act. 
FCA issued guidance in January of 2005 that gave system 
institutions a provisional opportunity to make mission-related 
investments through pilot programs supporting investments in 
rural America.
    The pilot programs are intended to strengthen the system's 
mission to provide for an adequate and flexible flow of funds 
to agriculture and rural communities across the country. 
Further, the pilot investment programs are intended to provide 
Farm Credit System institutions greater flexibility to partner 
with government agencies and other rural lenders in fulfilling 
their mission objectives. Through these programs the agency is 
looking to gain a better understanding of the diverse financing 
needs of agriculture in rural communities, and how Farm Credit 
System institution investments can help increase the 
availability and efficiency of funds to these markets.
    While we believe these programs are important for 
agriculture and for rural America, I do want to make it clear 
that FCA is very aware that safety and soundness must come 
first. With each of these pilot programs we place appropriate 
conditions on them to limit risk exposures and we can revise 
our approval any time safety and soundness comes into question. 
Mr. Chairman, first and foremost, I want to reiterate that the 
Farm Credit Administration is a safety and soundness regulator 
of the Farm Credit System. Most of our time and certainly the 
majority of our resources are dedicated to examination. Similar 
to the office of the Comptroller of the currency and other 
banking regulators, we do have the regulatory enforcement and 
supervisory tools that we need to carry out our 
responsibilities.
    In fact, because of the experience of the '80s, we do have 
the additional powers that some regulatory agencies lack. We 
also have responsibility to monitor and address how well the 
system is carrying out its mission as established by Congress. 
Overall, we believe that the system does do a very good job of 
using the authorities provided under the Farm Credit Act to 
meet the needs of farmers and ranchers and other authorized 
borrowers across the country. For example, with new emphasis on 
renewable fuels, specifically ethanol, various system 
institutions have responded by providing financing for this 
emerging market. Just a few weeks ago in this subcommittee you 
heard from the system regarding its commitment to funding 
renewable fuel projects.
    Now as the regulator FCA is supportive of these important 
projects while continuing to ensure the system's safety and 
soundness. There are though, two areas where we think the 
subcommittee should consider changes in law to clarify the 
ability of system institutions to meet the needs of 
agricultural producers in rural communities. These suggested 
changes are clarifications of the statute and are explained 
more fully in my written statement and we would be pleased to 
have further discussions on them with you and your staff. In 
addition, the Farm Credit System Insurance Corporation will 
also be suggesting one technical change to the Farm Credit Act, 
and has outlined that in a separate letter to the subcommittee.
    In closing, I would report to you that the quality of loan 
assets, risk bearing capacity, stable earnings, and capital 
levels collectively reflect a healthy Farm Credit System. 
Additionally, capital levels continue to be strong especially 
when compared with the system's risk profile. As we continue to 
see major changes in the lending landscape including higher 
energy and input costs the FCA is committed to maintaining our 
excellence in examination and being the strong arm's length 
regulator that Congress intended. We will also continue to 
craft thoughtful and sound regulations that will ultimately 
benefit the all important end users whom we must always keep in 
the forefront of our mind, farmers and ranchers of rural 
America. Mr. Chairman, thank you for allowing me to testify 
today. This concludes my statement, and I would be happy to 
answer any questions that you may have.
    [The statement of Ms. Pellett appears at the conclusion of 
the hearing.]
    Mr. Holden. I thank the witnesses for their testimony. The 
Chair will remind members that they will be recognized for 
questions in order of seniority if they were at the beginning 
of the hearing, and after that based on the time of their 
arrival with the two exceptions of the Chairman and the Ranking 
Member of the Full Committee. Mr. Keppy, what did you say the 
default rate was for your agency on the loans?
    Mr. Keppy. 8.1.
    Mr. Holden. 8.1. Any idea how that compares to other 
government agencies such as SBA or rural development USDA 
business and industry guaranteed loans?
    Ms. Cooksie. I think we compare very well. I think we are 
lower than some of them and higher than some. I think we need 
to keep in mind the farmer that we deal with is a limited 
resource borrower that some of the other people that we would 
compare ourselves with don't deal with as farmers. So I think 
for the farmer, the limited resource farmer that we deal with, 
the default rate and the loss rate is pretty good.
    Mr. Holden. Also, Mr. Keppy, we hear an awful lot about 
shortages in your agency and other government agencies. I am 
just curious, do you have the resources and the staff to serve 
the needs of farmers?
    Mr. Keppy. I feel very good about the staff. I just came 
from a farm loan chief's meeting and we have----
    Mr. Holden. Excuse me, Mr. Keppy. Your mic is either not on 
or you need to move a little closer, sir.
    Mr. Keppy. I just came from a farm loan chief meeting 
yesterday, and we have a staff that is very dedicated and 
working with our web-based business plan to be very proactive 
working with borrowers and trying to catch problems and catch 
existing situations before it gets out of hand. As far as 
funding, we are making do with the funding that has been 
allocated to our programs but with the changing agriculture and 
with the enthusiasm around ethanol and other things there is 
going to be a much higher input cost and more money is going to 
be needed. The farm bill addresses some of them issues but 
there is always a need, and I think that very easily and 
effectively the borrowers that Carolyn works with could see 
some benefit from increased funding.
    Mr. Holden. Any idea of the number of applicants you have 
to decline services to, percentage?
    Ms. Cooksie. Are you talking about the ones we decline 
because they just don't qualify or because we don't have money?
    Mr. Holden. Both.
    Ms. Cooksie. We have probably a 32 percent rejection rate 
because----
    Mr. Holden. 32?
    Ms. Cooksie. Yes, because they don't qualify. We have two 
categories basically that we carry over every year applications 
from year to year. That is usually the direct operating which 
is the farmer in the field, and the direct farm ownership, 
which is the real estate loans. And we also carry over some 
applications from year to year that are unfunded from one year 
to the next year, and the guaranteed OL interest assistance, 
the operating loan interest assistance, which is the program we 
buy down the interest rate. So we do have some carry over from 
year to year because we don't have funding in those areas.
    Mr. Holden. Thank you. Ms. Pellett, and we had this 
conversation when we met a few weeks ago, there are people who 
say that the Farm Credit System goes beyond its authority 
making loans to commercial activities at a hospital that we 
talked about as well, how is it that they are able to make that 
type of loan and where does the authority come from?
    Ms. Pellett. Mr. Chairman, the authority to do these types 
of things comes from the investment authority given in the Farm 
Credit Act. We did have this conversation, and I in no way feel 
that the system is going beyond their mission. The investment 
authority given to the Farm Credit System by the Farm Credit 
Act is again very broad powers, and I am delighted to be able 
to talk about some of this. As I mentioned in my testimony, a 
flow of funds to rural communities is imperative to keeping 
agriculture healthy and to getting new entrants into farming. 
If my sons or my daughters are going to come back to farming, 
they have got to have in their local communities the amenities 
that their college friends have in the urban areas.
    The investments in rural America project that we gave 
guidelines for in January of 2005 outlines some pilot programs 
that the system has taken advantage of, and the investment 
authority that they used to give financing to purchase bonds 
for this hospital in a rural area of Minnesota is a prime 
example. But it is merely a move of getting a flow of funds 
into these rural communities that is so necessary for 
agriculture and to get these entrants, new entrants, into 
agriculture and farming.
    Mr. Holden. Thank you. I see my time has expired. I might 
have a few questions if we have a second round. The ranking 
member, Mr. Lucas.
    Mr. Lucas. Thank you, Mr. Chairman. I think it is worth 
noting, Chairman Pellett, as we sit there and discuss this 
today, that 20 years ago your institution, and for that matter 
all financial institutions that serve rural America was coming 
out of a very tough five year stretch, a stretch that put a 
great strain on everyone that changed the landscape of rural 
America and most surely the financial institutions that serve 
it. Now looking at not only Mr. Keppy's statistics about how 
current his customers are, so to speak, but looking at the 
profit numbers in your testimony it looks to me like it is fair 
to say that rural America right now under the present farm bill 
under the present set of circumstances whether set aside in a 
few areas seems to be generally prosperous. Is it a fair 
statement to say that the people you are administrating are 
making record profits at the present time?
    Ms. Pellett. And they are because agriculture is so very 
profitable today. We learned some very valuable, valuable 
lessons during that time 20 years ago. Farmers learned lessons. 
The Farm Credit System learned lessons. Congress did, and the 
Farm Credit Administration learned some valuable lessons. As a 
result of these times, Congress gave the Farm Credit 
Administration the powers that it needed to regulate and to 
produce a safe and sound Farm Credit System and this Farm 
Credit System is very safe and sound today.
    Mr. Lucas. Which leads me to my next question. Do you 
believe you have the specific authorities because agriculture 
depending on world weather conditions and world market 
conditions can be very cyclical just like the cow-calf business 
is and has been for 200 years. Do you believe you have, as we 
work our way into this new farm bill, the necessary authorities 
to provide the responsibilities you have?
    Ms. Pellett. We as an agency do have the necessary 
authorities that we need to regulate and ensure that the Farm 
Credit System remains safe and sound. Now as far as the Farm 
Credit Act, the Farm Credit Act has not had a major overhaul 
for some 35 years. As you well know, Congressman, the scope, 
the landscape of agriculture has changed dramatically, and so 
maybe it is time to take an explorative, thoughtful look at the 
Farm Credit Act to ensure that the Farm Credit System does meet 
the needs of agriculture as it looks today.
    Mr. Lucas. Mr. Keppy, I am fixing to go out and do my 20 
town meeting road trip over the next two weeks, not quite the 
accomplishment of Mr. Moran but an accomplishment nonetheless. 
When you talk about expanding the ownership or the loan limits 
and those kind of things, I expect I will get the response back 
from some of my constituents does that risk meaning that we 
will have fewer resources for more producers if we allow 
ourselves to invest more through your agency than particular 
producers. How do I respond to that?
    Mr. Keppy. I think that that is going to be the way that it 
may happen but I guess we are looking at the fact that because 
of the change in agriculture the loan limits do have to rise 
and that is with the limited resources that is probably one of 
the dilemmas that we will have to face. Carolyn, would you like 
to add to that?
    Ms. Cooksie. Well, I think that is right. Loan limits 
haven't changed the Con Act, which is where this is housed. It 
is 1978. We all know that farming has changed tremendously, 
prices have changed tremendously, so I think it is true that if 
the appropriation does not go up we are going to be making 
larger loans to fewer farmers, but I think we have to balance 
that by the need because there are many farmers out there now 
that we can't reach because of the loan limit so we had to do a 
balancing act. And I think the fact that the Secretary's 
proposal is saying 500,000 and any combination under that for 
operating and farm ownership is probably the best place we can 
be at this point.
    Mr. Keppy. Because every borrower's needs are different. 
Some may want to put it in farm ownership. Others need a higher 
operating line so they can use that 500,000; however in which 
one of the programs they can benefit the most out of so I think 
that is very positive to have that flexibility.
    Mr. Lucas. Thank you, Mr. Chairman.
    Mr. Holden. Thank the ranking member. Mr. Walz.
    Mr. Walz. Thank you, Mr. Chairman, and thank you all for 
taking the time to come today. I come from that southern 
Minnesota district where that hospital is being built in St. 
James and toured that facility, and I can tell you that 
critical access hospital is absolutely part of the rural 
landscape, and understanding farm credit from a perspective of 
all the infrastructure that goes into rural development from 
the schools to the highways to the hospitals is critical so 
this is a very timely and important topic for this 
subcommittee, and it is one that I hear an awful lot about. So 
I had just a couple of questions on this. Mr. Keppy, you 
mentioned something I found pretty interesting. You said your 
loan rate to minority or some socially disadvantaged may be--
possible borrowers is fairly high I heard you say and that you 
are doing pretty well with that. I guess my first question is 
how are you making yourselves accessible to that population? 
How are you getting out and marketing that? How are these 
people getting access to this credit to allow them to get on 
the land?
    Mr. Keppy. Well, we clearly are concentrating on beginning 
farmers at SDA and we have an outreach program and an education 
program to try to enhance their ability to know about the 
programs and to help them proceed and be successful borrowers 
and move them up the ladder, if you will, to ultimately being 
able to get commercial credit from some other segment.
    Mr. Walz. The next thing I would say is that the Ranking 
Member I thought had a very insightful question, and I get the 
same question also as if we are concentrating some of these 
loans into small approvals. How are we going to expand it or 
what is going to be the nature of this with the limits that are 
on there. It is the one that comes up often. And I also get a 
lot of talk from bankers. They say they have got the access and 
they have got plenty of money and they want to get it out to 
them too. My question would be, and maybe to any of you on 
this, your response to some of those criticisms that there is 
plenty of credit out there, there is plenty of other resources, 
and that your coming in is an unfair advantage to try and give 
that. How do you respond to that because from my perspective 
is, what I want is, is I want the market to provide the most 
access to credit and capital possible for people out there, 
whatever that--if that mechanism is more lenders, great, if it 
is more on the side of the bankers. Whatever it is, I want to 
try and get a grasp of it. How would you explain that from your 
perspective?
    Mr. Keppy. The Chairman laid out our guidelines very well. 
We are the lender of last resort. If a producer comes in and 
can get a loan at some commercial facility that is where he or 
she should get the loan. If they are denied and are not able to 
do it then FSA steps to the plate and provides the loan that 
they need so that they can progress, and it is a goal of all of 
our people in the field is to get the people moved up, get the 
producers moved up to where they can be a commercial loan, 
whether it be a commercial bank or Farm Credit System.
    Mr. Walz. Did I hear that right, Ms. Cooksie? You said 32 
percent are turned away also?
    Ms. Cooksie. The rejection rate, the yearly rejection rate 
of applications that are either withdrawn or rejected for some 
reason.
    Mr. Walz. Where do those people go?
    Ms. Cooksie. Good question because we are the lender of 
last resort, and usually nine times out of ten it is based on 
their cash flow or their credit.
    Mr. Walz. And the last question before I finish up and 
yield back my time, Mr. Chairman, I am not sure if you can 
quite answer this. Could you sum up where you think the current 
Administration is at on the ability to expand Farm Credit's 
ability to lend? Where would you think our current 
Administration is at on that?
    Mr. Keppy. The Administration is very proactive in 
beginning farmers and SDA. I think everybody in this room 
realizes the age of farmers today is my age or older, and we 
are not going to be in it that much longer and we need our sons 
and daughters and people to get involved, and so it is an 
immediate need that we address that, and I think in the 
proposal that the Administration laid in the center of the 
table for discussion provides that.
    Mr. Walz. I yield back my time. Thank you, Mr. Chairman.
    Mr. Holden. Thank you. The Chair recognizes the Ranking 
Member of the Full Committee, Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman. Thank you for 
holding this hearing. Ms. Pellett, Mr. Keppy, everyone, 
welcome. We are very pleased to be talking about this issue. I 
know last year a little later in the year you and the other 
members of the Administration board and a number of others, in 
fact, some members of this subcommittee, were in Stanton, 
Virginia, when we resigned the original farm credit legislation 
that was adopted during Woodrow Wilson's administration, he 
being a native of Stanton, Virginia. And I was pleased to hear 
you say that after 35 years it is time for the Farm Credit Act 
to be given a serious review. I agree with that. I know that 
the lender owned institutions have their proposal, the Horizons 
proposal, and we will certainly give very careful consideration 
to that to make sure that the Farm Credit System is modern and 
up to date and in touch with modern agriculture.
    I would like to ask you about another issue, however, this 
morning, and that is I would like to hear more about the recent 
processing and marketing proposed rule, and can you tell the 
committee more about how the need for this rule came to be and 
explain how this fits in with this structure of the law?
    Ms. Pellett. Thank you, and I would be pleased to. This is 
a proposed marketing and processing regulation. It is a 
proposed regulation. The comment period has ended and our staff 
is now going through the many comment letters that have come in 
regard to this proposed regulation. It is an effort, it is a 
revision of a previous regulation, and it is an effort to 
respond to farmers and ranchers who are trying to bridge that 
gap between them as producers and the end user out here, the 
consumer. And there is a revision of a previous regulation as 
far as some of the structure that is involved here but just 
like all of agriculture has changed so has this structure of 
some of these endeavors by producers to get closer to that end 
consumer, and it is value added, a means of financing value 
added businesses which is given to the Farm Credit System by 
the statute that authority. Mr. Rawls, if you have anything 
that you would like to add to that.
    Mr. Rawls. I think the only point since the question was 
raised about legal authority, this does come from Section 111 
of the Act, which provides authority for system institutions to 
make loans to farmers basically for processing and marketing 
operations that are directly related to their operations. And 
what the agency is exploring in its rulemaking is that concept 
of directly related and so as the Chairman said we 
traditionally had a rule that said 50 percent ownership was the 
test for financing, processing, and marketing operations. What 
we are doing through this proposal is looking at other ways 
maybe to think about directly related and that would be farmers 
control the board of an operation, maybe farmers control 
management or otherwise have a contractual relationship such 
that they are in charge, and we think that that might fairly 
meet that test.
    And there are two other elements to this. We said, well, 
maybe if farmers own 25 percent of the entity or control 25 
percent of owning stock and they need a 20 percent through put 
so you are getting a very significant measure of farmer 
involvement. And then the last test is one where we are trying 
to capture what is happening where we see farmers creating 
different sorts of entities, for example, for their children 
also involved in those operations, and it would be an 
integration test.
    Mr. Goodlatte. Thank you, Mr. Rawls. I want to get to one 
question to Mr. Keppy as well. What is the profile of the 
traditional borrower of the loan guarantee program, and how can 
we focus on getting these borrowers on track to qualify for 
available commercial credit?
    Mr. Keppy. The traditional borrower is one as I just said 
earlier that has been denied the opportunity to get money from 
either commercial or Farm Credit. They are borrowers that we 
work with with our field staff to try to improve their 
efficiencies and their capabilities, their beginning and SDA 
farmers, and we are trying to move them up the ladder so that 
they can enter the commercial and Farm Credit. The profile is 
that there are small family farms, husband and wives family 
working together trying to make ends meet. There are a lot of 
challenges facing agriculture. There is a lot of opportunity 
and it is FSA's goal to try to help the producers move on their 
ability to borrow the money.
    Mr. Goodlatte. Thank you. Thank you, Mr. Chairman. I do 
have an opening statement I would like to submit for the 
record.
    Mr. Holden. The Chair thanks the ranking members and 
recognizes the gentle woman from South Dakota, Ms. Herseth.
    [The information appears at the conclusion of the hearing.]
    Ms. Herseth. Thank you, Chairman Holden, and thank you all 
for being here today. I would like to start, Mr. Keppy, with 
this focus on young and beginning farmers, and you describe in 
your testimony the Administration's proposal as it relates to 
opportunities for new farmers for land purchases by reducing 
the interest rates and reducing the minimum producer 
contribution from 10 percent of the property purchase price to 
five percent, and this is all a good step in the right 
direction, but could you describe again or further what the 
Administration is proposing, if anything, to assist younger 
producers with credit on the operating side?
    Mr. Keppy. Well, as we talked about already the limits are 
going to go up to 500,000 and give the operator the choice of 
using the money for operating loans if that is what they need 
or to use the money for beginning--for the farm loan ownership 
side of the equation.
    Ms. Herseth. And do you have any concerns that--if that is 
the primary focus of helping them on the operating side, do you 
have concerns that what young farmers are paying in cash rents 
will simply be subsumed by the increase in the borrowing 
authority or the limits, excuse me?
    Mr. Keppy. The agency is very concerned about many facets 
of the changing agriculture and the FSA changes that we are 
seeing. We are going to try to stay ahead of them. It is a goal 
that we can help--our goal is to make sure that we are helping 
them producers get into mainstream lending procedure and 
ultimately graduate from FSA programs.
    Ms. Herseth. Also, as a follow-up to Mr. Walz's question 
with regard to how FSA is going to make itself available to 
minority or socially disadvantaged farmers, I do want to raise 
with you a concern on the record today about the proposed FSA 
office closings. In the State of South Dakota most of the 
offices that are being proposed for closure are actually in 
counties where, well, it is Indian country, these counties, and 
if we are going to be helping Native American farmers and 
ranchers, many of whom are younger, I do want to raise with you 
the concern I have about these proposals and the accessibility 
of these individuals to access FSA programs.
    And so can you perhaps separate from the proposal of the 
office closings, have you had any specific discussions within 
the agency about outreach and making programs more accessible 
to Native American farmers and ranchers?
    Mr. Keppy. It is the goal of the field staff that is 
working for FSA, that is absolutely their goal is to make sure 
that we make accessible all the programs that we have to all of 
the people that are out there and SDA is women and minorities 
and it is a goal that we make sure the programs go to them.
    Ms. Herseth. And I appreciate that goal but have there been 
any specific recommendations that have been submitted to you or 
that you have folks you are working with that have generated 
specifically in working with tribal members whether it is 
disaster assistance, programs that are offered, specific 
programs authorized for tribal members within the farm bill?
    Mr. Keppy. I am not prepared at this moment but the 
Administration has been talking. I know there has been dialogue 
to that effect. Carolyn, have you got anything specific?
    Ms. Cooksie. No, but let me just say that as part of the 
outreach effort for all the states for socially disadvantaged 
beginning farmers we gave all our states and our loan officers 
goals for SDA and beginning farmers that they have to reach, so 
we attached those to their annual performance plans. So I feel 
confident in saying that when a state director in your state 
put his plan together he would have had to have addressed the 
issue of how all of those under served areas are going to be 
served in the plan. We could do some follow-up for you on that. 
I think that would probably be better.
    Ms. Herseth. I would appreciate that very much. Thank you. 
And my time is also up, and I may have more questions if there 
is another round. But, Ms. Pellett, thank you for being here, 
and I don't know if this is clarification from Mr. Walz's 
questions but if I have a second round I will come back to you, 
but I did want to ask one further question. Administrator 
Keppy, does the Administration have a position on expanding the 
lending authority with the Farm Credit System in particular? I 
know that in the proposals of the Administration for young 
farmers and beginning farmers as you have described anything 
that we can do to expand the lending opportunities but 
specifically on expanding lending authority for the Farm Credit 
System. Does the Administration have a position?
    Mr. Keppy. I am not aware of a position but I will look 
into that further and respond to you later.
    Ms. Herseth. Thank you. Thank you, Mr. Chairman. I do hope 
there will be opportunity for a second round.
    Mr. Holden. There will be. The Chair thanks the gentle 
woman and recognizes the gentleman from Kansas, Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you very much. Let me 
although I thought I would avoid this topic of office closures 
since Ms. Herseth raised the topic I would add my concern about 
access being eliminated in regard to a series of county 
consolidation and office closures going on across the country 
but especially in my home state, and I would appreciate you 
conveying our concern, in fact, my opposition to the plan to 
the folks at FSA. Let me direct--I think most of my questions 
will come for the second panel but let me direct to Madam 
Chairman the issue of the scope of lending of Farm Credit. How 
has that scope, how has permissible lending changed over the 
history of the Farm Credit System? Is Farm Credit now able to 
make loans that they were not originally able to make? Have 
they become legislatively, congressionally or administratively 
permissible or have there been expansions of definitions that 
have allowed the scope of lending to be increased?
    Ms. Pellett. Congressman, the Farm Credit Administration 
carries out the will of Congress in its regulation of the Farm 
Credit System. And as I mentioned earlier and as my testimony 
mentioned several times agriculture has changed so drastically. 
The Farm Credit Administration in its regulations albeit that 
it follows the statute has tried to ensure that the Farm Credit 
System meets the needs of the farmers and ranchers of today. 
And so I would say that probably the regulations have become a 
little more flexible although following the statute to a tee.
    Mr. Moran. I would not expect you to suggest that you 
didn't follow the statute but I was curious as to what kind of 
loan could be made today that was impermissible under previous 
rules. What would be an example that would be understandable?
    Ms. Pellett. Let me think for a minute, and I would call 
upon my general counsel also.
    Mr. Rawls. I think the short answer is a yes. Historically 
the act has been augmented to provide broader authorities.
    Mr. Moran. The act has been as in Congress' act?
    Mr. Rawls. Yes. Now that has not occurred to a great extent 
in recent years. As the Chairman mentioned the last major 
rewrite was 1971, but there have been amendments. We have ended 
up with an act that is a little creaky because of various 
amendments and the changing structure of the system that came 
out of the '80s but essentially there is fairly broad authority 
there to lend to agriculture, and then you look at one which 
deals with real estate loans, Title Two, production or shorter 
term credit, Title Three is broad loans to cooperatives and 
infrastructure, telecommunications and wastewater and so on, 
broad participation authority to work with commercial banks, to 
actually get into the larger agri business type loans with the 
commercial banks through participation or similar entity loans. 
So there is a lot there to work with but over time those have 
been--the act has been augmented.
    Mr. Moran. While Ms. Pellett thinks of examples of a loan 
that can be made today that could not have been made in the 
past. Let me take my question in a slightly different 
direction. What is the underlying legislative history or 
purpose of the Farm Credit Act in regard to the suggestion that 
Farm Credit is a lender of last resort or is to make loans to 
those who are not otherwise commercially creditworthy? Is that 
part of the history, is that part of the law, and is that part 
of the atmosphere at Farm Credit?
    Mr. Rawls. No, that is not part of the history. The Farm 
Credit System was established as you know as a cooperative 
system of farmers who got together and wanted charters to 
establish their own lending institutions. And the lender of 
last resort, as I think was discussed earlier, is an aspect of 
the USDA program but has never been an element of the Farm 
Credit System. Farm Credit System is by and large a GSE but it 
essentially operates as a private lending institution.
    Mr. Moran. And, therefore, the purpose of Farm Credit is to 
fill what nitch or gap that was not being met by other lenders?
    Mr. Rawls. Reading back in the history there was a gap 
basically with farmers getting credit, access to credit, got 
certainly all types of loans at the time the system first came 
into being.
    Ms. Pellett. Congressman, and the Farm Credit System is 
charged by Congress to be there during good times and bad, and 
that is where the Farm Credit System has been throughout time. 
And now when it is in this very--agriculture is in this very 
healthy state there are lots of lenders out there but as 
Congressman Lucas mentioned should this become cyclical as we 
know it does the Farm Credit System will be there at all times. 
The Farm Credit System, I would also like to say, sets maybe 
the standard for competitive rates and by that not just their 
borrowers can take advantage of a competitive rate set by the 
Farm Credit System but all farmers benefit from this 
competitive rate.
    And so I would say, and I would hope you might agree, 
competition is always good, and that is where the Farm Credit 
System has been throughout time also.
    Mr. Moran. My time has expired. If there is a second round, 
I would like to follow up with a couple of thoughts and I would 
appreciate some examples of what has happened over time as far 
as lending ability. Thank you. Thank you, Mr. Chairman.
    Mr. Holden. The Chair thanks the gentleman and recognizes 
the gentleman from Colorado, Mr. Salazar.
    Mr. Salazar. Well, thank you, Mr. Chairman. Mr. Keppy, you 
talked a little bit about term limits. Could you expand on that 
a little bit, and then also do you track people after they 
leave your system and they go into the private sector as to 
what the success rate is? Could you talk about that a little 
bit?
    Mr. Keppy. Term limits were set up in the original statute 
to have FSA work with the borrower for a certain number of 
years and seven is the number that is in the book today, and it 
was the intent that they graduate to the next avenue of getting 
money either through Farm Credit or commercial banks. And, yes, 
it is a challenge. There are some individuals that after the 
seven year period are not ready to graduate, and it is a cold 
fact but those producers are going to have a challenge getting 
monies if they need to to expand their farming operation.
    Mr. Salazar. Do you kick them out of the system 
automatically at the seven year period or are there certain 
requirements that you can allow them to stay in longer?
    Mr. Keppy. I would like Carolyn to answer that.
    Ms. Cooksie. There are actually two limits. One of them is 
for the direct program as Mr. Keppy said, which is seven years. 
After they get--they have used a loan for seven years then they 
have to go to another creditor somewhere else. The other one is 
for the guarantee program, which is 15 years, which is a 
combination of direct and guaranteed for 15. The guaranteed is 
now till September 2007. Term limits for direct loans are not, 
and so we do have a lot of farmers that are going to hit that 
wall and we don't have any other avenue for them.
    Once they hit that year limit there is no other avenue in 
the COT Act to move them or help them after that. They have to 
find credit elsewhere or they have to go out of business so it 
is a concern.
    Mr. Salazar. So is this something that Congress should 
change or do you think that this is something that you can 
change within your system?
    Ms. Cooksie. Well, the problem with changing it within the 
system is that there are so many variables of farming that you 
are doing fine and you feel like next year you are going to be 
able to go to commercial credit, then you have a bad weather 
year and your cash flow goes down to nothing or energy prices 
go up as they have been, and so your cash flow becomes a 
problem. So for us to be able to deal with it in house is a 
problem for us because I don't know that we can actually do 
that in a realistic way.
    Mr. Salazar. Ms. Pellett, thank you very much for being 
here as well, and you mentioned a couple of things. First of 
all, you said that agriculture was doing great, and I can agree 
with you, I guess, somewhat, but as you know fuel prices have 
gone up by 113 percent and fertilizer prices have gone up by 
some 60, 70 percent, so the bottom line isn't as rosy as most 
Americans would like. You mentioned two things. You mentioned 
that you would like to see two changes in proposed law. Could 
you expand on that a little bit?
    Ms. Pellett. The changes that we are suggesting are merely 
clarification of the existing, several existing USDA programs. 
One is the rural business investment corporations originally 
designed to promote economic development and create wealth and 
job opportunities. The Farm Credit System was mentioned 
specifically in this, and as when the regs were written the 
non-leveraged corporations were not included, and we would just 
like some clarification there. We think it would be another way 
to bring a flow of funds into rural America, and the Farm 
Credit System would like to be a part of that.
    The second one is a technical change in loan to value 
requirements with guaranteed loans just to make it consistent 
with USDA requirements, loan to asset requirements, so those 
two minor changes but both of them clarifications.
    Mr. Salazar. I do appreciate that. Thank you, Mr. Chairman, 
I yield back.
    Mr. Holden. The Chair thanks the gentleman and recognizes 
the gentlewoman from Colorado, Ms. Musgrave.
    Ms. Musgrave. Thank you very much, Mr. Chairman. I would be 
remiss if I did not add my concerns about office closures, 
proposed office closures, along with Ms. Herseth and Mr. Moran. 
You know, service is in the title there, and we want service 
and we want accessibility. I really have a two part question. 
Consolidation is really an issue to me. Farm Credit Service is 
rapidly consolidating and now has more than 20 institutions 
that are larger than one billion. So there is an image there 
that it is farmer owned and farmer controlled. And I am really 
wondering about whether or not that will be the case as I 
assume this trend will continue, and I would like to know if 
that is your opinion whether or not this consolidation will 
continue.
    And really you have to look at the average agricultural 
bank there that is 84.5 million in assets to really see the 
comparison. In February of this year Farm Credit System issued 
a memorandum talking about non-mission activities that were 
taking place, and this kind of goes along with Mr. Moran's 
question also. And some of the non-mission activities could be 
commercial real estate development. The reference is also made 
to speculation, and I would really like to know why this 
warning was issued and what are the specific non-mission 
activities that are occurring. Could I have some explanation 
about that, please?
    Ms. Pellett. Non-mission activities are by far the 
exception rather than the rule, and when these are brought to 
our attention or our examiners find them during their process 
of examination our staff, our agency, takes prompt action to 
correct.
    Ms. Musgrave. Could you tell me what some of those would 
be, a non-mission activity?
    Ms. Pellett. A non-mission activity was one that you 
mentioned, and that is development. These might be agricultural 
areas that are going to be used for development. There is a 
fine line here as we define those areas, so development is not 
part of the mission of the Farm Credit System. Moderate 
housing, however, is.
    Ms. Musgrave. Could you address that consolidation issue, 
please?
    Ms. Pellett. Please help me and explain a little bit 
further, please. Excuse me.
    Ms. Musgrave. Well, the rapid consolidation of the Farm 
Credit System now contains more than 20 institutions that are 
larger than one billion, and then when you think about what we 
think of farmer owned and farmer controlled, do you think that 
this has any bearing on who is really going to be controlling?
    Ms. Pellett. No. The Farm Credit System is a very strong 
cooperative system and the borrowers are the owners. We have 
within the past year passed a governance regulation that firmly 
puts control of that association in the hands of the board of 
directors.
    Ms. Musgrave. Could you elaborate on that?
    Ms. Pellett. Yes. Yes. The board of directors have the firm 
control of that association. There are audit committees. There 
are internal auditing regulations. There are outside directors. 
Somebody on the board has to be a financial expert and these 
are just some things that are included in that governance 
regulation. But it has become somewhat of a model for other 
regulators. As far as consolidation in the Farm Credit System, 
it kind of follows the trend of agriculture. We in agriculture, 
I am a producer, we are trying to cut overhead. As Congressman 
Salazar said our input costs are going up. We are cutting 
overhead and doing our best to do that. The Farm Credit System 
has tried to do the same thing, and one of the means by which 
they have done that is through consolidation.
    Ms. Musgrave. So you do expect the consolidation to 
continue though. That is the trend that we are following now.
    Ms. Pellett. It was a very rapid trend before I came on 
this board but it has slowed down tremendously since I came on 
the board, and I have been here about four and a half years.
    Ms. Musgrave. Thank you very much. Thank you, Mr. Chairman.
    Mr. Holden. The Chair thanks the gentle woman and 
recognizes the gentle woman from Kansas, Ms. Boyda.
    Ms. Boyda. Thank you so much, Chairman Holden. Let me just 
start by saying thank you for being here today. This is 
obviously an important issue to my district, and let me just 
start by saying when I do get to speak with--spoke with some 
Farm Bureau people on Saturday morning in Allen County, Kansas, 
and my opening remarks was, okay, I heard, I get it. I can 
barely have a conversation without hearing about the FSA. And 
it is two things that I am hearing. One, you are closing them 
down, you are consolidating. It is just the wrong direction. It 
is very, very troublesome. But just the lack of technology 
means that now somebody has got to drive a couple of counties 
over to be told that things aren't operating, and the next day 
they are going to have to drive back because the computer 
systems only work in the afternoon sometimes, and then come 
back a third day when things aren't working well. So maybe 
other have been more polite, and I am just going to say there 
is outrage in my district about this closing and certainly ask 
what we can do in Congress' role and seeing if we can reverse 
that trend. So my guess is we will be having further 
conversation about that. Thank you very much.
    I am concerned with the Farm Credit that it is going beyond 
its original boundaries and am concerned that its original 
intent was to be there when other lending sources weren't 
available. Let me just ask a couple of questions and I will 
follow up maybe on what my colleague from Kansas also asked. 
The hospital that was built in Congressman and Representative 
Walz's district, would that have been built with these Farm 
Credit funds 30, 40 years ago?
    Ms. Pellett. Probably not because this was an investment by 
Farm Credit institutions. The Farm Credit System has not used 
the very broad authorities that the Farm Credit Act gives them 
in this investment area until quite recently.
    Ms. Boyda. Were there no other funds available? Was it 
checked? I mean was Farm Credit the last resort, were there 
other commercial or bonds or other mechanisms that were 
aggressively used to fund that hospital?
    Ms. Pellett. There have been although the project was 
stymied until the Farm Credit System came in and purchased 
those bonds to make the building of that hospital possible. 
USDA has come in with a guarantee at this point as well.
    Ms. Boyda. I understand. Let me just ask another question. 
You were speaking about something where you were also making 
loans from Value Added. What were the two words that you used 
to describe that? I will ask later. It doesn't matter. It was 
part of----
    Ms. Pellett. Processing and marketing.
    Ms. Boyda. Yes, thank you very much. PM, let us call it. I 
would just like to add there my concern and as you make your 
regulations having 50 percent ownership makes sense. Having a 
certain number of input from the local farmers that are there 
makes sense. Having people on boards, having titles, that is 
awfully easy to accomplish without actually having that very 
clear binding relationship, so I would certainly ask that you 
keep those relationships very strong. Keep the ties as you are 
offering any credit to people who are getting into the Value 
Added areas. I certainly would not support saying if somebody 
is just on a board or if they hold some titles in a corporation 
that that is reason for allowing that credit to go through. So 
I will yield back my time again. Thank you.
    Mr. Holden. The Chair thanks the gentle woman and 
recognizes the gentleman from Michigan, Mr. Walberg. The 
gentleman passes. Mr. Rogers.
    Mr. Rogers. Thank you, Mr. Chairman. I want to follow up on 
this questioning about the credit availability. I have heard 
conflicting things from Mr. Keppy and the counsel, Mr. Rawls, 
about this being a credit source of last resort. Mr. Keppy said 
it was his understanding that originally the intent was for 
Farm Credit availability to be a credit source of last resort 
for farmers. Was that not your statement?
    Mr. Keppy. Well, FSA's obligation is----
    Mr. Rogers. As far as Farm Credit is not meant to be a 
credit source of last resort.
    Mr. Keppy. Thats right.
    Mr. Rogers. So if the community bankers, which I think are 
going to be on the next panel, say that they can provide this 
credit to farmers you believe that the competition of your 
entity should be there to compete for that business, and, if 
so, why?
    Ms. Pellett. Yes, sir, I do believe that the competition 
should be there, and it is probably as relevant today as it was 
90 years ago when the Farm Credit System originated as 
Congressman Goodlatte commented on earlier. Competition is 
always good but the thing also is that the Farm Credit System 
is mandated by Congress to be there during good times and 
during bad times, and the commercial bankers don't have that 
mandate.
    Mr. Rogers. Let me ask, do you have any specific 
recommendations for this committee as to what, if any, changes 
you think should be made to the parameters within which Farm 
Credit can be made available?
    Ms. Pellett. I don't know as I am prepared to comment on 
that today. I do want to offer the assistance, technical 
assistance, of our staff as you go around evaluating and 
exploring the Farm Credit Act and the farm bill. I offer our 
staff for any assistance that they could offer to you.
    Mr. Rogers. How about you, Mr. Rawls?
    Mr. Rawls. I am with the Chairman.
    Mr. Rogers. I was hoping you would peel off. I was afraid 
you wouldn't but I was hoping you would peel off. Thank you, 
Mr. Chairman. That is all I have got.
    Mr. Holden. The gentleman from Indiana, Mr. Ellsworth.
    Mr. Ellsworth. Thank you, Mr. Chairman. Thank you all for 
coming. I guess we are all kind of beating the same horse here. 
I hate to call it a dead horse. I guess I am sitting here 
wondering why we are going--if this was a lender of last resort 
then why are we having two panels here today because I am just 
going to go out on a limb and say that the next panel coming 
here will say that they are being unfairly treated because of 
these increases, so it is the lender of last resort. Why will 
the ICBA come in in the next 15 or 20 minutes and tell us this 
is not a good idea?
    Ms. Cooksie. I would be very surprised if they did for farm 
loan programs because we are certainly not in competition with 
any bank or Farm Credit. They are our lending partners in our 
guarantee program. But since we are the lenders of last resort, 
that means that people come to us for loans when they can't get 
commercial loans from banks or Farm Credit. So I don't believe 
that farm loan programs are in any way in competition with the 
banks or Farm Credit at all.
    Mr. Ellsworth. Anybody else? The next question would be can 
you explain to me, I have been here 3 months now and why the--I 
think this is like a lot of federal programs. They start off 
with really good intentions and then through amendments and 
add-ons sometimes get muddled up. I find that more and more. 
The reasoning behind going from a 2,500 making on population 
community to 50,000 as opposed to just doing an occupation. It 
says farm right there in the Farm Credit Administration. It 
doesn't say town or city. Can you explain that to me for a 
newcomer why population matters? Why wouldn't it just be if you 
are a farmer apply for this and you qualify?
    Ms. Pellett. Congressman, this is part of the Act that 
probably does need some investigation and exploration. Our 
mandate is rural housing loans, and as we look at the 
landscape--I am from Iowa, I am from Atlantic Iowa, population 
around 7,000, 7,500. My town is purely rural, and yet the Farm 
Credit System cannot make loans, rural housing loans, in that 
town. And so just as agriculture has changed maybe the 2,500 
population limit some place in between is where it should 
settle but I am frustrated that the Farm Credit System cannot 
make loans in some of these county seat towns that are more 
than 2,500 population scattered across the United States.
    Mr. Ellsworth. Are you pretty confident that has never 
occurred, and I don't know, that a loan has been made in a 
community that say has 7,000, 10,000, 20,000, are you confident 
that that has never been done?
    Ms. Pellett. I cannot say for absolute certainly, no, sir, 
but according to the statute that is the limitation, the 2,500 
population.
    Mr. Ellsworth. Thank you very much. Mr. Chairman, I don't 
have anything further.
    Mr. Holden. The Chair thanks the gentleman and recognizes 
the gentleman from Missouri, Mr. Graves.
    Mr. Graves. Thank you, Mr. Chairman. I was actually very 
interested in what Mr. Moran what had to say, so I would like 
to yield my time to the gentleman from Kansas.
    Mr. Moran. I thank the gentleman for yielding although I 
want to head down a different track. There was something that 
my colleague from Kansas indicated, and I would appreciate, Mr. 
Keppy or Ms. Cooksie, to speak about this issue of computers. 
My impression is that we are on the verge of a collapse at USDA 
in regards to the ability for our farmers and ranchers to 
access certainly the FSA programs. I would be interested in 
knowing your perspective in regard to the lending aspect at 
FSA. Just within the last week a report from a farmer that he 
went to his local FSA office. They could not access the 
computer, over capacity.
    All the computers in the FSA office were closed down so 
that he could have a chance for the computer to work for him. I 
just think that Ms. Boyda raised a topic that this committee, 
the House Agriculture Committee, needs to pursue a lot of 
time--needs to spend a lot of time on but more importantly USDA 
from the Secretary down needs to grasp an issue that has been 
around USDA for a long time seemingly not getting any better 
and my guess is, my prediction is, something catastrophic is 
around the corner. Am I missing something? Would you like to 
reassure me that things are just fine?
    Mr. Keppy. I have been in here for less than a year, and 
one of my biggest frustrations coming in to here was the fact 
to get my hands around the fact that the IT problems that 
exist. I had thought that the U.S. government and the county 
and state offices surely had some of the best technology 
available, and it was frustrating for me to find out that that 
is not the case. And it is frustrating for farmers when they 
come in to their office and have to wait for maybe their 
particular time zone to get time on the computer. There are 
challenges in that area. Dialogue had been taking place since 
last fall between our department and the Administration and the 
Hill, and we are very appreciative of that.
    I think that there are some solutions, there are some 
corrective activities that are going to take place. You are 
right, it is close to maybe being a disaster but I think that 
we started soon enough on the problem that--and maybe I should 
rephrase, not soon enough but we are addressing the issue now. 
I hope that we can resolve it. Also, within FSA we are looking 
at ways to make a signature authority and other things that 
take place in the office a little bit less complex but still 
meet the obligations that FSA has.
    As far as farm loans they are affected somewhat by the 
computer challenges but farm loan was very proactive and came 
up with the web-based business plan that the field staff is 
using, and they are not experiencing the degree of problems 
that FSA has in the rest of the areas, and I would like Carolyn 
to further comment.
    Mr. Moran. Let me make sure I understand what you just 
said, and that is that it is the same computer you would 
access. It wouldn't matter when you went to your county office 
what computer you were on but it is a different program and 
that program is more effective, more likely to work than the 
other side of FSA?
    Ms. Cooksie. Absolutely. A few years ago, as you know, the 
farm loan portion of FSA came over from the Farmers Home 
Administration. When we came over in '95, we had an outdated 
computer system so we had to start thinking about in farm loan 
programs how we are going to modernize more quickly than 
probably the rest of the agency did so we bought servers that 
are just for our systems and FLP. As Mr. Keppy said a few years 
ago, a couple years ago we bought some web-based systems off 
the shelf that we could use that is not dependent on the 
servers that FSA has, so we have not had some of the concerns 
that the rest of the agency has had.
    Mr. Moran. In the loan application process is the 
information that FSA, the farm program side of FSA, is it 
required in the loan process that do you need the information 
from FSA in order to evaluate a loan application?
    Ms. Cooksie. I don't need the information from farm 
programs part of FSA to evaluate an application for farm loan 
programs.
    Mr. Moran. So their computer problems do not affect your 
computer?
    Ms. Cooksie. There are only two times where we really have 
a problem. We have two common data bases that we interact with. 
One of them is called the SKIMS data base which is where you 
put the borrower information in and the other is the EOFF which 
is where you get indication to get into the system. When that 
is down for FSA then the farm loan program experiences 
problems. When it is not, which is not been the biggest problem 
then the farm loan program is pretty much up and running.
    Mr. Moran. I thank the Chairman. I especially thank the 
gentleman from Missouri for yielding his time.
    Mr. Holden. Thank the gentleman, and recognize the gentle 
woman from New York, Ms. Gillibrand.
    Ms. Gillibrand. Thank you, Mr. Chairman. I just spent part 
of my weekend talking to farmers in Washington County in my 
upstate New York district, and the biggest concern they have as 
dairy farmers is just staying in business. And one woman 
described to me what it is like to be a farmer today and how 
the high cost of fuel, the high cost of feed, the low prices of 
milk have really put her farm in a very difficult position, and 
she said that the farmers don't want to answer their phones 
because it is creditors calling over and over again, and they 
have no ability to pay. And for the dairy industry it is even a 
bit more dire because they typically will have good times and 
bad times and when the milk prices are high they are able to 
pay everybody back and everything gets back on a level playing 
field.
    But what has happened is because these low milk prices, 
high gas prices, and high feed costs have continued for so long 
they don't think they will be able to rebound, so my biggest 
concern is that we will have no dairy farms in upstate New York 
or in the northeast if we don't change our current policies. So 
in the testimony I was particularly looking at Mr. Keppy's 
testimony. You talk about delinquency rates and foreclosures, 
and you give a very rosy picture, and you say that for 
delinquency rates they are down to 8.1 percent in '06 from 23.8 
percent in '95, and you say the decrease was facilitated by 
expanded authority since 1996 to offset federal payments, 
salaries, and income tax refunds to delinquent buyers. I would 
like to comment on what percentage of these do you think are 
dairy farms, and are they overwhelmingly being hit whereas 
other farms may be doing well. And, second, what are other 
recommendations you can make to us as legislators about how we 
can help our farmers receive the credit they need, have the 
kind of flexibility they need to be able to sustain their farms 
and stay in business.
    Mr. Keppy. The percentage question, Carolyn, I will give to 
you.
    Ms. Cooksie. I don't have data with me on the 8.1 percent, 
which one of those are dairy farmers. We do have that in our 
data base. That could be a follow-up question we could get back 
with you. I would be happy to do that. You know, any 
delinquency rate and any foreclosure rate no matter how high it 
was years ago and low it is now that still represents somebody 
out there in trouble. And one of the dilemmas that we have in 
the loan program is trying to figure out how we help them pass 
the authorities that we have. We only have certain authorities.
    Now I do have to say in farm loan programs we have a little 
bit different thing because we do have the authority that some 
other lenders don't have. When a borrower gets in trouble if 
they are going to get in financial trouble they probably want 
to get in financial trouble with us because we have something 
called the servicing actions that is mandated by law that we 
have to offer everybody who is 90 days delinquent to try to get 
them out of the situation there. We try to re-amortize. We try 
to restructure. We have a myriad of servicing actions that we 
try to work with them that a lot of other lenders just don't 
have. And so we try all of those but at the end of the day 
whether it is a dairy farmer or a tobacco farmer or whatever, 
there are some people who are just not going to make it, and we 
don't have any authority not to collect the loan back at some 
point.
    Ms. Gillibrand. Is that something you can look to us as 
Congress to begin to have a discussion about, is there anything 
that you need from the regulatory perspective that would allow 
for more flexibility for farmers, particularly those who are in 
industries that are in a difficult climate. And also we 
experienced some severe flooding in my district. We had 
extraordinary flooding in Delaware County in particular this 
past summer, and it really hurt our farms. And having another 
loan payment was not something they were able to take on, so I 
would really like you as our panelist and as leaders in our 
farming industry to begin to think creatively about what help 
we can give you to allow our farmers to sustain their business 
because I am very concerned that we are at a tipping point, and 
we need to make some serious decisions and make some effective 
and hopeful recommendations about how to move forward.
    Mr. Keppy. As you know, we are very proud of the progress 
that FSA has made on making loans, but we are in a new era of 
today and there are new challenges that none of us really have 
a handle on in many different areas. You refer to dairy and we 
have done a lot of work in the dairy side. I have learned more 
about dairy the last short year than I ever knew before, but 
there are some challenges ahead and we need to continue to have 
the dialogue, and I think together we can come up with programs 
that can be beneficial as we move into these new challenges.
    High prices are great but along with high prices come 
higher input so the bottom line is just uncertain as of today, 
but you bring up some good concerns.
    Ms. Gillibrand. I welcome your activism. Thank you. Thank 
you, Mr. Chairman.
    Mr. Holden. Thank the gentlewoman. I want to thank our 
witnesses for their testimony today and for their indulgence. 
Several members have indicated they want to follow up on 
questions so thank you for your indulgence on that. And I want 
to remind all members any questions can be submitted for the 
record and answered. Ms. Boyda, I believe had a question, Mr. 
Keppy, that we will submit to you for a response specifically 
to Kansas. I really don't have a question, but I would be 
remiss if I didn't follow up and say that the Pennsylvania 
farmers are not thrilled about closing of offices either. So I 
am not trying to pile on but we need to chat, Mr. Keppy, and I 
recognize----
    Mr. Keppy. The points that have been--excuse me for 
interrupting but the points that have been made on that 
particular issue are well taken. We are in a very open process. 
We are in dialogue and we need input that you have provided and 
what the state people are going to provide. It is an effort to 
try to make sure that we are as efficient as can be. It is 
definitely from bottom up and we just need to continue to have 
dialogue so that we make sure that we are being proactive to 
the American taxpayers and have an efficient a program as 
possible. But we need a lot more dialogue and I appreciate the 
comments that I heard today.
    Mr. Holden. We understand, and we will be talking to your 
people in all of our states but you are sitting in the seat so 
we just wanted to let you know. I recognize the ranking member, 
Mr. Lucas.
    Mr. Lucas. Thank you, Mr. Chairman. And really just to 
speak more for some observations about what we have heard and 
what we are going through in this process. I think it is worth 
noting that I think for three of us in this room this will be 
our third farm bill, so a lot of us, we are together adjusting 
to the new world and working our way through it. But, Mr. 
Keppy, I just offer you an observation and being an ag 
economist by training at Oklahoma State and having been a 
farmer in that '79, '87 period so when it was so horrible, so 
horrible for everybody out across the country, I just note that 
your agency is designed and targeted to help challenged 
farmers, to help beginning farmers, but you can't be, and I 
speak now to my colleagues as much as to you, but you can't be 
a permanent source of credit forever.
    At some point our friends with the special challenges or 
from a beginning mode have to move on to regular sources of 
credit. You cannot be their source of credit for 30 some years 
or 40 years or 50 years. That is why those limitations are in 
the bill. If it is not viable then the assets need to be 
provided to other challenged farmers or other beginning 
farmers. You just cannot be the permanent source of credit. It 
is not good for the system. And, Ms. Pellett, time and time 
again we have heard comments about maybe you are part of the 
system of last resort for credit. That is clearly not why Farm 
Credit was created. It was created in 1916 to provide more 
sources of credit to create more competition, to bring down the 
markets, to give farmers and ranchers a variety of 
opportunities to finance their operations, and it has been 
successful.
    And the competition that your entity has created with the 
commercial banking industry has driven them to more profitable, 
more aggressive--I say profitable, more advantageous products 
for consumers out there, and this is good but we all need to 
remember that when more credit is available chasing a fixed 
amount of assets, be it land or whatever the inputs are, we 
drive up prices so as we make credit more available and more 
effective it chases those assets and up goes the price of land 
whether it is the beginning farmer or the established farmer or 
anyone else.
    I have tried in the '96 Farm Bill and the 2002 Farm Bill to 
suggest to my colleagues that we look at the whole picture, the 
whole entire picture. Should we be allowing people to move a 
loss off their form F tax return over against the regular 
income? Does that encourage assets that are part-time farm, 
aren't farm related to wind up competing with people trying to 
be farmers on a day-to-day basis? We need to look at the whole 
picture. I just say this. When you look at where agriculture is 
in this country, when I was a freshman at Oklahoma State or a 
sophomore that fall of '79 the tractorcades were going on, and 
a number of our witnesses here remember the tractorcades up and 
down this town. It was a reflection of how tough the economy 
was back home that '79 to '87 period.
    We have had almost 20 amazing years under farm bills 
written by both Republicans and Democrats alike. Let us bear in 
mind the good place we begin from as we write this new farm 
bill. Let us help all of you help our constituents out there, 
but let us be realistic about this. We can't save everybody. We 
can't fix everybody's problem but we can create an environment 
where everyone can compete effectively and in a realistic 
fashion, then rural America will prosper. I apologize, Mr. 
Chairman, for the tirade but I have lived through the tough 
times. These aren't the tough times. We need to build off of 
the good times we are in right now. Thank you, sir.
    Mr. Holden. The Chair thanks the ranking member. Ms. 
Herseth.
    Ms. Herseth. Thank you, Mr. Chairman. I appreciate the 
comments of our ranking member given his experience, and I 
think he has highlighted and kind of brought us into focus 
particularly with some of what is being proposed for the Farm 
Credit System and an expansion of the lending authority. I do 
want to come back to that real quickly, but, first, Ms. 
Pellett, since the Rabobank experience where Rabobank tried to 
buy the Farm Credit Association that served Nebraska and South 
Dakota, Iowa, Wyoming. Have you had any other institutions 
wanting to leave the system?
    Ms. Pellett. No, ma'am, there have not been.
    Ms. Herseth. And were some of the governance provisions 
that were recently passed in part a response to the Rabobank 
experience?
    Ms. Pellett. Possibly, but they were underway far before 
that experience.
    Ms. Herseth. And finally you had mentioned a little bit 
earlier an area where you think deserves further investigation 
within the Horizons project that has been proposed as it 
relates to home mortgage lending for communities less than 
50,000. Given that another proposed change in the lending 
authority is to enable the Farm Credit Council to lend to 
entities that are primarily engaged in processing farm 
production or furnishing goods and services to farmers, I know 
that this has been explored a bit in other questions, as the 
Farm Credit regulator will such an increase in authorities 
cause you any concern whatsoever? Do you feel that you have 
fully investigated the impact given what we have seen with 
other government sponsored entities and the need for the 
regulator to be in a firm position to manage anticipated growth 
in the lending authorities that you have the tools available to 
you?
    Ms. Pellett. We have not, Congresswoman, investigated any 
of their proposals in great depth. In fact, today is the first 
time that they have really been made public. But our attempt at 
processing and marketing has been the proposed regulation that 
has been talked about, and as we go about reading the comments 
and coming to a final rule that is our attempt under the 
present statute of bringing processing and marketing 
regulations up to date. It is not an attempt, however, to 
expand the authorities of the Farm Credit System in this area 
but it merely brings it more in focus with the intentions of 
farmers and ranchers today to get closer to that consumer.
    Ms. Herseth. I appreciate your explanation. I think that 
that is an important point to make with regard to updating a 
system of regulations that keep track with how farming and 
ranching have evolved particularly with producers desire to get 
a percentage of that processing dollar. So thank you very much 
and thank you, Mr. Chairman.
    Mr. Holden. Thank you. Does anyone else have a follow-up 
question that they wish to ask? I recognize the Chairman of the 
Full Committee.
    Mr. Peterson. Thank you, Mr. Chairman, and I just want to 
thank you and the ranking member for your leadership and the 
other members in this hearing today and the other work that you 
are doing. And I am little tied up today so I apologize for the 
brief appearance, but we know that things are in able hands and 
we appreciate the work that you are doing.
    Mr. Holden. Thank the Chairman. The Chair wishes to thank 
our witnesses today. Thank you. The second panel will convene 
momentarily. We welcome the second panel to the table. Mr. 
Frank Pinto, President of the Pennsylvania Association of 
Community Bankers, on behalf of Independent Community Bankers 
of America and America's Community Bankers from Harrisburg, 
Pennsylvania. The Ranking Member would like to introduce the 
second panelist.
    Mr. Lucas. Yes, sir, Mr. Chairman. Thank you for that 
opportunity. I would like to welcome Jeff Greenlee to the 
hearing today. Jeff grew up on a peanut, cattle, and wheat farm 
in Oklahoma. Jeff is a fellow agricultural economics graduate 
from Oklahoma State University. He currently serves as 
President of the NBanc in Altus, Oklahoma where he has worked 
since 1994, and he has been in the banking industry for over 20 
years. Thank you, Mr. Chairman.
    Mr. Holden. We would also like to welcome Mr. Doug Stark, 
President of the Farm Credit Services of America from Omaha, 
Nebraska; Mr. Armin Apple, Director of Agribank, McCordsville, 
Indiana; Mr. John Zippert, Federation of Southern Cooperatives, 
and Chairman of Rural Coalition, Epes, Alabama; Ms. Karen 
Stetler, Director of LSP Farm Beginnings, on behalf of Land 
Stewardship Project, Lewiston, Minnesota. The Chair would like 
to ask our witnesses to keep their comments or summation to 
five minutes and submit their full testimony for the record. 
Mr. Pinto, you can begin if you are ready, sir.

 STATEMENT OF FRANK PINTO, PRESIDENT, PENNSYLVANIA ASSOCIATION 
   OF COMMUNITY BANKERS, ON BEHALF OF INDEPENDENT COMMUNITY 
BANKERS OF AMERICA AND AMERICA'S COMMUNITY BANKERS, HARRISBURG, 
                               PA

    Mr. Pinto. Good morning, Chairman Holden, Ranking Member 
Lucas, and members of the subcommittee. Thank you for the 
invitation to testify. I am Frank Pinto. I am the President of 
the Pennsylvania Association of Community Bankers. I am also 
representing the America's Community Bankers and the 
Independent Community Bankers of America. As Chairman Holden 
noted in his opening remarks, the commercial banking industry 
is the largest single sector provider of agricultural credit 
supplying nearly 40 percent, and we are really proud of this. 
Since this is a hearing on availability of credit in rural 
America, I think we took two approaches. The Independent 
Community Bankers of America did a survey that was just 
concluded this past February with over 1,000 bankers.
    In a survey of the Pennsylvania community bankers last 
week, we asked the question is there a lack of credit available 
in your market place. In both surveys 100 percent of the 
bankers responded no. Two-thirds had five or more competitors 
in the market place. Respondents overwhelmingly report that 
agri businesses have ample credit. So our two surveys then the 
findings are clear. In our eyes there is no lack of credit in 
rural America. There is no lack of competition. Numerous 
private sector lenders serve rural markets and agri businesses 
have ample credit available. Our surveys are reinforced if you 
look back in history at previous findings and the United States 
Treasury Department statements.
    A 1996 USDA study of almost 4,000 non-metro and metro 
manufacturing firms revealed that credit was equally available. 
In contrast to numerous findings the system has been pushing 
for well over a decade for expanded powers. Both the Clinton 
and Bush treasuries have warned against expanding Farm Credit 
powers because FSC is highly subsidized and could displace 
private sector competition. For example, in 2000 the Treasury 
stated FSC lenders are not just another competitor. The 
government is giving them significant competitive advantages. 
These proposals are not new. Back in 1995 the Farm Credit asked 
to lend to agri businesses, expand their mortgage finances, and 
remove borrower stock and borrower rights requirements. 
Congress did not act.
    Again this year the Farm Credit seeks to lend the non-
farmer owned and non-farmer controlled corporations engaged in 
virtually any activities that either directly or indirectly 
benefit farmers. The language appears to allow FSC to lend to 
any mainstream businesses. This benefits FSC, not rural 
America. The result would significantly weaken the vibrant 
network of private sector lenders essential to a competitive 
rural market. Community banking would be weakened, implicit 
burden on government taxpayers expanded, public benefits would 
not be targeted to any verifiably underserved group. The FSC 
also seeks authority to provide mortgage products in cities of 
50,000. There is no lack of mortgage credit.
    USDA indicates homeownership percentages are higher in non-
metro areas than in metro areas. FSC can offer mortgages in the 
suburbs of Washington, D.C., New York City, and Los Angeles. 
Farm Credit desires to offer home equity loans which can be 
used for any purposes including any non-farm purpose. System 
income for mortgage and real estate lending is tax exempt 
offering significant advantages over the private sector. 
Another proposal removing borrowed stock requirements appears 
to allow FSC to engage in broad commercial and consuming 
lending. In our eyes there is no need for new powers.
    FSC, as you heard earlier, has experienced unprecedented 
growth with loan volume growing over 16 percent, the highest 
growth rate since 1981. FSC achieved this growth under current 
authority. At this rate the FSC assets will multiply 10 times 
within a decade and a half. FSC's return on assets is over 1.5 
percent. By contrast rural banks are always less than one 
percent. New authority as advocated would not be used to make 
new loans. FSC would shift existing loans from community banks 
and on to the Farm Credit books. State and local governments 
could lose taxes making it harder to sustain adequate services 
and infrastructure. Adding less than 100 FSC lenders in the 
rural business markets does not enhance competition when there 
are already 6,000 community banks serving towns of 20,000 or 
less.
    Farm Credit is unique. It is the only GSE retail 
competitor, and that is important for you guys and gals to 
understand. Introducing a highly subsidized lender into the 
market undermines robust private sector competition leading to 
fewer credit choices. FSC's proposals will allow a dramatic 
shift away from farmers and into non-farm lending. In regard to 
the regulator this year's FSC plans to propose broad new scope 
and eligibility regulations allowing FSC to finance non-Farm 
Credit needs. We have numerous concerns here. We believe that 
the FCA should be required to testify annually to Congress 
providing assurances that no ineligible lending activities are 
current.
    In conclusion, rural America is awash in credit. The FCA is 
not supervising sufficiently to prevent ineligible lending. 
Farm Credit should not be allowed to shift their focus away 
from real farms and from agricultural credit needs. If FCS 
achieves their agenda there will be no incentive for the system 
to engage in loan participations with community banks. Congress 
should not pursue legislation that could displace countless 
community banks from the market. I ask that a letter of 
opposition to the system's Horizons proposal from over 50 state 
banking associations be included in the record, and of course 
we look forward to questions. Thank you, Mr. Chairman.
    [The statement of Mr. Pinto appears at the conclusion of 
the hearing.]
    Mr. Holden. All testimony and all letters will be entered 
into the record. Mr. Greenlee.

  STATEMENT OF JEFF GREENLEE, PRESIDENT, NBANC, ON BEHALF OF 
                  AMERICAN BANKERS ASSOCIATION

    Mr. Greenlee. Thank you, Mr. Chairman, and members of the 
committee. I am pleased to be here today representing the 
American Bankers Association to discuss the availability of 
credit in rural America. My name is Jeff Greenlee. I am 
President of NBC Bank, Altus, Oklahoma. We are a community bank 
chartered in Tulsa, Oklahoma with banks located in Tulsa, 
Altus, Enid, and Kingfisher. I am pleased to report to you that 
the banking industry operates nearly 22,000 banking offices in 
rural and small town America. The services our industry 
provides guarantees that rural Americans have the same access 
to financial products and services that urban Americans enjoy. 
In agricultural production and agricultural real estate finance 
the banking industry had $106.9 billion loaned to American 
farmers and ranchers at the end of 2006.
    Nearly 40 cents of every dollar borrowed by producers comes 
from the banking industry. I am pleased to report to you that 
the agriculture loan portfolio is performing very well. The 
choices producers have to finance their operations have never 
been greater. Congress deserves much of this credit for what we 
have achieved in financing rural America by providing a safety 
net that supports agriculture. Congress strengthens the ability 
to farmers and ranchers to obtain credit that they need. Ninety 
years ago the Congress created the Farm Credit System, a 
government backed retail lender. It enjoys considerable tax 
advantages and relies on taxpayers to loan the FCS the credit 
rating so it can borrow lendable funds in the government 
sponsored bond market.
    For over a year the Farm Credit System has publicized the 
Horizons Project. FCS has touted how it assembled all of the 
stakeholders in rural America to solicit opinions what the FCS 
should do next. I wish to point out that no representative from 
the Farm Credit System ever consulted with the American Bankers 
Association or to my knowledge any banker in the country. The 
Horizons Project is about expanding the system, not a fresh 
vision for rural America. It would set the FCS on a path that 
would take them further away from financing agriculture 
producers. Today the FCS is a large, fast growing institution 
with a concentration of credit to large borrowers.
    In fact, almost \1/4\ of all FCS loans are to borrowers who 
have borrowed more than $5 million. The recommendations of the 
Horizons report point to the fact that Farm Credit wishes to 
become a corporate lender to big business and to finance 
suburban housing and consumers who have little or no 
relationship to agricultural and rural America. Farm Credit 
System lenders have had the authority to finance farmer owned 
businesses that provide services directly related to producers 
on farm operating needs for decades. Over the years FCS lenders 
have gotten into more and more questionable types of business 
finance. Farm Credit wants to finance any ag related business 
and for the first time businesses that provide capital goods or 
equipment to farmers are those who would qualify under FCS 
regulations to be defined as farmers regardless of ownership 
requirement.
    CoBank, the last remaining bank for cooperatives, exists to 
lend the farmer owned and farmer controlled cooperatives. They 
now seek the authority to finance corporate entities regardless 
of the organizational structure of the entity being financed. 
If granted these new authorities, CoBank would be allowed to 
finance entities that compete directly with farmer owned 
cooperatives. Unlimited authority to finance agri business 
would be a radical change in the direction of Farm Credit and 
would be harmful to the farmer owned businesses and farmer 
owned cooperatives. Farm Credit wishes to expand their current 
authority to finance homes in towns of 2,500 or less to cities 
of up to 50,000 people. There is no justification for such 
action. Rural America is not in cities of 50,000. What public 
policy mission does this fulfill?
    FCS wants to render the ownership structure of the system 
irrelevant. Farm Credit was created as a farmer owned and 
farmer controlled cooperative. FCS lenders want Congress to 
remove the stock ownership requirement from statute and allow 
the board of directors of each FCS institution to determine how 
much stock each borrower is required to buy. Such action will 
result in FCS that is owned by favored class of borrower while 
others who borrow would be barred from voting or from receiving 
other benefits of ownership. We urge Congress to reject Farm 
Credit's expansion plan. The Farm Credit System was created to 
serve the credit needs of farmers and ranchers and farmer owned 
service businesses and farmed owned cooperatives.
    They should not be allowed to abandon their mission to 
serve these borrowers while retaining the tax, regulatory and 
other special benefits to serve a new base of non-farm 
borrowers. Mr. Chairman, I have included recommendations for 
improvements to the USDA Farm Service Agency guaranteed loan 
program in my statement. Currently, banks write more than 93 
percent of the loans in this program. I urge you to look at 
those recommendations. In summary, the American Bankers 
Association appreciates the opportunity to discuss the issues 
of credit availability in rural America. Thanks to the banking 
industry rural Americans enjoy a limited opportunity to finance 
farms, ranches, businesses and homes at competitive rates and 
prices.
    We reject the Farm Credit System's claim that something is 
missing in rural America. Our system works well because 
Congress has wisely chosen to restrict the role play by 
government backed lenders that compete directly with the 
private industry. I will be happy to answer any questions that 
you may have.
    [The statement of Mr. Greenlee appears at the conclusion of 
the hearing.]
    Mr. Holden. Thank you, Mr. Greenlee. Mr. Stark.
    Mr. Stark. Mr. Chairman, if it would be all right, I would 
like to offer the mike first to the farmers. At Farm Credit we 
let farmers speak first, and I would like our director to speak 
first if that is okay.
    Mr. Holden. Without objection. Mr. Apple.

          STATEMENT OF ARMIN APPLE, DIRECTOR, AGRIBANK

    Mr. Apple. Thank you, Mr. Chairman. I am here as a farmer 
from McCordsville, Indiana, and as borrower, stockholder, and 
Director of the Farm Credit System. I have been farming since 
my sophomore year in high school when I had borrowed equipment 
and 40 acres of rented land. Today I farm over 1,400 acres. I 
started borrowing from Farm Credit in 1972. My father borrowed 
from Farm Credit as do my daughter and son-in-law. I know what 
it means for Farm Credit to stand by you in good times and bad. 
This background is important because it is people like me that 
direct system institutions and it is people like me who will 
continue to do so in the future.
    We have excellent managers that run our institutions and 
make sure they comply with all regulations and disclosure 
requirements. It is the directors that keep these institutions 
focused on agriculture and rural America. This is the Farm 
Credit System which undertook the Horizons Project. System 
director and management together studied the dramatic changes 
occurring in agriculture and in the rural communities on which 
agriculture depends. We obtained broad input and then 
identified how current regulations and law limit Farm Credit's 
ability to meet customer needs. While many issues were 
identified only four legislative items met our internal 
criteria that they enhanced Farm Credit's ability to meet 
customer needs while maintaining our focus on agriculture and 
rural America. Mr. Stark will describe those in detail.
    I want to give you a sense of why change is necessary. In 
addition to being a farmer, I have been very active in my local 
community serving on several boards. I also spent 12 years as 
an elected county commissioner for Hancock County, Indiana, 
which made me a close observer of the change happening in my 
community. Our county is experiencing suburban sprawl. The 
population has grown and consolidation has occurred in 
agriculture, much of that due to farmers retiring. The bottom 
line is that there are fewer of us in rural crop production 
today to support the farm-related businesses we need to stay in 
business.
    With about 600 farm proprietors remaining in a county of 
58,000 residents the environment for farm-related businesses 
change. The typical small grain elevator disappears as does the 
local seed dealer and implement dealer. As this happens, the 
local banker can't justify having an agricultural loan officer 
on staff. Interest in servicing farm-related businesses also 
declines. There are other non-farm businesses lending 
opportunities available. When that happens farm-related 
businesses are left with few competitive credit options to turn 
to, and that speeds up their departure. When the farm-related 
infrastructure goes, the challenge for farmers to stay in 
agriculture becomes that much greater.
    Another trend occurs. Some local farmers start to adapt. A 
concentrated population brings the opportunity to adjust to 
higher value production. A field of feed corn might become a 
profitable field of sweet corn. A soybean field might shift to 
sod. Folks see ways to get more income out of high value land 
in order to resist the temptation of cashing out to 
development. To do this successfully though we need access to a 
whole new set of farm-related businesses different from what 
were there before. High value vegetable operations require a 
lot of labor that must be hired and managed. Pesticide 
application always has required care but greater regulation has 
increased the need for expertise especially in more populated 
areas.
    Even producing organic vegetables requires consultants on 
pest management and soil fertility. These new farm-related 
businesses as well as the old ones that still remain continue 
to be there to support farming operations they require access 
to competitive and reliable capital providers that know 
agriculture and are committed to serving farm-related 
businesses. In many cases, Farm Credit can't directly serve 
those businesses. The Farm Credit Act says we are to support 
farm-related businesses necessary for efficient farm operations 
but as those businesses have changed dramatically and their 
business structures have changed, the law has not. I have 
described just one small case study of one county in Indiana. 
We can provide you with many more examples that don't involve 
suburban sprawl like the changing ownership structure of 
renewable fuel plants or the changing ownership of a local 
processing facility owned by a retiring farmer that provides an 
essential market for local producers or even the very small 
town that has grown by 50 people in population that Farm Credit 
can no longer provide home mortgage financing.
    As the Farm Credit director, I take very seriously my 
responsibility for the stewardship of this system. We bring the 
benefit of access to national money markets, to agriculture and 
rural America, packaged in a cooperative organization that our 
farmers own. The changes we are suggesting won't alter our 
focus, our mission or our ownership, but only improve our 
ability to serve the changing needs of your agricultural and 
rural constituents. Thank you, and I will be happy to answer 
your questions.
    [The statement of Mr. Apple appears at the conclusion of 
the hearing.]
    Mr. Holden. Thank you, Mr. Apple. Mr. Stark.

  STATEMENT OF DOUG STARK, PRESIDENT, FARM CREDIT SERVICES OF 
                            AMERICA

    Mr. Stark. Thank you, Mr. Chairman, and members of the 
subcommittee. I appreciate the opportunity to appear before you 
today on behalf of the Farm Credit System. I am Doug Stark, 
President and CEO of Farm Credit Services of America, 
headquartered in Omaha, Nebraska. Farm Credit Services of 
America is one of the 100 cooperatively owned financial 
institutions that make up the Farm Credit System. We serve 
farmers, ranchers, and rural businesses in Nebraska, Iowa, 
South Dakota, and Wyoming. The Farm Credit System has 
identified a number of things that we can do to help 
agriculture producers in rural communities adapt to the new and 
evolving realities they face. We are here today to ask for the 
committee's support for these proposals.
    We are recommending two very modest and incremental changes 
to our basic lending authority that will provide more benefits 
to farmers and rural communities. We also recommend two 
technical changes to the law governing Farm Credit's 
cooperative stock. The first proposal would serve the needs of 
farming and fishing-related businesses. We ask Congress to 
recognize the modern business structures in agriculture by 
basing eligibility for Farm Credit financing on the activities 
undertaken by the company and not determined on the corporate 
structure under which the company operates.
    Under the proposal businesses are primarily engaged in 
processing, preparing for market, handling, purchasing, 
testing, grading, and marketing farm or aquatic products would 
be eligible for Farm Credit financing. In addition, the 
proposal would make eligible businesses that are primarily 
engaged in furnishing farm and aquatic business services, 
capital goods or equipment to farmers, ranchers or producers of 
aquatic products. These are the very businesses that farmers 
and aquatic harvesters depend upon to support their operations. 
They are one step away from the farm gate. Farm Credit already 
finances many of these businesses. However, outdated law 
prevents us from fully serving the needs of this important 
sector of the agricultural economy.
    We also believe that more rural residents should be able to 
obtain a competitively-priced Farm Credit mortgage loan. Since 
1971 Farm Credit's ability to provide home mortgage financing 
for rural home buyers has been strictly limited to rural areas 
with less than 2,500 in population. This 36-year-old 
restriction no longer makes sense. We propose to modify the 
term of rural to conform it to the definition Congress included 
in the 2002 Farm Bill, which is any area other than a city or 
town that has a population of greater than 50,000 inhabitants, 
and the urbanized area contiguous and adjacent to such city or 
town.
    This proposal has been subject to a great deal of 
mischaracterization. Our proposal, and our intent, has never 
included authorizing home mortgage lending in urbanized areas 
like Beverly Hills, California, Darien, Connecticut, or McLean, 
Virginia. In addition, this proposal to redefine rural has no 
impact on any other authority other than Farm Credit's home 
mortgage lending authority. We understand that opponents of 
this provision argue that it would permit Farm Credit to lend 
to anything in towns with less than 50,000 in population. That 
simply is not the case. We remain committed to our cooperative 
structure and farmer ownership and control. Nothing we propose 
has any impact on our cooperative structure nor does it impact 
farmer ownership or control of FCS institutions.
    Instead we propose to lower the barrier to entry for 
customers of the Farm Credit System associations by eliminating 
the minimum stock requirement from the statute. Borrowers would 
still have to own stock but the cost of purchasing that stock 
could be significantly lower. This insures that we maintain our 
customer owned cooperative structure. We also recommend that 
Congress give CoBank's customer owner elected board of 
directors the authority to determine which of its customers is 
allowed to hold voting stock in that organization. This would 
allow CoBank's non-cooperative rural utility customer base to 
vote for directors to the CoBank board.
    Mr. Chairman, these four proposals constitute our 
recommendations for updating the Farm Credit Act to meet the 
changing needs of rural customers. They are consistent with the 
system's traditional mission. The changes are quite modest and 
incremental. They will benefit agriculture and rural 
communities by offering greater access to a competitive, 
reliable, dedicated, and customer-owned source of credit. Thank 
you for holding this hearing today, and I look forward to the 
dialogue we will have here shortly.
    [The statement of Mr. Stark appears at the conclusion of 
the hearing.]
    Mr. Holden. Thank you, Mr. Stark. Mr. Zippert.

STATEMENT OF JOHN ZIPPERT, FEDERATION OF SOUTHERN COOPERATIVES, 
                 AND CHAIRMAN, RURAL COALITION

    Mr. Zippert. Good morning. I want to thank the committee 
for inviting me. I am John Zippert. I am the Director of 
Program Operations of the Federation of Southern Cooperatives 
at our rural training and research center in Epes, Alabama, 
which is Sumter County, Alabama. I also am the chairperson of 
the Rural Coalition, and as such beyond our work with African-
American farmers the Rural Coalition works with the Intertribal 
Agriculture Council, the National Latino Farmers and Ranchers 
Trade Association, the National Hmong American Farmers, and 
many other groups of people of color farmers, minority farmers, 
socially disadvantaged applicants. In the perspective of this 
hearing, I think I represent the 42 percent of the people Ms. 
Cooksie said were rejected and not considered more or less for 
loan applications.
    Personally, I have been involved in this effort for over 40 
years. I started as a teenager in the civil rights movement in 
Louisiana working with farmers in St. Landry Parish, Louisiana. 
In 1971, I moved with the federation to Sumter County where we 
have a 1,000 acre demonstration farming facility committed to 
our movement of cooperatives and credit unions among poor 
people in the south. I think I have a gray hair in my beard 
today for every black farmer I have worked with and tried to 
assist over the years, and of course this work has been against 
great obstacles and we really stand now at a position of 
crisis. We have only three percent of the black farmers that we 
had at the turn of the century in 1910 still in existence, and 
we have small groups of other farmers, native American farmers, 
Latino farmers, Asian-American farmers, and unless this farm 
bill does something to address these people the issue of the 
ownership of land in this country and the issue of involvement 
in minorities and agriculture will have a dim future. I think 
we have a last chance here in this farm bill.
    We have a 20-page statement we made to the committee, and 
five minutes is impossible to deal with all of this. For 
instance, one of the things you heard today was that Farm 
Service is concentrating on beginning farmers and socially 
disadvantaged, but they don't make a distinction. When you get 
down to the county level, that means different things in 
different places in America, and if you look on page four of 
our statement that for instance the beginning farmers program 
as good as it is that 92.5 percent of the recipients have been 
white males, and only four percent of the recipients have been 
women, and 3.9 percent of them have been white women. Now this 
information comes from the requirement we asked you to put in 
the last farm bill, Section 10-708 to give us information by 
race, by gender of all of the programs of USDA.
    So they produced 120,000 separate PBFs but they didn't 
integrate them. They didn't put them in the system that you 
could search with a computer so some of the information you 
need and we need that you asked for is not readily available to 
us to really evaluate these programs. I want to say that one of 
our main concerns is still foreclosures. We want you in the 
next farm bill to have an independent commission to look at 
every single foreclosure a Farm Service agency is about to 
carry out to make sure that people get all the benefits that 
they were supposed to receive. On pages 15 through 17 of our 
statement we have a detailed integrated program that would 
really help the constituents I represent in terms of outreach 
credit, risk management, collaborative marketing and all the 
rest.
    And obviously I ran out of time but we really want to come 
and talk to you about what a meaningful farm bill would be for 
our constituents. Thank you very much.
    [The statement of Mr. Zippert appears at the conclusion of 
the hearing.]
    Mr. Holden. Thank you, Mr. Zippert, and your entire 
testimony will be entered into the record, and we look forward 
to talking to you. Ms. Stettler.

STATEMENT OF KAREN STETTLER, DIRECTOR, LSP FARM BEGINNINGS, ON 
               BEHALF OF LAND STEWARDSHIP PROJECT

    Ms. Stettler. Good afternoon, Chairman Holden, and members 
of the subcommittee. My name is Karen Stettler. I am the 
Director of the Land Stewardship Project Farm Beginnings 
program, and I am happy to be here today to testify on the 
obstacles and the opportunities that are for beginning farmers 
and as it relates to credit. The Land Stewardship Project is a 
membership organization working primarily in rural committees 
in the Upper Midwest. My testimony reflects the realities and 
experiences of beginning, transitioning, and established 
farmers that we work with through the Land Stewardship Project 
Farm Beginnings training and education program. Sixty percent 
of the Farm Beginnings graduates are currently farming. In the 
last eight years, I have worked with hundreds of beginning 
farmers who have come from various backgrounds, current 
farmers, multi-generational families, those changing careers 
with little experience, all who are interested in a variety of 
agricultural enterprises from dairy to beef to hogs to 
community-supported agriculture.
    We also have an equity building livestock loan program. 
There is opportunity in agriculture today. It is important to 
know that there are people who desire and are committed to 
farming. For example, in our 10th year of offering the Farm 
Beginnings program, we have more participants than ever, and 
this is true of other organizations around the nation who are 
offering similar programs. There are other opportunities right 
now that make getting into farming an exciting proposition. One 
is the demand for organic. Local and regional markets are 
another. Growing crops for bio-fuels and farmer support and 
training that works that are making a difference are all 
helping beginning farmers get started.
    Despite the opportunities, obstacles remain. For America's 
next generation of farmers to take advantage of these 
opportunities we need to initiate good public policies that 
assist beginning farmers and ranchers in overcoming barriers to 
getting started and succeeding. From our experiences in the 
Farm Beginnings program where we work intimately with a segment 
of our farmers often in need of credit a couple of the common 
struggles we hear from people are lack of technical assistance 
in guiding applicants through the process and a need for 
education of FSA and other lenders about the broadening variety 
of farm enterprises. From the lender's side we hear that 
farmers are unprepared or lack the knowledge and tools needed 
to develop business plans. These obstacles can be overcome 
through community-based farmer training that helps beginning 
farmers develop the tools and know how to do sound business 
planning which will then assist the farmers in accessing 
affordable credit.
    By focusing on financial training and business planning, 
beginning farmers are coming to the lending institutions with 
carefully thought out plans and the numbers to support it. The 
beginning farmer and rancher development program authorized in 
the last farm bill would fund local programs that introduce 
beginning farmers to not only financial and business planning 
but also goal setting, whole farm planning, and on farm 
education, in addition to connecting with established farmers 
through mentorships. Our experience has been that offering 
quality training and then ongoing community support is the best 
combination for beginning farmers success. The new farm bill 
should fund the beginning farmer and rancher development 
program. In our view, this is the single most important 
beginning farmer and rancher request in the 2007 Farm Bill.
    Regarding the USDA credit programs, we believe that the 
existing loan structure can and has been successfully used in 
supporting beginning farmers. With some adjustments these 
programs can become more effective. The down payment loan 
program in the past has served beginning farmers well 
especially when there was higher interest rates in the '90s. To 
make this program more successful with today's realities of low 
interest rates an adjustment should be made to fix the interest 
rate provision to set it at four percent below the regular 
direct farm ownership interest rate or one percent, whichever 
is greater. The direct farm ownership and operation loans were 
last adjusted in the late '70s and '80s. We recommend 
increasing the loan limitations from $200,000 to $300,000 to 
reflect increased land values and overall higher farming costs. 
Along with loan limit adjustments, the authorization level for 
direct farm ownership and operating loans should be increased.
    Individual development accounts would be another policy 
area that would aid beginning farmers in asset building. In 
summary, there are good opportunities in farming today for 
beginning and transitioning farmers. There are also obstacles 
and it is therefore important to have good public policies that 
provide smart, cost-effective start-up support and incentives 
for America's next generation of family farmers. The 
opportunity is in the 2007 Farm Bill. We cannot afford to let 
these opportunities slip by. The time to act is now. Thank you 
very much.
    [The statement of Ms. Stettler appears at the conclusion of 
the hearing.]
    Mr. Holden. Thank you, Ms. Stettler. I thank all the 
witnesses for their testimony. A Member of the Subcommittee, 
who will remain anonymous, when they walked into the room said 
to the Ranking Member and I, whose idea was it to have this 
hearing anyway, and I think pretty much he was right on target. 
We don't have really have that many questions of where you 
stand on the issues, but we are really concerned with one 
thing, and that is that the credit needs are being met all 
across rural America and all across the agriculture community. 
So I would say to Mr. Stark and to Mr. Apple that again, and 
you pretty much covered it in your testimony as well as did Mr. 
Pinto and Mr. Greenlee, but first to Mr. Stark and Mr. Apple, 
if you can identify where you think there are gaps in credit, 
needs and concerns that are not being met by the commercial 
banks or not being met by any other lenders, and how you think 
the proposal by Farm Credit can address that.
    Mr. Stark. I will take a first stab at that. Thank you for 
the question. I don't think that even as we looked at this 
project it wasn't as much about the gaps. It was about the 
issues that we put on the table, you and some members of the 
committee, providing competitive alternatives for producers in 
rural America. What we did with the Horizons Project initially 
was studied the changes that have occurred in rural America and 
in agriculture, and really not only looked back but tried to 
look forward in terms of what it is going to take to meet the 
changing needs of this very dynamic industry.
    And so with that, we came to the table with what we thought 
were some very modest proposals that would still keep the Farm 
Credit System focused on agriculture as our primary and core 
business but in addition then allow the Farm Credit System to 
support those businesses where they are becoming very 
integrated with the agricultural community, and that is really 
the essence of where we are coming from.
    Mr. Holden. Mr. Apple, didn't you mention a situation in 
Indiana where the credit needs are not being met?
    Mr. Apple. Well, I think it is very much like Mr. Stark 
said. There is credit available, and there is always credit 
available no matter what the time is. It is just how much do 
you pay for it. And sometimes even in small communities some of 
the banks may not have the certain capacities to handle all of 
the particular credit for maybe one of these ag-related 
businesses so oftentimes the Farm Credit institutions and the 
local banks work in tandem with these businesses to provide 
these new businesses in these rural communities that can 
basically keep the jobs there, keep the young people in these 
communities. That is probably the goal that I would state 
there.
    Mr. Holden. Mr. Pinto and then Mr. Greenlee, are credit 
needs being met in rural America in the agriculture community?
    Mr. Pinto. I feel like the fellow on television, the survey 
says no. I mean we explored--let us take your district, 
Congressman Holden. We have 26 financial institutions in the 
district. We have explored them. Their comments, I want to 
submit for the record. Generally speaking, there is an 
overabundance of availability. When these guys are talking 
about competitive alternatives and they are talking about 
credit availability the Farm Credit System is a retail 
provider. They already have the built-in advantages over the 
private sector. When they go to the market to get additional 
monies from Wall Street, when they get the tax break and 
everything, and even when Chairman Pellett alluded to the fact 
that competition is good, guess what, we employ that too but we 
just want it to be fair competition.
    When you build in all these factors our reading of this is 
that we have not seen--of course someone can take an isolated 
pocket. When you take the 8,000 commercial banks and thousands 
and thousands of branches, and we have covered this nation 
quite well, I don't think you make national public policy based 
on isolated factors where there might be a lack of credit and 
if you do then you have to look at the balance and say where is 
the competition, and how can we make it a more level playing 
field.
    Mr. Holden. Mr. Greenlee, do you wish to add anything?
    Mr. Greenlee. I would pretty much agree with Mr. Pinto on 
his comments. There is an abundance of competition in rural 
America at least as we see it in rural Oklahoma and as I have 
seen across the country with the various members that I serve 
on the committee with. I think what has been mentioned here is 
an inference of competition into how it will affect it. I want 
to point out that it is not pure competition. It is an unlevel 
competition that we are looking at right now, and I would ask 
the committee to keep that in consideration as they seek 
expansion of this area. When it comes into residential home 
lending there is no doubt that there is an overabundance of 
available credit out there especially with the technology of on 
line lending and other services. It just does not make sense 
that any part of this country is being underserved.
    Mr. Holden. Thank you. Ms. Stettler, I appreciate your 
comments on beginning farmers, and I do not mean to ignore you 
or Mr. Zippert, but I want to ask a question about startup of 
beginning farmers because we are concerned about that. I am 
just curious, Mr. Stark and Mr. Apple, and then followup from 
Mr. Pinto and Mr. Greenlee, what does your portfolio look like 
with beginning farmers? Can a young farmer looking to get into 
the business look to you for credit and can you provide it?
    Mr. Stark. Mr. Chairman, very definitely so, and I think 
that again is one of the things we probably don't do a good 
enough job of talking about is the what I would call the great 
service we provide to beginning operators. I would speak from 
our institutional perspective, we have many different programs 
all the way starting with loans to 4H and FFA kids. We have 
special programs that allow them to finance their 4H and FFA 
stock projects. We have scholarships and things along that 
line. But one of the key hallmarks of our program is what we 
would call a program to limited resource customers that are 
referred to here this morning basically those customers that 
can't qualify for credit on a conventional basis. We have 700 
of those customers in the 4 states that we serve to individuals 
that could be coming right out of college buying their first 
tractor, their first farm, renting a farm to operate on, and it 
is for over $130 million.
    In total our portfolio if you consider that we consider 
young as less than 35 years old, we have over 9,000 loans to 
customers that are in that category that are under 35 years of 
age. And so we think it is a great story that we have already 
done a very effective job at.
    Mr. Holden. I see my time has expired. Mr. Pinto, are the 
community banks and the commercial banks engaged with beginning 
farmers?
    Mr. Pinto. Sure. We are looking--in our business, which is 
a regulated business, we are looking to be paid back, and 
unlike the lenders of last resort that USDA talked about, we 
have to make sure because of our regulators' oversight, and 
constant oversight, that what we do is prudent, fiscally 
responsible, so we just can't give it away. There has to be a 
quid pro quo there in the relationship between the borrower and 
the lender, and I think we have excelled at that.
    Mr. Holden. Thank you. The Chair recognizes the ranking 
member.
    Mr. Lucas. Thank you, Mr. Chairman. Jeff, let us visit 
about Jackson County, Altus, America. Farm Credit is present in 
your county and in addition to NBC, how many other banks are 
there?
    Mr. Greenlee. I believe there are seven other banks in 
Altus, and there are approximately four other banks in the 
outlying communities in Jackson County.
    Mr. Lucas. So in the case of NBC, what is the biggest loan 
that you could make to a creditworthy farmer or for that 
matter, anybody else?
    Mr. Greenlee. Legal lending limit is about $4.6 million of 
our bank organization. Because of our ownership structure, we 
have another bank that is under the same exact ownership that 
we generally participate loans out to go above that, and that 
can take our legal lending limit up to close to $10 million. 
However, because of relationships with area banks any 
organization that is looking at a loan larger than that, for 
example, if I can include this, we are working on a $20 million 
package for a cancer center in southwest Oklahoma, working with 
three regional hospitals. We were able to work with banks in 
the region to go above our legal lending limit to meet those 
needs. That is a rare moment but we can go above those limits 
and work with other banks and participate and take care of the 
needs.
    Mr. Lucas. Mr. Apple, in your part of Indiana, which county 
was it again?
    Mr. Apple. Hancock County, Indiana, east of Indianapolis.
    Mr. Lucas. East of Indianapolis. Describe for me the 
financial circumstances in your county. Obviously, Farm Credit 
is there. What other----
    Mr. Apple. Farm Credit is there. That close to Indianapolis 
there are a multitude in my particular county, a multitude of 
things in that particular area. As you move out county by 
county from the large metropolitan areas though, that does 
increase or does decrease because you have less population and 
just less demand for those particular services. So there are 
banks there, yes.
    Mr. Lucas. I asked the earlier panel, we discussed the 
general prosperity of the farm country out there, and I 
referenced that and credit and the cost of inputs and land and 
all those things going up, and I put this to all four of you in 
the financial business. How do you gauge the impact of land 
price changes, the trend over the last two--one, two, three, 
four, five years in that general time zone, are we seeing a 
consistent----
    Mr. Stark. Your question is in terms of where land prices 
went? Certainly in almost all cases the four states we serve 
including South Dakota, we have seen significant increases in 
land prices even over the last six months particularly with 
corn and soybean prices moving up like they have. And so that 
varies by state though. South Dakota has probably been the most 
over a five and seven year time period been one of the highest 
in the rate of increases. Nebraska, however, has been very 
conservative relative to that so it does vary depending on the 
state and economic conditions of each state and the various 
laws and regulations that you state.
    Mr. Lucas. How would you describe land values in southwest 
Oklahoma, Jeff?
    Mr. Greenlee. They have certainly been increasing like the 
rest of the country. I think if you get a group of bankers 
together the first guy doesn't stand a chance as far as how 
high land prices are going in their area, but southwest 
Oklahoma certainly we have had lower per acre land prices than 
some other areas, but we have seen some great increases in the 
last five years. Most of that increase is coming in from non-
farm demand.
    Mr. Lucas. Which leads me to my next question. Thinking 
back to those horrid days of the '80s that we all went through 
together, how would you describe the typical farm portfolio 
that you have, how much leverage is increasing or decreasing if 
there is such a thing as a typical farmer's loan portfolio 
either NBC or at Farm Credit?
    Mr. Greenlee. If I can answer that. I think we all would 
like to say we have learned our lessons. Unfortunately, bad 
loans are made during good times, and we can't really recognize 
that right now. We have some times over the last 10 years 
especially in the cotton industry with weather-related issues 
that we have portfolios that have gotten a little bit weaker. 
And then thanks to restructuring programs and working with 
other programs out there got those customers back on their feet 
and made some improvements. There is a lot of swing right now 
going on between road crop farmers who are enjoying some of the 
benefits with some higher grain prices versus some of your 
livestock producers. There is that swing going on that we are 
seeing right now. Some of our livestock producers, especially 
grass people who are doing grass cattle are not seeing as good 
returns as they have in the past.
    Mr. Stark. In terms of portfolio, we feel very good about 
that. We have a philosophy, at least at Farm Credit Services of 
America, that we are going to be conservative in good times, we 
are going to be courageous in tough times, which means being 
consistent all the time regardless of the cycles. Actually 
going back three years ago, we started addressing this topic, 
and we lowered our advance rates on real estate loans because 
of the concern we had with escalating real estate prices. And 
so we took a conscious decision there. I have a year end 
portfolio management report that shows me on an ongoing basis 
what our penetration rates are on real estate and almost 80 
percent of our portfolio is under a 60 percent loan value based 
on current prices. So, in essence, land values could drop 40 
percent and those producers would still have equity in their 
land. And probably there is over 60 to 65 percent of that is 
less than a 50 percent loan to value so there is great equity 
in real estate even at today's prices even if something would 
change.
    Mr. Lucas. We did learn our lesson. Thank you. Thank you, 
Mr. Chairman.
    Mr. Holden. The Chair thanks the ranking member and 
recognizes the gentlewoman from South Dakota, Ms. Herseth.
    Ms. Herseth. Thank you, and thanks to all of you for your 
insightful testimony today. I would like to start with you, Mr. 
Stark and Mr. Apple, about this change in the home mortgage 
lending authorities. Horizons proposes to enable Farm Credit 
entities to do home mortgage lending in communities up to 
50,000. Now, Mr. Stark, as I know you are aware, if adopted 
that would exclude Farm Credit from exactly two communities in 
South Dakota. And in rural America cities that size are 
generally considered small. They are often time regional hubs 
of economic activity, and they often have vibrant mortgage 
banking opportunities and enterprises that compete clearly 
effectively against one another.
    So given that fact, why should Congress grant to the Farm 
Credit System such a significant increase in the size of 
community to which it can provide home mortgages?
    Mr. Stark. Yeah, thank you for the question. That really is 
a good one because internally as we developed our own 
recommendations we wrestled a lot with that. What is the right 
number, is it 25, is it 50, is it higher, is it lower. What is 
right in South Dakota is not right in Pennsylvania, so we 
really wrestled with that a lot. We ended up coming back to the 
number and the definition that was already defined by Congress 
to define a rural area as a basis as some kind of external 
validation for what we could put in place.
    While we recognize that only two communities in South 
Dakota would be excluded most people would say Huron, South 
Dakota is not a metropolitan area, for example, and we believe 
that those communities and a lot of the businesses that are 
housed there really benefit agriculture as well and so there is 
a great mission tied to allow the Farm Credit System to be able 
to support those kind of communities.
    Ms. Herseth. I appreciate your response. I live in 
Brookings, South Dakota. When you add in the students we are 
about 18,000 or so. And I hear what you are saying about 
communities like Brookings and Huron but I also know from my 
experience in Brookings as well as the folks that I know in 
Huron and Aberdeen and other communities that are under 50,000, 
I haven't heard concerns about the ability to get a competitive 
rate in a home mortgage in those communities given the 
competition that I think exists, not only with the banks, the 
commercial banks, that are in--and community banks in Brookings 
or Huron but also other mortgage lending opportunities whether 
they are in Sioux Falls, whether they are in Mitchell, Rapid 
City. So I appreciate your response and how you grappled with 
sort of the right size of the community.
    Within your membership, I know that currently with the 
2,500 or lower population that is the existing authority for 
the home mortgage lending, correct?
    Mr. Stark. Right.
    Ms. Herseth. Where are you in terms of the 15 percent cap?
    Mr. Stark. We are still fairly low in that. There is room 
there. At the same time, and we need to speak to that, we are 
not asking for the other limits in Farm Credit's authority for 
home mortgage to be changed. They have to be owner occupied, 
have to be single family, and we still have to stay within our 
current 15 percent cap, so we are not asking for the lid to be 
taken off and focus this into rental properties or those kinds 
of areas.
    Ms. Herseth. Thank you for that clarification as well. Mr. 
Pinto and Mr. Greenlee, and I think, Mr. Greenlee, you in your 
testimony suggested what I think the answer is going to be to 
this question, but let me pose it and explain where I am coming 
from on this. CoBank can currently lend farm cooperatives that 
seek to start ethanol plants and the like but many of these 
entities are changing their structures in a way that continues 
to have significant farmer involvement, and that was alluded 
to, I believe, in Mr. Stark's testimony and Mr. Apple's about 
these modern business structures that have evolved as the 
agricultural industry has evolved and these higher producers to 
be involved in some of the processing and marketing of their 
commodities and value added products.
    Now would you pose any changes that would enable CoBank to 
continue to loan to groups with significant farmer involvement 
if they don't meet the current limits of CoBank's lending 
authority?
    Mr. Greenlee. I think the definition of farmer involvement 
is a question--I think a comment was made over here that 
perhaps you can window dress farmer involvement by the change 
of the board although the ownership is less than 50 percent or 
the control is less than 50 percent. The bottom line is in 
business control is everything. By having a board that is put 
on there that is predominantly by farmers or producers doesn't 
necessarily meet the definition of control. So I would oppose 
any change to that and keep the ownership requirements the 
same.
    Ms. Herseth. If I might, one follow up. Taking LLC, for 
example, where it is over 50 percent owned and controlled by 
individual farmers but they made decisions based on 
differential tax treatment of the structure whether it is a co-
op or an LLC. Would you oppose a change to allow CoBank to lend 
to an LLC that really differed little in terms of the amount of 
farmer involvement, the farmer ownership, and the farmer 
control but because it changed, it transitioned from a co-op 
when it initially started to an LLC and so others followed suit 
and rather than using the cooperative structure use the LLC 
structure.
    Mr. Greenlee. Like a lot of things at face value that may 
seem appropriate but what it does is open the doors for other 
things to come in its place. I think the law as it is defined 
right now is very adequate and those fine line areas that you 
are talking about as far as corporate structures being set up 
those projects can still be met by the private sector. I don't 
think that those entities would be lacking in financing 
available.
    Ms. Herseth. Thank you, Mr. Chairman. I may submit an 
additional question for the record.
    Mr. Holden. The Chair thanks the gentlewoman and recognizes 
the Ranking Member of the Full Committee, Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman, and let me follow 
up on some of the questions of Ms. Herseth and Mr. Lucas. I 
think Mr. Pinto and Mr. Greenlee commented that the 50,000 cap 
on home loan lending population areas is something you oppose, 
and it is a dramatic increase. I am not sure that I would agree 
with that significant increase. But let me ask Mr. Greenlee and 
Mr. Pinto, is there any number above 2,500 that you would 
support increasing that to cover very small communities that 
are in rural areas and are not able to be served by Farm Credit 
Service at this point.
    Mr. Greenlee. Let me just say no.
    Mr. Goodlatte. Okay. I appreciate that, but let me follow 
up with that. Should it be 2,500 or should it be zero?
    Mr. Greenlee. We are not asking for the----
    Mr. Goodlatte. I know you are not asking for it. What do 
you think it should be?
    Mr. Greenlee. Realistically it should be zero because--
    Mr. Goodlatte. Okay. Let me follow up then on a question 
that Mr. Lucas asked. I think this is an important aspect of 
what we are talking about here. I very strongly support my 
banks in all of the areas of my district, large and small, and 
they serve a very vital need. But there are certain 
circumstances and there are certain times in which banks simply 
aren't there. And the Farm Credit System has the ability to 
offer loans because of the very subsidies that you have noted 
and complained about that you wouldn't take the risk on. So 
aren't we really talking here about whether or not there should 
be a Farm Credit Administration and Farm Credit System of 
lending in addition to what you are offering because right now 
in rural America times are in most places really good but there 
are really bad times as well, and during those times your banks 
by the very nature of their entity and their source of 
survival, you have to be accountable to the bottom line in a 
somewhat different way than the Farm Credit System does. Aren't 
they unable to lend in situations where Farm Credit can't, and 
shouldn't they be able to do that or should people simply not 
be able to get credit under those circumstances?
    Mr. Greenlee. Let me answer just briefly going around your 
question there and give by example your concern as far as when 
it comes to bad times, do banks tighten up where the Farm 
Credit System is not required to. If I can just answer that and 
just between 1984 and 1990 what we consider extremely bad times 
in agriculture. I think let the numbers speak for themselves. 
The Farm Credit System went from $61 billion in loans to $33 
billion in 1990, a drop of 46 percent, while at the same time 
banks stood in there at $47 billion and went to $56 billion by 
the end of 1990, a 19 percent increase. In answer to your 
question, we are there in bad times as well as good times.
    Mr. Goodlatte. Let me ask Mr. Stark and Mr. Apple if they 
want to respond to that.
    Mr. Stark. Well, I would agree that certainly we believe 
that there are opportunities for the Farm Credit System to be 
involved, and I am speaking to your question on the zero or the 
2,500. We put the 50,000 limitation in there again going back 
to something that had already been tied in from a congressional 
mandate, and so we feel good about that. At the same time we 
recognize the banks have provided very good service over these 
years. We don't deny that. We also believe the Farm Credit 
System as has been stated here learned some very valuable 
lessons in the 1980s. We are very well capitalized at this 
point in time. We are well prepared through the situation we 
are in today to finance agriculture in these rural communities 
as we go forward and we are looking forward to that.
    Mr. Goodlatte. How would you differentiate yourself as a 
system from banks other than in the different administrative 
requirements and the different taxing requirements that you 
face that would enable you to justify a distinction here?
    Mr. Stark. Well, a couple of ways. It is all about service, 
and that is what this whole program for us has been about 
anyway. It is about service to the customer. This has not been 
about what is good for the Farm Credit System or what is good 
for the commercial banks. It has been about what is good for 
the customer, and our focus is on that. So if we differentiate 
ourselves in terms of the home mortgage market or our farmer 
market we are going to make every attempt to differentiate 
ourselves based on service and quality of service.
    Mr. Goodlatte. Well, what about the issue of risk though? 
It is my understanding that the Farm Credit System was 
originally established for that very purpose. There was a 
belief a long time ago that there were certain circumstances 
and certain times in certain parts of America when traditional 
forms of lending based entirely on private enterprise and 
private credit wouldn't step in and lend money. Can you draw 
that distinction today?
    Mr. Stark. Well, I believe we can. At the same time 
Congress has also expected us to run and you expect FCA to 
regulate us in a safe and sound manner. We make every attempt 
to serve customers in tough times. Another way that we have 
done that is through the specialization of the focus strictly 
on agriculture in rural America we have. We know we don't have 
any other option. We can't pull out into another line of 
business so we are forced to stay there, and we expect our 
directors to keep us there as well.
    Mr. Goodlatte. Can anybody tell me where the 2,500 number 
originally came from for home loan lending communities?
    Mr. Stark. In 1917 that was a pretty big number.
    Mr. Goodlatte. Well, I know. Today it is not as big a 
number so is there some number that the four of you could agree 
upon that is less than 50,000 but greater than 2,500.
    Mr. Pinto. Well, had we been involved in discussions and 
had we been aware of this whole process, I mean this proposal 
has been bandied about internally for two and a half years.
    Mr. Goodlatte. Sure, but that is simply a proposal by an 
outside group. The Congress is going to act based upon what we 
collectively think is in the best interest of consumers in 
rural America and the banks and the Farm Credit System to 
preserve and optimize all of them.
    Mr. Pinto. My observation then, Congressman, would be as 
long as you continue the subsidy and the special status of the 
Farm Credit System, I would keep everything the same even at 
the 2,500. You are talking about a discrepancy in basis points 
anywhere from 30 to 200, the way the competitive nature of this 
whole thing is. And you used the word banks wouldn't lend in 
certain times. Well, banks cannot lend in certain times.
    Mr. Goodlatte. I acknowledge that. I don't think they 
should lend in certain times. The question is whether the Farm 
Credit System was established for the purpose of enabling loans 
to be made in certain times but when banks couldn't lend money 
because of the regulations and because of the fact that at the 
end of the day you got to have some money left in the bank. You 
can't just take any risk that someone might want you to take. I 
think neither can they but supposedly there was a difference 
that caused the creation of their system.
    Mr. Pinto. Well, I think as long as they can keep the farm 
in the Farm Credit System we would support most of their 
proposals. They have gone well beyond the Farm Credit System.
    Mr. Goodlatte. My time has expired. Otherwise, Mr. 
Chairman, I would give Mr. Apple or Mr. Stark an opportunity to 
respond.
    Mr. Holden. If the gentleman wants to continue.
    Mr. Goodlatte. If they would like to respond to that 
observation which I think is a fair observation.
    Mr. Apple. There are a couple of things there that we had 
talked about, and we talk about an unfair playing field. It is 
probably correct but we are not sure which side has the 
advantage. The banks, of course, have the deposits and the 
ability to get the CDs and things like that that they can use 
for their capital and for their lending purposes which the Farm 
Credit System does not. We have the GSE status. As far as the 
tax status of the institutions there is some question there 
because several of the banks, a little over 2,000 of them, are 
Chapter S banks so their tax treatment is a lot different than 
what the regular commercial bank might be even that advantage 
somewhat there, and on the Farm Credit side the short and 
intermediate term loans are taxable, the income off of that is 
taxable. So it is not exactly just quite the appearance that we 
say it is nontaxable and taxable and that result.
    The other thing on the home loans and the 2,500, our 
association that I am a member of in Indiana, Iowa, Kentucky 
and Tennessee, Farm Credit Services of America, has a county in 
Tennessee that has a county wide government so they are 
classified as one community. That is Lynchburg, Tennessee, 
where Lynchburg, Tennessee is, and that is kind of a famous 
little town, but they are unable because there is a 17,000 
population in that entire county, they are unable to make a 
rural home loan in that county. So somewhere that number may 
not be 50,000 but somewhere in between I think probably would 
be a fair number.
    Mr. Goodlatte. One last question, Mr. Chairman, if I may, 
are there discussions going on between the independent 
community bankers and the American Bankers Association and the 
Farm Credit Services and the related institutions that work 
with you on trying to find some common ground here or is that a 
fruitless effort?
    Mr. Pinto. They will start at lunch time. If anything is 
going to happen here it has to start at lunch time.
    Mr. Goodlatte. We would be encouraged by that.
    Mr. Stark. Mr. Goodlatte, I would just like to add an 
example, you asked for examples of where the Farm Credit System 
has stepped up in the absence of other lenders, and a couple 
weeks ago we had a testimony hearing on the ethanol industry 
and renewable fuels, and clearly the Farm Credit System stepped 
up both for financing farmer equity and ethanol plants and 
directly funding ethanol plants in the absence of other credit 
that was available at that time, and they also are probably one 
of the largest holders of senior debt on ethanol facilities in 
the country at this point. So I think that is a good example of 
the budding industry where the system has stepped up to help 
support these rural communities.
    Mr. Goodlatte. Thank you, Mr. Chairman, and I apologize for 
taking the extra time.
    Mr. Holden. The Chair thanks the ranking member, and 
recognizes the gentleman from Kansas, Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you very much and I may try 
to follow up on some of Mr. Goodlatte's observations and 
questions as well. This is a topic that is no fun. I assume 
that part of what we are about in trying to figure out Farm 
Credit's role and our commercial banker's role in lending to 
agriculture it revolves around this new proposal by Farm 
Credit, but my assumption is that that is the target because it 
is what is in front of us. Commercial bankers have much greater 
objections than just this proposal and it is with, I assume, 
what I just heard Mr. Apple help me begin to learn once again 
about the unlevel playing field, and so apparently there is a 
dispute between commercial bankers and Farm Credit as to who 
has the advantage.
    This topic we have had before. I remember asking these 
questions to a different set of witnesses within the last two 
or three years about what is the distinction between Farm 
Credit's ability to access funds and the cost of those funds, 
and I would like to explore that again. Mr. Apple started down 
the path of indicating that there is uncertainly as to whether 
the Farm Credit System has the advantage or the commercial 
bankers have the advantage. Surely that is a determinable fact 
that one can determine what one's cost of funds are. There is a 
designed answer to whether or not it costs more money over time 
to raise money with deposits made by bank customers versus 
accessing funds through GSE.
    I assume that there is a quantifiable amount of advantage 
or disadvantage that comes from the tax code, and in regard to 
property taxes, in regard to income taxes, in regard to the 
cost of funds is there an examination cost. Is there a 
difference between what Farm Credit goes through with the 
regulators as compared to what a commercial bank goes through? 
And it would be helpful to me if we could ultimately get to the 
point to understand who has the advantage and who has the 
disadvantage as we--I would guess that there is unless you are 
ready to convince me that Farm Credit was created for purposes 
of providing money to those who had greater risks to fill a 
nitch in the rural and agricultural lending opportunities for 
those who would otherwise not be creditworthy at a commercial 
bank. I assume ultimately in my mind this does revolve around 
whether or not there is a level playing field.
    If Farm Credit's purpose continues today to be something 
different than what a commercial bank that is an important 
feature too. And so the question then becomes to me really it 
is quantifiable to who is Farm Credit lending to, who are 
commercial banks lending to. And then finally I don't--I guess 
I should never admit I don't know what is going on in rural 
America. My hometown in Kansas, I think the population today is 
about 1,000 less than when I graduated from high school. 
Today's population is about 1,900. And yet when I was growing 
up as a kid, I would assume since the '30s since banks were 
closed, we had one commercial bank in our community. We now 
have four. And I don't know whether--again I assume it is 
determinable whether those banks are lending to farmers, 
lending to rural America, making housing loans, or are they 
just collecting funds and sending that money off to be lent in 
some bigger city where the rate of return is greater. Does 
anyone have a response to just the way I see this?
    Mr. Pinto. I think we all have a response but it is going 
to be a written response. I feel like a Shakespearian 
character. Somebody just handed me a note.
    Mr. Moran. I also would point out that your written 
testimony is lengthy in and of itself so you probably have 
covered all my points previously, both Farm Credit and the 
commercial banks.
    Mr. Pinto. There is no question about it. If we had a chart 
together we can--and I think Doug can do the same thing. That 
might be best for you guys before you make your final 
determination. Just shooting from the hip, I would rather not 
shoot from the hip. I think this requires a written response to 
address.
    Mr. Moran. I am happy to know if I am asking the wrong 
question.
    Mr. Pinto. You are asking the million dollar question.
    Mr. Moran. And I am happy to have your evidence of the 
numbers at a different point in time. Farm Credit, is this the 
right line of questioning?
    Mr. Stark. Well, it is interesting that we probably both 
view it as the grass is greener on the other side of the fence. 
We envy their deposit taking with Federal backing, their access 
to the Federal home loan bank board, you know, their 
opportunities to tap into Fannie and Freddie as well as GSEs. 
They envy our GSE direct funding. I mean, I don't know, we 
could have this debate all afternoon and not reach a 
conclusion. Again, as we looked at the issues we really tried 
to focus on what is good for the customer in rural America, not 
what is good for Farm Credit institutions and commercial banks 
as institutions. We looked at what is good in the customer's 
eyes, and that is what we focused on. That is why we kept 
bringing our proposals back to that very issue. I don't think 
we have enough time to debate all the issues around the level 
playing field. Certainly, I think both of us would agree that 
we think the others have advantages. Our limited resource 
charter. We can go into other--all those things, as you said, 
really play into----
    Mr. Moran. Mr. Stark, then would your point be that 
regardless of whether we agree upon a level playing field the 
issue is about who is able and willing to make loans to 
agriculture in rural America? That is the crux of the issue is 
that as I look at this as policy maker what I ought to be 
looking at is how do we increase the amount of funds and lower 
the price of funds for rural America?
    Mr. Stark. That is exactly it. What we came to the table 
with is what we thought was a proactive approach to serving 
people in rural communities. We weren't trying to undermine 
what anybody else was doing. We were trying to say how can the 
Farm Credit System bring solutions to rural America.
    Mr. Moran. Let me ask, if I may, Mr. Chairman, that then if 
you follow that, I assume then at some point in time that if 
you assume an advantage to Farm Credit then over time there is 
a disadvantage that will take away the role that commercial 
banks play in rural America so it ultimately can't just--even 
if it is just about service the level playing field comes back 
into play because to provide service I would think we would all 
agree that we want the commercial banks in the market as well.
    Mr. Stark. We certainly do, and certainly the market data 
would show that they are very effective. And I think it really 
refutes the point that we are running them out of business. At 
60 percent market share we have not driven commercial banks out 
of business.
    Mr. Moran. And my own hometown is somewhat intriguing to me 
but how can a town of 1,900 who lived with one commercial bank, 
one community bank for nearly my lifetime to this point, now 
have four. Something is going on in rural America that is 
different over time than it was in the past. My time is way 
past, but I appreciate the opportunity to explore this, Mr. 
Chairman. Thank you.
    Mr. Holden. Thank the gentleman. Ms. Musgrave.
    Ms. Musgrave. Mr. Chairman, we were talking about the 15 
percent cap. Mr. Stark, I think, and Ms. Herseth said that. How 
close are you to that 15 percent cap?
    Mr. Stark. Excuse me again?
    Ms. Musgrave. When Ms. Herseth asked the question about the 
home loans being able to be made in communities of 2,500 or 
less, and then she talked about the certain percentage that you 
were able to make, how close are you to the 15 percent cap 
right now?
    Mr. Stark. We are significantly below it. I don't know what 
the actual number is. We could certainly supply that to you.
    Ms. Musgrave. Okay. I would really like to also talk about 
young farmers, minority farmers. What in the Horizons project 
is targeted specifically for this group?
    Mr. Stark. Well, really there isn't anything specifically 
in here about young farmers other than the access, the 
expansion to be able to allow our ability to invest and finance 
non-farm or these businesses that we are talking about here. A 
lot of young producers have to have off farm jobs and they have 
to have other--they have other businesses that they may want to 
invest in. This allows the Farm Credit System to tie in to 
their farming operations. They get started in farming and also 
to help them with these other operations and in the communities 
that they live in and work other types of jobs.
    Ms. Musgrave. Thank you, Mr. Chairman. Thank you to the 
witnesses.
    Mr. Holden. The Chair wishes to thank the witnesses for 
this lively discussion and very important information gathering 
session that we had today. Under the rules of committee the 
record of today's hearing will remain open for 10 days to 
receive additional material and supplementary written responses 
from witnesses to any question posed by a member of the panel. 
The hearing of the Subcommittee on Conservation, Credit, 
Energy, and Research is adjourned.
    [Whereupon, at 12:50 p.m., the Subcommittee was adjourned.]



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