[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]





          HEARING TO REVIEW CREDIT CONDITIONS IN RURAL AMERICA

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON CONSERVATION, CREDIT,
                          ENERGY, AND RESEARCH

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 11, 2009

                               __________

                           Serial No. 111-19


          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,            FRANK D. LUCAS, Oklahoma, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California        SAM GRAVES, Missouri
DAVID SCOTT, Georgia                 MIKE ROGERS, Alabama
JIM MARSHALL, Georgia                STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South     RANDY NEUGEBAUER, Texas
Dakota                               K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
JIM COSTA, California                JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana              ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota           ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin               DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon                BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois       GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER,              BILL CASSIDY, Louisiana
Pennsylvania                         CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
SCOTT MURPHY, New York
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho

                                 ______

                           Professional Staff

Robert L. Larew, Chief of Staff      Nicole Scott, Minority Staff 
Andrew W. Baker, Chief Counsel       Director
April Slayton, Communications 
Director

                                  (ii)


                                 ______

       Subcommittee on Conservation, Credit, Energy, and Research

                   TIM HOLDEN, Pennsylvania, Chairman

STEPHANIE HERSETH SANDLIN, South     BOB GOODLATTE, Virginia, Ranking 
Dakota                               Minority Member
DEBORAH L. HALVORSON, Illinois       JERRY MORAN, Kansas
KATHLEEN A. DAHLKEMPER,              SAM GRAVES, Missouri
Pennsylvania                         MIKE ROGERS, Alabama
BETSY MARKEY, Colorado               STEVE KING, Iowa
MARK H. SCHAUER, Michigan            RANDY NEUGEBAUER, Texas
LARRY KISSELL, North Carolina        JEAN SCHMIDT, Ohio
JOHN A. BOCCIERI, Ohio               ADRIAN SMITH, Nebraska
MIKE McINTYRE, North Carolina        ROBERT E. LATTA, Ohio
JIM COSTA, California                BLAINE LUETKEMEYER, Missouri
BRAD ELLSWORTH, Indiana              GLENN THOMPSON, Pennsylvania
TIMOTHY J. WALZ, Minnesota           BILL CASSIDY, Louisiana
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
FRANK KRATOVIL, Jr., Maryland
SCOTT MURPHY, New York
WALT MINNICK, Idaho
EARL POMEROY, North Dakota

               Nona Darrell, Subcommittee Staff Director

                                 (iii)










                             C O N T E N T S

                              ----------                              
                                                                   Page
Goodlatte, Hon. Bob, a Representative in Congress from Virginia, 
  opening statement..............................................     2
Holden, Hon. Tim, a Representative in Congress from Pennsylvania, 
  opening statement..............................................     1
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, prepared statement..................................     3

                               Witnesses

Caruso, Doug, Administrator, Farm Service Agency, U.S. Department 
  of Agriculture, Washington, D.C................................     4
    Prepared statement...........................................     6
Strom, Hon. Leland A., Chairman and CEO, Farm Credit 
  Administration, McLean, VA.....................................    14
    Prepared statement...........................................    15
Frazee, J. Robert, President and CEO, MidAtlantic Farm Credit, 
  Westminster, MD................................................    36
    Prepared statement...........................................    38
Drabenstott, Ph.D., Mark, Director, (Rural Policy Research 
  Institute) RUPRI Center for Regional Competitiveness; Research 
  Professor, Harry S Truman School of Public Affairs, University 
  of Missouri, Kansas City, MO...................................    44
    Prepared statement...........................................    45
Bauer, Fred J., President and CEO, Farmers Bank, Ault, CO; on 
  behalf of Independent Community Bankers of America.............    51
    Prepared statement...........................................    52
Gerber, Michael A., President and CEO, Federal Agricultural 
  Mortgage Corp. (Farmer Mac), Washington, D.C...................    62
    Prepared statement...........................................    63
Sullivan, Patrick, Economic Development Specialist and Leader, 
  Agricultural Mediation Program Project, New Mexico State 
  University, Las Cruces, New Mexico, Las Cruces, NM; on behalf 
  of Coalition of Agricultural Mediation Programs (CAMP).........    68
    Prepared statement...........................................    70

                           Submitted Material

American Bankers Association, submitted statement................    79
Submitted questions..............................................    81

 
          HEARING TO REVIEW CREDIT CONDITIONS IN RURAL AMERICA

                              ----------                              


                        THURSDAY, JUNE 11, 2009

                  House of Representatives,
 Subcommittee on Conservation, Credit, Energy, and 
                                          Research,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 1302, Longworth House Office Building, Hon. Tim Holden 
[Chairman of the Subcommittee] presiding.
    Members present: Representatives Holden, Herseth Sandlin, 
Halvorson, Dahlkemper, Markey, Schauer, Kissell, McIntyre, 
Costa, Ellsworth, Massa, Bright, Murphy, Minnick, Pomeroy, 
Peterson (ex officio), Goodlatte, Moran, King, Smith, Latta, 
Luetkemeyer, and Thompson.
    Staff present: Nona Darrell, Adam Durand, Scott Kuschmider, 
Merrick Munday, John Riley, Anne Simmons, Debbie Smith, Kevin 
Kramp, Josh Maxwell, and Jamie Mitchell.

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

    The Chairman. This hearing of the Subcommittee on 
Conservation, Credit, Energy, and Research to review the credit 
conditions in rural America will come to order.
    I would like to welcome our witnesses and guests to today's 
hearing. We will review the status of credit conditions in 
rural America.
    Agriculture is not the risky business as it once was 
perceived in the early part of the last century, when credit 
was often unavailable or unaffordable in rural areas. Credit 
opportunities for farmers have greatly increased in the last 
100 years, and even in the last 20 years.
    The current financial crisis that has affected so many 
other markets has not hit the agriculture sector quite as hard, 
but farmers are still feeling the effect. For example, dairy 
farmers in my home State of Pennsylvania, and across the 
nation, have been negatively affected by a drop in prices 
received for their products.
    Given the current state of the economy, some farmers are 
finding it harder to repay their loans. Even producers who are 
doing better than others are having difficulty in obtaining new 
credit.
    Lenders have to tighten their purses as they find it harder 
to access capital or sell bonds. Lenders are seeing a small 
uptick in the number of non-performing or delinquent loans, yet 
it is not anywhere near as serious a situation as back in the 
last recession of the 1980s.
    The Department of Agriculture's Farm Service Agency, as a 
lender of last resort for those who cannot obtain credit from 
the market, has experienced a large influx of producers who are 
not finding loans in the private sector. Congress recently 
provided, in the stimulus bill, extra funding for this higher 
demand, but now even those funds are running short.
    I hope we will hear today how we can assist our agriculture 
producers and rural residents in obtaining credit and creating 
opportunity for development.
    I look forward to hearing from our witnesses today and now 
recognize the Ranking Member of the Subcommittee, the gentleman 
from Virginia, Mr. Goodlatte.

 OPENING STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN 
                     CONGRESS FROM VIRGINIA

    Mr. Goodlatte. Thank you, Mr. Chairman. I appreciate you 
holding today's hearing to review credit conditions in rural 
America.
    The financial crisis has taken longer to reach rural 
America, but our farmers and ranchers are starting to feel the 
effects and face challenges in accessing credit. Crop prices 
are down from historical highs, land values are decreasing, and 
there is rising unemployment throughout rural America. The USDA 
predicts that average farm income will decrease by 20 percent 
in 2009.
    Agriculture lenders state that credit is still available 
for eligible borrowers. However, FSA, the lender of last 
resort, has reported a 200 percent increase in demand for 
guaranteed assistance for operating loans. FSA continues to 
face backlogs in their oversubscribed lending programs, even 
after the addition of supplemental appropriations.
    The Farm Credit System reports a reduction in growth and a 
small rise in delinquencies, though it should be noted these 
trends come off of historic lows in delinquencies. I believe 
that, due to the actions of the Congress in the 1980s, the Farm 
Credit System remains strong and continues to be a source of 
credit to farmers and ranchers during these tough economic 
times. Also, because the people in the Farm Credit System 
didn't lose sight of their underwriting standards and 
requirements, the Farm Credit System is still able to provide 
loans for creditworthy projects. I congratulate the farm credit 
banks like AgFirst in Virginia for staying true to its mission.
    With current economic conditions, I am stunned that 
Congress is attempting to pass a cap-and-trade--some of us 
refer to it as ``cap-and-tax bill''--that will result in a 
massive national energy tax. The effects of this national 
energy tax will be far-reaching to business, consumers, and 
even more so to rural America. A national energy tax will cause 
producers to pay more for seed, equipment, machinery, steel and 
other supplies needed for agricultural operations. This will 
ultimately increase the need for larger operating loans during 
a time when credit is already becoming more difficult to 
obtain.
    Today, I hope to hear more from our witnesses on current 
credit conditions and how rural America will be affected in the 
future if the current economic environment continues.
    Thank you, Mr. Chairman.
    The Chairman. The chair thanks the Ranking Member and would 
ask all other Members of the Subcommittee to submit any opening 
statements for the record.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota
    Thank you Mr. Chairman. I appreciate your calling this hearing 
today. I look forward to hearing from both panels of witnesses this 
morning and get their thoughts about the credit conditions in rural 
America, particularly the obstacles that farmers and ranchers face in 
securing financing for their operations in these tough economic times.
    While most people have focused on the failures of large banks on 
Wall Street and the resulting credit crisis, the balance sheets of 
rural America, including farmers and agricultural lenders, are starting 
to be affected.
     There are some economic signs in rural America that are of 
concern. Farm income is on the decline this year; non-performing loans 
are on the rise; and the chief asset of many rural Americans, their 
home and land, is declining in value in some regions. Because of these 
and other factors, tighter credit is expected for the remainder of the 
year. These economic factors could continue to cause hardships among 
some farmers and ranchers when it comes to paying back loans or trying 
to sustain their operations.
    Conditions are such that applications for financing through the 
Farm Service Agency's credit programs have increased dramatically. 
Congress has had to respond with two rounds of funding, one in the 
stimulus bill and another one pending in the supplemental 
appropriations bill.
    Some communities have felt the brunt of the credit crunch worse 
than others. In particular, the dairy and pork sectors have experienced 
some very hard times due to low milk and pork prices. And the failure 
of New Frontier Bank, a large farm lender in eastern Colorado, has 
caused severe problems for farmers and ranchers in a major ag-producing 
area of our country. This has directly affected many of the 
constituents of one of our Committee Members, Ms. Betsy Markey, who has 
worked to help find a solution for those who are scrambling to find new 
lenders for their operating loans.
    The availability of credit is of concern to this Committee because 
there are still a lot of opportunities for rural America and American 
agriculture.
    Farmers and ranchers are eager to meet the public demand for 
locally-grown crops, organics, and other value-added products. Farm-
based renewable energy has the potential to be a great economic engine 
for rural America. It is the job of policymakers and administrators to 
help them access all the tools that are available to them to ride out 
the tough times.
    I have long said that farmers take the kinds of financial risks 
most people wouldn't even think about taking. And they don't do it for 
the dream of striking it rich, but rather to provide themselves and 
their neighbors with the food, fiber and fuel that supports our 
economy. Whether they are getting started, or whether they need a 
bridge during downturns, folks need accessible credit at reasonable 
rates, and a network that can assist them when they need it. Having 
these financial tools will quite often determine whether or not they 
can succeed.
    I hope this Subcommittee will gain some good information today 
about the credit conditions in rural America. Thank you again, Chairman 
Holden, for calling this hearing today, and I yield back my time.

    The Chairman. We would like to welcome our first panel of 
witnesses today: Mr. Doug Caruso, Administrator for the Farm 
Service Agency for the United States Department of Agriculture; 
and Mr. Leland Strom, Chairman and CEO of Farm Credit 
Administration.
    Mr. Caruso, you may begin when you ready.

         STATEMENT OF DOUG CARUSO, ADMINISTRATOR, FARM
  SERVICE AGENCY, U.S. DEPARTMENT OF AGRICULTURE, WASHINGTON, 
                              D.C.

    Mr. Caruso. Thank you, Mr. Chairman and Members of the 
Committee. I appreciate the opportunity to appear before you to 
discuss credit conditions in rural America, focusing on the 
current status and operations of the farm loan programs at the 
Farm Service Agency.
    I want to address the issue of credit availability first. 
Activity at FSA's farm loan program certainly indicates that 
less commercial credit is available to farmers at the present 
time. Loan volume in farm loan programs is usually 
countercyclical to the general farm economy. This makes sense, 
since the basic requirement to qualify for the programs is to 
be unable to meet the criteria for commercial credit.
    When the farm economy is strong, farm loan program activity 
is flat, even declining. During times of financial stress in 
the farm economy, we see increased demands for FSA farm loans.
    This year, the programs are experiencing demand levels that 
have not been seen in over 20 years. As of May 30, demand for 
direct operating loans was up by 81 percent; demand for direct 
ownership loans was up 132 percent and demand for guaranteed 
operating loans has increased by 31 percent.
    And just to look at the numbers quickly, as of June 10, we 
had obligated $848 million in direct operating loans and have 
another backlog of approved, but unfunded, loans to the tune of 
$96 million. And in direct farm ownership we have obligated 
$198 million and have a backlog of $277 million of approved, 
but unfunded loans, for a total backlog of approved but 
unfunded loans, direct loans, of $373 million. That is a total 
of about 3,000 loans that we have approved, but are unable to 
fund due to lack of funds.
    Perhaps the most telling is the number of new applicants 
this year. As of May 26, 45 percent of the direct operating 
loans approved for this fiscal year were for customers who did 
not have existing FSA operating loans; that is, they are new to 
our System. Normally that number is about 20 percent. The fact 
that an unusually high number of direct operating loan 
applications are for new customers this year is a clear 
indication that more farmers are having trouble getting the 
credit they need.
    When farmers need credit, they need it timely. We continue 
to emphasize the importance of processing applications rapidly. 
Between 2001 and 2008, farm loan programs reduced direct 
application processing time-frames by 13 days, or 30 percent, 
and reduced the guaranteed loan processing time-frames by 5 
days or 28 percent.
    As of May 30, the average time for applications from 
receipt to final decision was 27.7 days for direct loans and 
only 8.5 days for guaranteed loans. It is remarkable that even 
though loan demand has surged, there has been no deterioration 
in application processing time, and this is a testament to the 
dedication of FSA field staff and the effectiveness of the IT 
solutions that the farm loan programs has deployed.
    I want to take a moment to touch on an issue that is of 
critical importance, civil rights at FSA. Secretary Vilsack has 
made extremely clear that improper and inequitable treatment of 
those that USDA and FSA serve will not be tolerated. I and all 
members of the FSA management team remain fully committed to 
equal access and opportunity for all those that FSA serves. I 
will closely monitor the operations of farm loan programs, and 
all other FSA programs, to assure that our producers, program 
applicants and employees receive fair and equitable treatment.
    I want to update you on a few key activities in this 
critical area. As you may know, Section 14002(b)(1) of the 
Food, Conservation, and Energy Act of 2008 required the USDA 
Office of Inspector General to conduct a review of FSA 
foreclosure cases of socially disadvantaged farmers and 
ranchers to determine whether the Agency followed the 
applicable laws and regulations governing foreclosures.
    Of course, foreclosure is never the outcome we want. When 
an account ends with foreclosure, we and the borrower have both 
failed. However, I am glad to report that the OIG review found 
no instances of inconsistency or improper treatment of any 
borrowers in that unfortunate circumstance.
    I believe it is important to point out that FSA does not 
reach--does reach many socially disadvantaged farmers and 
ranchers more often than given credit for. A look at statistics 
shows that FSA provides assistance to socially disadvantaged 
farmers in greater proportions than their demographic 
percentage of the total farming population.
    In the 2008 Farm Bill, Congress reaffirmed the focus for 
FSA programs on beginning farmers and ranchers. FSA continues 
to strive to reach more beginners and has increased the amount 
of loan funds provided to beginning farmers and ranchers. The 
FSA direct loan beginning farmer caseload increased from about 
3,500 in 1995 to almost 17,000 in 2008, and the guaranteed 
beginning farmer caseload increased from about 3,600 in 1997 to 
over 8,600 in 2008.
    Given the difficult conditions in today's credit 
environment, borrower term limits pose a major challenge to the 
Agency and to borrowers alike. The statute presently limits a 
borrower to direct operating loans in each of 7 years with an 
additional one-time 2 year waiver on an individual basis. There 
are more than 4,800 FSA borrowers who can only receive direct 
operating loan assistance 1 more year from the Agency, and 
there are more than 7,800 FSA borrowers who can only receive 
direct operating loan assistance 2 more years from the Agency.
    Without FSA direct loan assistance, many of these borrowers 
will be forced out of farming, as they may not have access to 
the capital necessary for them to conduct their farming 
operations. Under the current credit environment, it is 
unlikely that many of these borrowers, reaching their term 
limits with us, will be able to obtain conventional financing. 
They will be left with nowhere to turn.
    It does not seem fair that these borrowers may be forced 
out of business because they reached their term limits at a 
time when credit is scarce.
    More challenges lie ahead. Government resources are 
increasingly limited and the agricultural production landscape 
is changing. We are experiencing unique conditions in the 
credit and banking sectors and, to a large extent, in 
agriculture. These changes pose significant barriers and 
challenges to the groups that FSA farm loan programs are 
intended to assist.
    These issues create major challenges for us as well, since 
the success of the program depends on the farmers and ranchers 
we are here to serve. To keep pace with these changes, we will 
modernize the efforts to change the delivery system and refine 
and adjust program requirements and operations to maximize the 
opportunities for our nation's small, beginning and socially 
disadvantaged farmers and ranchers.
    We look forward to working with you, Mr. Chairman, and the 
Committee Members to address the challenges we face in 
accomplishing this worthwhile mission to strengthen family 
farmers in rural America.
    [The prepared statement of Mr. Caruso follows:]

Prepared Statement of Doug Caruso, Administrator, Farm Service Agency, 
            U.S. Department of Agriculture, Washington, D.C.
    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to appear before you to discuss credit conditions in rural 
America, focusing on the current status and operations of the farm loan 
programs at the Farm Service Agency (FSA).
Credit Conditions
    Reports from the Federal Reserve and other sources indicate there 
is a tightening of credit for farmers and ranchers around the country. 
A combination of limited or negative returns in much of the livestock 
industry, reduced profit margins in crop production, and increased 
sensitivity to credit risk has caused many farm lenders to raise their 
credit standards, reduce the amount they are willing to lend in 
agriculture, or both. Many lenders report that increased scrutiny from 
regulators has caused them to raise credit standards significantly.
    Activity in FSA's farm loan programs certainly indicates that less 
commercial credit is available to farmers at the present time. Farm 
Loan programs demand is usually countercyclical to the general farm 
economy; when the farm economy is strong, farm loan activity is flat. 
During times of financial stress in the farm economy, demand for farm 
loan program loans increases. This makes sense, since a basic 
requirement to qualify for the programs is to be unable to meet the 
criteria for commercial credit. This year, the programs are 
experiencing demand levels that have not been seen in over 20 years. As 
of May 30, 2009, demand for direct operating loans was up by 81 
percent, demand for direct ownership loans was up 132 percent, and 
demand for guaranteed operating loans has increased by 31 percent An 
unusually high number of direct operating loan applications are from 
new customers this year. As of May 26, 45 percent of the direct 
operating loans approved in FY 2009 were for customers who did not have 
existing FSA operating loans. Normally, that number is about 20 
percent.
Performance and Portfolio Condition
    Farm loan programs continue to emphasize the importance of 
processing applications in a timely manner. Between FY 2001 and FY 
2008, farm loan programs reduced its direct loan application processing 
time-frames by thirteen days (30 percent), and reduced guaranteed loan 
processing time-frames by 5 days (28 percent). As of May 30, the 
average time from applications receipt to final decision for direct 
loans was 27.7 days, and for guaranteed loans, 8.55 days. It is 
remarkable that even though loan demand has surged, there has been no 
deterioration in application processing time. This is a testament to 
the dedication of FSA field staff and the effectiveness of the IT 
solutions farm loan programs has deployed.
    The quality of our portfolio has continued to improve, due in large 
part to our modernization efforts, better customer service and the 
dedication of FSA employees, as well as the much improved farm 
financial environment of the past 7 years. At the same time, we realize 
that given the increased financial stress the agriculture economy and 
the increased workload resulting from a larger case load, portfolio 
performance is likely to somewhat deteriorate in the future. We are 
committed to using all the authorities available to assist borrowers 
and will strive to minimize any deterioration in portfolio performance.
    Loss Rates. In FY 2008, losses in the direct loan program fell to 
their lowest level since 1986--just 1.7 percent (Chart 1).
    Losses for FY 2008 in the guaranteed loan program were 0.3 percent, 
the lowest rate since we began monitoring this trend in 1985 (Chart 2).
    Delinquency Rates. As with losses, the direct loan delinquency 
rates are at historic lows at 6.5 percent for FY 2008 (Chart 3). This 
is the result of steady and dramatic decreases from a 23.8 percent 
delinquency rate in FY 1995. The decrease was facilitated by expanded 
authority, since 1996, to offset Federal payments, salaries and income 
tax refunds to delinquent borrowers.
    In the guaranteed program, the FY 2008 delinquency rate was 1.18 
percent, the lowest since 1995 (Chart 4).
    Foreclosures. Foreclosure rates continue to be very low in the 
direct loan program. In 2008, FSA participated in 169 foreclosures, 
including cases initiated by other lenders against individuals who also 
had loans with FSA. This is compared to 311 foreclosures the agency 
participated during 2003. This represents less than \1/4\ of 1 percent 
of the agency's direct loan caseload.
    Inventory Properties. Inventory farm properties--those that have 
come into government ownership through voluntary conveyance or 
foreclosure--are also at historic lows with just 79 farms covering 
9,600 acres in FY 2008. In 1995, FSA held nearly 1,800 farms covering 
598,000 acres. Many of those inventory properties were sold to 
established and beginning farmers, providing those individuals with 
prime opportunities to expand or create new operations.
    Graduation Rates. Federal law requires FSA to ``graduate'' its 
borrowers to commercial credit when they have made sufficient progress 
to be able to qualify for loans from other lenders. They are assisted 
by the agency in refinancing their direct loans with FSA guaranteed 
loans from commercial lenders. Some 2,918 direct loan borrowers were 
able to graduate in FY 2008, which is consistent with graduation rates 
over the past 5 years.
Equitable treatment and participation
    Secretary Vilsack has been extremely clear that improper and 
inequitable treatment of those that USDA and FSA serve will not be 
tolerated. On April 21, 2009, he announced several actions in a 
comprehensive approach to ensure fair treatment of USDA employees and 
constituents. These actions included an initiation of several 
improvements in processing civil rights complaints, requesting an 
external analysis of program delivery by USDA service center agencies, 
and 90 day suspension of FSA farm foreclosures, which has provided us 
time to review these files to ensure that all producers have received 
their statutory protections. I, and all the members of the FSA 
management team remain fully committed to equal access and opportunity 
for all those FSA serves. I will closely monitor the operations of farm 
loan programs and all other FSA programs to assure our producers, 
program applicants, and employees receive fair, equitable treatment. I 
want to update you on a few key activities dealing with these important 
issues.
Foreclosure review
    As you know, section 14002(b)(1) of the Food, Conservation, and 
Energy Act of 2008 (the 2008 Farm Bill) required the USDA Office of 
Inspector General (OIG) to conduct a review to determine whether 
foreclosure proceedings, with respect to farm loans made to socially 
disadvantaged farmer and ranchers, were consistent and in conformity 
with the applicable laws and regulations governing foreclosures. 
Foreclosure is never a desired outcome. When an account ends with 
foreclosure, both the agency and the borrower have failed. However, I 
am glad to report that the OIG review found no instances of 
inconsistency or improper treatment of any borrowers in that 
unfortunate circumstance. These results speak to the commitment of farm 
loan program managers and field staff to assure that all applicants and 
borrowers are treated fairly and equitably. I am committed to 
maintaining, and where possible further improving performance in this 
area.
Program participation
    An examination of the composition of FSA's loan portfolio indicates 
that FSA finances minority farmers at a much higher rate than those 
groups' proportion of the farm population (Chart 5). For example, while 
the 2007 Census of Agriculture indicates that 1.40 percent of farm 
operators are Black or African American, this group makes up 3.42 
percent of FSA's direct loan portfolio, almost 2.5 times the proportion 
in the total farm population.
    FSA has significantly increased the amount of loan funds provided 
to socially disadvantaged applicants. Between 1995 and 2008, the FSA 
direct SDA caseload increased from 3,260 to 14,068. Between 1997 and 
2008, the FSA guaranteed socially disadvantaged caseload increased from 
1,730 to 3,014.
    In the 2008 Farm Bill, Congress re-affirmed the focus for FSA 
programs on beginning farmers and ranchers. FSA continues to strive to 
reach more beginning farmers and has increased the amount of loan funds 
provided to beginning farmers and ranchers. The FSA direct loan 
beginning farmer caseload increased from 3,474 in 1995 to 18,785 in 
2008. Guaranteed caseloads for beginning farmers and ranchers were 
first reported in 1997. The FSA guaranteed beginning farmer caseload 
increased from 3,617 in 1997 to 8,648 in 2008.
IT Modernization
    FSA has made significant strides in modernizing the IT systems used 
in farm loan programs delivery and management. Performance in delivery 
and operations this year illustrates the high level of performance and 
functionality of farm loan programs IT systems. So far, in FY 2009, FSA 
has processed 41 percent more loan requests than in FY 2008, but 
service levels have not declined. Average processing times for direct 
and guaranteed loan applications have been fairly steady. This is a 
tribute to the dedication and diligence of farm loan programs field 
staff, but without the modern IT systems they could not have maintained 
an acceptable level of service. For example, Business plans for FSA 
borrowers are now processed through a Web based state of the art 
system. This off-the-shelf IT solution provides access to ``real time'' 
data on our portfolio while sharing data among our automated systems. 
This system also provides a reporting option. This system has allowed 
our loan officers to conduct more extensive and meaningful financial 
analysis of our borrower's farm businesses reducing risk to the 
government while enhancing their opportunities for success and 
graduation to commercial lending. FSA loan officers now order applicant 
credit reports from the three major reporting companies through this 
system as well, which also expedites processing.
    Farm loan programs has also implemented modern, web-based systems 
to manage the loan application, approval, and funding process. This 
system provides real-time management data on application activity and 
allows the Agency to better cope with funding problems and act quickly 
when necessary. For example, when the Agency received supplemental 
funding in the American Revitalization and Recovery Act, over 2,000 
farmers were waiting for desperately needed direct operating loans to 
pay 2009 planting and other farming expenses. When funds were made 
available to FSA, the agency was able to process obligations over 
night, and funds began flowing into farmers' bank accounts only 3 days 
later. I am proud to say that FSA was one of the first agencies in the 
government to get stimulus funding flowing to those who desperately 
needed it. The modern, web-based IT systems in place for farm loan 
programs were a key factor in our ability to provide such timely 
service.
    Currently, we are in the last phase of moving all of our automated 
farm loan programs systems to the Web. When the project is completed we 
will eliminate duplicate data collection and farm loan services will be 
delivered even more efficiently. Our employees will be able to conduct 
USDA business from any location where there is broadband, WiFi or dial-
up Internet access. This will allow us to conduct business with 
producers at locations and times convenient to them. Additionally, this 
information will be stored on a centralized server allowing employees 
to quickly access portfolio information and provide real time 
management reports. However, there is still additional work to be done. 
We will continue working to improve our accounting systems to improve 
their capabilities to capture data and be more easily modified to cope 
with program changes. These improvements will enhance our capabilities 
in portfolio management.
Ongoing Challenges
    As we look ahead in the ever-changing environment, FSA will face 
significant and ongoing challenges in the years to come. Some of the 
most prominent are staffing constraints, term limits, and maintaining 
program performance and success rates through these difficult times.
    Staffing Challenges. We project that approximately 35 percent of 
FSA's current loan officers will be eligible to retire by the year 2012 
and 45 percent can retire by 2014. This potential loss of experienced, 
seasoned credit experts comes at exactly the wrong time considering the 
increased workload from this year's influx of new borrowers; and 
creates the potential for major staffing challenges in the next few 
years.
    FSA farm loan programs has an excellent employee recruitment and 
training program, but appropriations limit the number of new hires that 
can be brought into the system at any given time. On average, it 
requires about 2 years to hire and train a loan officer in order to 
provide the level of effective supervision, expertise and customer 
service needed to maximize every opportunity for success for FSA 
borrowers. The 2 year training window for new loan officers complicates 
an already cloudy staffing forecast.
    FSA's portfolio and borrowers could be exposed to financial risk if 
retirement attrition projections for loan officers are even marginally 
accurate. A large percentage of FSA borrowers are either beginning 
farmers or financially stressed borrowers who need financial 
supervision, especially in these challenging times. FSA loan officers 
provide this supervised credit which requires a complete knowledge of 
FSA programs, finances, and agriculture enterprises.
    Term Limits. The statute presently limits a borrower to direct 
operating loans in each of 7 years, with an additional one-time, 2 year 
waiver on an individual case basis:

   There are more than 4,800 FSA borrowers who can only receive 
        direct operating loan assistance one more year from the agency; 
        and

   There are more than 7,800 FSA borrowers who can only receive 
        direct operating loan assistance 2 more years from the agency.

    Without FSA direct loan assistance, many of these borrowers may be 
forced out of farming as they may not have access to the capital 
necessary for them to conduct their farming operations. Under the 
current credit environment, it is unlikely that many borrowers reaching 
their term limits will be able to obtain conventional financing. They 
will be left with nowhere to turn. It will be unfortunate if these 
borrowers are forced out of business because they reached their term 
limits during a period of unprecedented upheaval and uncertainty in the 
banking and financial sectors.
    The statute presently limits borrowers with guaranteed operating 
loans to 15 years of eligibility, with receipt of a direct operating 
loan also counting as a year of eligibility for guaranteed operating 
loans. This provision has been suspended on several occasions; most 
recently the 2008 Farm Bill extended the suspension through December 
31, 2010. How problematic this limit will be when the suspension ends 
depends on the agricultural economy and availability of conventional 
credit at that time. As of June 1, 2009, over 3,800 guaranteed loan 
borrowers would not qualify for additional loan guarantees if the 
limits were in effect.
    Farm loan programs performance over the past few years has been 
outstanding, with delinquencies and losses near all-time lows. Under 
the challenging economic and financial environments agriculture faces, 
it is almost inevitable that program delinquency and loss rates will 
increase. However, we are committed to use all available options to 
minimize any increases in program delinquencies and losses.
    We are fortunate to have many tools at hand to service accounts and 
assist borrowers through difficult times. The automated systems I have 
mentioned will assist us in timely farm planning and exploring many 
different possibilities to assist borrowers in finding a viable 
operating plan if that is possible. We have a wide array of loan 
servicing options available to include restructuring or deferring 
payments, and even to reduce debts in exchange for conservation 
contracts in some cases. We expect that our ability to manage our 
portfolio will only improve as we move forward with IT modernization. 
However, limited staffing and administrative resources combined with 
departures of experienced staff will limit FSA's ability to respond to 
this challenge, particularly if demand for new loans continues at a 
higher than normal level.
Conclusions
    Through modernization efforts, maintaining focus on program 
objectives, and the hard work and dedication of FSA employees, FSA farm 
loan programs has made great strides in improving program performance. 
Loan failures and losses have declined which is a strong indication 
that the program mission of helping farmers become successful is being 
accomplished. At the same time, increased assistance to small, 
beginning, and minority farmers, reflects remarkable success as well.
    However, more challenges lie ahead. Government resources are 
increasingly limited and the agriculture production landscape is 
changing. We are experiencing unique conditions in the credit and 
banking sectors, and to a large extent, in agriculture. These changes 
pose significant barriers and challenges to the groups that FSA farm 
loan programs are intended to assist. These issues create major 
challenges for the agency as well, since the success of the program 
depends on those whom the programs are intended to serve. To keep pace 
with these changes, we will continue efforts to modernize the delivery 
system, and to refine and adjust program requirements and operations to 
maximize the opportunities for our nation's small, beginning, and 
socially disadvantaged farmers and ranchers.
    Because of our rural delivery system and experienced loan officers, 
the FSA farm loan programs staff is well positioned to continue the 
high quality delivery of existing programs and new initiatives to 
assist small, beginning, and minority family farmers. We look forward 
to working with this Subcommittee to address the challenges we face in 
accomplishing this worthwhile mission to strengthen family farmers and 
rural America.
    Thank you for allowing me to share our Department of Agriculture 
perspective as you address this important issue. I am available to 
answer your questions now or at any time in the future.
                               Attachment
Chart 1


     Thank you, Mr. Caruso.It is my understanding that you have 
additional information that you did not submit previously that you want 
to make part of the record?
    Mr. Caruso. I do, sir. I have a table here that shows historic 
participation in our programs and the significant spike that we have 
experienced in the current fiscal year.
    The Chairman. Without objection, it will be made part of the 
record. Thank you.
    [The information is located on p. 13.]
    The Chairman. Mr. Strom.

   STATEMENT OF HON. LELAND E. STROM, CHAIRMAN AND CEO, FARM CREDIT 
                       ADMINISTRATION, McLEAN, VA

    Mr. Strom. Mr. Chairman, Ranking Member Goodlatte, Members of the 
Subcommittee, I am Leland Strom, Chairman and CEO of the Farm Credit 
Administration. I serve on the FCA board with my colleague, Nancy 
Pellett.
    FCA is an independent, arm's-length agency responsible for 
examining and regulating the Farm Credit System. The FCS is a network 
of borrower-owned financial institutions that provide credit to 
farmers, ranchers, rural residents, agriculture and rural utility 
cooperatives and other eligible borrowers.
    I am pleased to report that the overall condition and performance 
of the System remains safe and sound. During 2008, the FCS experienced 
another year of solid earnings and continued strong asset growth. 
Significantly, the System continues to have good credit quality and 
adequate capital. However, stresses from the general economy, the 
financial and credit crises and shocks in commodity prices have 
increased risks.
    The global recession is having a serious impact on the agricultural 
economy and the risk environment faced by agricultural lenders. In 
fact, System asset quality has deteriorated from the challenging 
economic environment that stressed large credits in the poultry and 
ethanol industries. As a result, during the fourth quarter of 2008, and 
in the first quarter of 2009, we downgraded our risk ratings of several 
Farm Credit System institutions and increased our supervisory 
oversight.
    It is times such as these that the System, as a government-
sponsored enterprise devoted to agriculture and rural America, must 
maintain its presence in the marketplace to provide dependable credit 
for creditworthy farmers ranchers and agricultural cooperatives.
    In fact, the System did much in the past year to help producers in 
rural America. When commodity prices soared in early 2008, System 
institutions met the critical financing needs of the grain elevator 
industry and the high demand for financing of machinery and increased 
input costs for producers. The FCS also helped borrowers affected by 
floods, worked with livestock producers as they made difficult 
decisions, and made critical infrastructure projects possible for rural 
America.
    The System also continued its unique mission to serve young, 
beginning and small farmers and ranchers. In 2008, the System's lending 
and service to YBS producers continued to show solid results. As a 
result of the economic and financial market turmoil, the System's 
ability to issue debt with preferred maturities was extremely 
challenging.
    Due to its strong financial condition and investors' demand short-
term high quality securities, the System was able to maintain 
continuous access to short-term funding. However, System access to 
longer-term debt market became much more difficult. The current 
economic environment also increased the System's funding cost as 
spreads relative to U.S. Treasuries increased and remained well above 
historic levels.
    For our part, we have provided the System appropriate regulatory 
flexibility. For example, we increased the System's discount note 
ceiling and adopted a market emergency standby resolution to allow the 
System to raise short-term funds if financial markets are not open to 
term debt.
    Going forward, we will focus on continuing to ensure that the 
System remains safe and sound while serving its mission by providing 
appropriate and proactive guidance, examination and supervisory 
programs.
    FCA also oversees Farmer Mac, a separate GSC established by 
Congress to provide secondary market services for agricultural 
mortgages, rural home loans and rural utility loans made by 
cooperatives. Despite nonprogram investment losses this past year, 
Farmer Mac continued to have access to the debt markets to fund its 
program assets. Among other actions, it raised new capital through 
preferred stock offerings in the third and fourth quarters of last year 
to replace investment losses.
    Farmer Mac continues to work to improve its balance sheet and to 
provide options to financial institutions that lend to agriculture, 
rural utilities and rural America.
    In conclusion, as agriculture contends with the challenges of these 
uncertain times, we are mindful that the System was designed to be a 
dependable lender to agriculture and rural communities. Farm Credit 
Administration remains committed to ensuring that the System can 
fulfill its mandate to both current and future generations of farmers 
and ranchers and the rural areas in which they live.
    Mr. Chairman, this concludes my statement. I would be happy to take 
your questions.
    [The prepared statement of Mr. Strom follows:]

  Prepared Statement of Hon. Leland A. Strom, Chairman and CEO, Farm 
                   Credit Administration, McLean, VA
    Mr. Chairman, Members of the Subcommittee, I am Leland A. Strom, 
Chairman and Chief Executive Officer of the Farm Credit Administration 
(FCA or Agency). On behalf of my colleague on the FCA Board, Nancy 
Pellett of Iowa, and all the dedicated men and women of the Agency, I 
am pleased to participate in this important hearing today.
    FCA is an independent agency responsible for examining and 
regulating the banks, associations, and related entities in the Farm 
Credit System (FCS or System), including the Federal Agricultural 
Mortgage Corporation (Farmer Mac). The FCS is a nationwide network of 
borrower-owned financial institutions that provide credit to farmers, 
ranchers, residents of rural communities, agricultural and rural 
utility cooperatives, and other eligible borrowers.
Mission of the Farm Credit Administration
    As directed by Congress, FCA's mission is to ensure a safe, sound, 
and dependable source of credit and related services for agriculture 
and rural America. The Agency accomplishes its mission in two important 
ways.
    First, FCA ensures that FCS institutions, including Farmer Mac, 
operate in a safe and sound manner and comply with applicable law and 
regulations. Our examinations and oversight strategies focus on an 
institution's financial condition and any material existing or 
potential risk. We evaluate the ability of management and board to 
direct operations in each institution. We also evaluate each 
institution's compliance with laws and regulations to serve all 
eligible borrowers, including young, beginning, and small (YBS) farmers 
and ranchers. If a System institution violates a law or regulation or 
operates in an unsafe or unsound manner, we use our supervisory and 
enforcement authorities to ensure appropriate corrective action.
    Second, FCA develops policies and regulations that govern how 
System institutions conduct their business and interact with customers. 
FCA's policy and regulation development focuses on protecting System 
safety and soundness; implementing the Farm Credit Act; providing 
minimum requirements for lending, related services, investments, and 
capital; and ensuring adequate financial disclosure and governance. The 
policy development program includes approval of corporate charter 
changes, System debt issuance, and other financial and operational 
matters.
    As the arm's length regulator of the FCS, the Agency will continue 
to focus on ensuring that the System remains safe and sound by 
promulgating regulations, providing appropriate guidance, and 
maintaining strong and proactive examination and supervisory programs. 
With the dynamics and risks in the agricultural and financial sectors 
today, FCA recognizes that FCS institutions must have the appropriate 
culture, governance, policies, procedures, and management controls to 
effectively identify and manage risks.
    It is in times such as these that the System, as a government-
sponsored enterprise (GSE) devoted to agriculture and rural America, 
must maintain its critical presence in the agricultural marketplace to 
provide competitive credit for creditworthy farmers, ranchers, and 
agricultural cooperatives. In fact, the System did much during the past 
year to help producers and rural America. When commodity prices soared 
in early 2008, System institutions stepped forward to meet the critical 
financing needs of the grain elevator industry. They met increased 
demands for financing machinery and higher input costs for producers. 
The FCS also helped Midwest borrowers affected by floods, worked with 
livestock producers as they made difficult decisions, and made critical 
infrastructure projects possible for rural America through innovative 
bond financing, such as a critical care facility in St. James, 
Minnesota, and similar needed community facilities in the Midwest, 
Southeast, and Northwest.
Condition of the Farm Credit System
    I am pleased to report that despite the unprecedented instability 
in the U.S. and global financial markets and a recessionary world 
economy, the overall condition and performance of the System remains 
fundamentally safe and sound. The System finances more than 35 percent 
of all U.S. farm business debt, providing credit to more than 450,000 
eligible agricultural borrowers through a nationwide framework of five 
banks and 90 local retail associations. In addition, the FCS finances 
cooperatives, agribusinesses, rural utilities, and rural residents. As 
of March 31, 2009, total assets were $215 billion and loans exceeded 
$161 billion.
    During 2008, the FCS experienced another year of solid earnings and 
continued strong asset growth. Gross loans grew by 13.0 percent in 2008 
compared with 15.8 percent the previous year. However, we anticipate 
overall 2009 loan growth to moderate from these historically high 
levels because of less demand, a riskier credit environment, and the 
System's decision to more carefully manage growth in fulfillment of its 
mission. In fact, the System's loan growth slowed to just 0.6 percent 
in the first quarter of 2009, which reflects normal seasonal repayments 
on agricultural production loans and a modest two percent growth in all 
other lending types.
    While the System continues to have good credit quality and adequate 
capital, it and its borrowers face a number of risks, including 
volatile farm commodity and farm input prices; stress to specific 
agricultural sectors, including ethanol, cattle, hogs, poultry, and 
dairy; and reduced debt servicing ability by many farm families and 
rural residents because of the rising level of unemployment and less 
non-farm income. System asset quality has deteriorated recently because 
of this challenging economic environment and, in particular, because of 
large credits in the poultry and ethanol industries that have become 
stressed. With the continuation of the adverse effects emanating from 
the general economy and the rising risks in the agricultural economy, 
we anticipate further deterioration in the System's portfolio, as well 
as in portfolios of other agricultural lenders throughout 2009.
    Going forward, agricultural producers are facing greater financial 
challenges from lower farm income, volatile commodity prices, higher 
input costs, and potentially changing government support priorities. As 
a result, lenders are naturally becoming more cautious and conservative 
on the extension of credit to farmers, ranchers, and other agricultural 
producers. While creditworthy farmers and ranchers still have access to 
credit, the cost of credit is rising, underwriting requirements are 
more carefully scrutinized, and fixed-rate term loans are more 
difficult to obtain. To avoid excessive risk, lenders are increasingly 
lowering portfolio hold limits on various segments of the agricultural 
industry experiencing stress and conserving their capital resources. 
From FCA's perspective, the potential for increased risks in the 
agricultural industry will make credit a continuing area of concern. 
While creditworthy borrowers will still have access to credit, rising 
risks in various agricultural sectors means lenders will be cautious 
about increasing portfolio exposures.
    Importantly, however, the System's capital position, solid 
financial condition, and experienced management will help it remain a 
viable, dependable, and competitive lender during these difficult 
times. Total capital was $27.8 billion (including the Farm Credit 
Insurance Fund) at March 31, 2009, with more than 85 percent of total 
capital in the form of earned surplus, the most stable form of capital. 
The ratio of total capital to total assets was 12.9 percent as of March 
31, 2009, compared with 13.6 percent the year before. The decline 
occurred because System assets grew at a faster pace than capital and 
because the fair value of certain System investments changed. We note 
that the Agency's efforts and encouragement for the System to build its 
capital proved beneficial last year when commodity price volatility led 
to huge margin calls and other credit demands that the FCS was able to 
fund.
    System earnings in 2008 remained strong, with $2.9 billion in net 
income, a 7.9 percent increase over 2007. As cooperative institutions, 
the FCS banks and associations passed a portion of their earnings on to 
their borrower-owners as patronage distributions--33 percent of 
Systemwide net income in 2008. Return on assets (ROA) remained 
favorable at 1.44 percent. In fact, during an unprecedented turbulent 
and challenging year for all financial institutions, an ROA of nearly 
1.5 percent is considered very strong when compared with the ROA of 
other lenders. During the first quarter of 2009, the System earned $615 
million, 19 percent less than a year earlier. The decline in earnings 
resulted primarily from increased loan charge-offs and the need to 
replenish loan loss reserves because of rising risk in the loan 
portfolio, in particular for large credits in the ethanol and 
livestock/poultry industries.
    Despite declines from historic high levels over the past few years, 
credit quality remained good overall with less than four percent of all 
loans classified adversely as of March 31, 2009. Another credit quality 
indicator is the level of non-performing loans. Non-performing assets 
and nonaccrual loans increased from historically low levels. Non-
performing loans increased $500 million from December 31, 2008, to 
nearly $3 billion on March 31, 2009. This represents 1.8 percent of 
total loans, up from 1.5 percent at year-end 2008. Importantly, as 
increased stress is beginning to surface in FCS portfolios, we at FCA 
recognize that System senior management is well experienced and 
seasoned. Many gained experience during the agricultural credit crisis 
of the 1980s, and we believe appropriate actions, in general, are being 
taken by FCS boards and management.
    In addition to the System's management experience and board 
direction, as well as FCA's oversight, the Farm Credit System Insurance 
Corporation (FCSIC) further protected investors in more than $175 
billion in Systemwide consolidated debt obligations. It holds $3 
billion in its Insurance Fund. In response to an FCSIC proposal, 
Congress amended the Farm Credit Act through the Food, Conservation, 
and Energy Act of 2008 (2008 Farm Bill) to authorize a broader range of 
FCSIC premiums on the System's insured debt obligations. The 
implementation of these legislative changes in June 2008 for the second 
half of the calendar year increased the amount of premiums that FCSIC 
collected in 2008 and will ensure the fund's continued growth as needed 
into the future.
    The FCS has been able to maintain financial strength and serve its 
mission despite the economic and financial market turmoil. During the 
past year, negative economic developments in the financial markets have 
created a high level of uncertainty about the repayment capacity of 
global financial institutions. These conditions greatly reduced both 
the level of credit available and investor willingness to purchase debt 
securities of financial institutions. As a result, the System's ability 
to issue debt with preferred maturities and structures was extremely 
challenging. Because of the strong condition of the FCS and its status 
as a GSE, it has been able to issue short-term debt securities, even 
though the issuance of longer-term debt became much more difficult. The 
current financial environment also negatively impacted the System's 
cost of funding, as spreads relative to Treasuries have increased 
significantly. For instance, the spread to comparable Treasuries for 2 
year FCS debt peaked at 230 basis points compared with typical levels 
before the financial market crisis, ranging from 20 to 30 basis points. 
Most recently spreads have been about double the pre-crisis level. 
System institutions are responding to these funding challenges 
appropriately by increasing liquidity and the quality of its investment 
portfolio and, as necessary, increasing borrowing rates to customers.
    During this period of extreme market volatility, many non-System 
banks and financial institutions have been able to access funds through 
various programs created or recently expanded by the U.S. Government in 
response to the current financial crisis. The System does not have 
access to these programs or to any other U.S. Government-backed 
liquidity credit line. While this situation has not prevented the 
System from obtaining funds, continued volatility within the GSE debt 
market makes the outlook for the availability and pricing of future 
funding less certain. This is an area meriting close monitoring by the 
FCS, its regulator, and Congress.
    For our part, we have taken actions to provide the System 
appropriate regulatory flexibility during this difficult period. For 
example, we increased the System's discount note ceiling to $60 billion 
from $40 billion to allow it to raise funds if financial markets are 
not open to term debt. The FCA Board also adopted a Market Emergency 
Standby Resolution that would go into effect only in the event of a 
serious market disruption. It would temporarily allow Farm Credit banks 
to fund their assets with short-term liabilities, even if doing so 
would cause the liquidity reserve of one or more System banks to drop 
below the regulatory minimum requirement of 90 days. We continue to 
consider other measures to enhance System liquidity, capital levels, 
and earnings.
Examination Programs for FCS Banks and Associations
    The Agency's highest priority is to maintain appropriate risk-based 
oversight and examination programs. FCA's programs have worked well 
over the years and have contributed to the present overall safe and 
sound condition of the System, but we must continue to evolve and 
prepare for the increasingly complex nature of financing agriculture 
and rural America. We are hiring more examiners and increasing on-site 
presence and oversight of FCS institutions in response to the changing 
and riskier environment we face today.
    We evaluate each institution's risk profile on a regular basis. The 
Financial Institution Rating System (FIRS) is the primary risk 
categorization and rating tool used by examiners to indicate the safety 
and soundness of an institution. FIRS ratings range from one for a 
sound institution in every respect to five for an institution that is 
likely to fail. Our most recent FIRS ratings continued to reflect the 
sound financial condition of the FCS, although conditions in the System 
are beginning to show increased stress.
    The global recession is having a serious impact on the agricultural 
economy and the risk environment faced by agricultural lenders. Lower 
global demand for most commodities since mid-2008 has led to a rapid 
decline in crop prices. The decline in farm input costs in recent 
months should mitigate some of the effects of declining commodity 
prices, but for most crop producers prices have declined much more than 
input costs, resulting in tighter margins. Volatile feed prices and 
falling demand, especially in international markets, have also led to 
lower livestock margins. Significantly higher unemployment rates are 
expected to result in lower off-farm income, which is an important 
source of loan repayment for many System borrowers. Overcapacity in the 
biofuels industry and much lower dairy prices have added to System 
risk. The recent H1N1 outbreak has sparked import bans on U.S. pork, 
which may continue to depress hog prices. In February, the U.S. 
Department of Agriculture forecast a decline in 2009 net cash farm 
income of 17 percent from the record 2008 level. These factors are 
expected to lead to a continued decline in asset quality at System 
institutions.
    The combined effect of these factors increased the risk environment 
and contributed to FIRS ratings downgrades for several institutions in 
the fourth quarter of 2008 and again in the first quarter of 2009. 
Currently, none of the 95 FCS institutions are under formal enforcement 
action and no FCS institution is in conservatorship or receivership. 
However, we maintain an aggressive oversight and special supervision 
program to address risk in FCS institutions promptly and proactively. 
For example, we have increased examination and supervisory actions on 
the ten institutions rated three or worse. It is important to note that 
these ten institutions do not pose material risks to the System overall 
and the System remains financially strong and adequately capitalized.
FCA Actions to Mitigate Risk
    To address the heightened risk environment facing the System, we 
have told FCS boards and management that solid portfolio management and 
underwriting are paramount in these uncertain times and have emphasized 
the importance of portfolio stress testing. The Agency's examiners are 
increasing on-site presence and placing special emphasis on testing and 
evaluating the following:

   Internal audit and credit review programs to ensure that 
        they are adequate and that they reflect each institution's 
        risks in a timely manner.

   Portfolio management and stress testing functions to ensure 
        that they are appropriate for the institution.

   Large loans held by multiple institutions to ensure that 
        underwriting, servicing, and independent credit decisions are 
        made by purchasing FCS institutions and that representations 
        and warranties of the FCS originating lender are appropriate.

   Adequacy of the Allowance for Loan Losses and loan loss 
        provisions.

   Capital adequacy and capital management.

   Adequacy and quality of liquidity at System banks.
Federal Agricultural Mortgage Corporation
    Congress established Farmer Mac in 1988 to provide secondary market 
arrangements for agricultural mortgage and rural home loans. Farmer Mac 
creates and guarantees securities and other secondary market products 
that are backed by mortgages on farms and rural homes, including 
certain USDA guaranteed loans. The 2008 Farm Bill expanded Farmer Mac's 
program authorities by allowing it to purchase and guarantee securities 
backed by eligible rural utility loans made by cooperative lenders. 
Through a separate office required by statute (Office of Secondary 
Market Oversight), the Agency examines, regulates, and monitors Farmer 
Mac's operations.
    Farmer Mac is a separate GSE devoted to agriculture and rural 
America. By statute, in extreme circumstances Farmer Mac may issue 
obligations to the U.S. Treasury Department, not to exceed $1.5 
billion, to fulfill the guarantee obligations of Farmer Mac Guaranteed 
Securities. The Insurance Fund does not back Farmer Mac's securities, 
and the System is not liable for any Farmer Mac obligations.
    Farmer Mac's total program volume exceeded $10 billion at year-end, 
including both direct loan volume and guarantees. For the year ending 
2008, Farmer Mac experienced a large net loss. Specifically, nonprogram 
investment losses occurred because Farmer Mac held $50 million of 
Fannie Mae floating rate preferred stock and $60 million of Lehman 
Brothers senior debt securities. Events in September 2008 caused Farmer 
Mac to recognize a total of $106 million in other-than-temporary 
impairment charges on investment holdings. The full year 2008 net loss 
to common stockholders was $154 million, including the above-mentioned 
investment losses and losses related to fair value changes in financial 
derivatives and provisions for loan exposures to the ethanol sector. 
These losses were not the result of significant negative developments 
in Farmer Mac's program loan portfolio, although stress in Farmer Mac's 
ethanol portfolio has developed during the past two quarters and pushed 
delinquencies and non-performing loans higher from recent historically 
low levels.
    Despite the difficulties in 2008, Farmer Mac continued to have 
access to the debt markets to fund its program assets. Farmer Mac 
raised $124 million in net new capital through preferred stock 
offerings in the third and fourth quarters of 2008. As a result of the 
issuance of new equity, Farmer Mac's core capital exceeded the 
statutory minimum capital requirement at year-end 2008. The Farmer Mac 
Board of Directors replaced the Chief Executive Officer and Chief 
Financial Officer during the fourth quarter.
    During the first quarter of 2009, Farmer Mac reported net income of 
$33.5 million, compared with a net loss in the fourth quarter of 2008 
of $61.1 million. First quarter 2009 net income was primarily driven by 
gains on the values of financial derivatives and trading assets, offset 
somewhat by further provisions for losses principally related to the 
ethanol sector. Capital surplus exceeded the minimum requirement by $67 
million at March 31, 2009. During the first quarter of 2009, Farmer Mac 
improved its capital position by raising equity in conjunction with new 
business, selling loans and thereby shrinking assets, and recognizing 
gains on the values of financial derivatives and trading assets since 
fourth quarter 2008. Farmer Mac is continuing to work to improve its 
balance sheet, strengthen its capital position, and provide secondary 
market opportunities for agriculture mortgages and rural utility loans.
    Farmer Mac had positive developments for its business in late 2008 
and improvements continue in 2009. As mentioned above, the 2008 Farm 
Bill expanded Farmer Mac's program authorities in guarantee securities 
backed by eligible rural utility loans made by cooperative lenders. As 
of the quarter ending March 31, 2009, Farmer Mac guaranteed rural 
utility securities totaling $1.3 billion. Since then, Farmer Mac has 
agreed to purchase or guarantee additional rural utility loans from one 
cooperative lending partner.
Working With Young, Beginning, and Small Farmers
    The System is required to develop programs and make special efforts 
to serve young, beginning, and small farmers and ranchers. In 2008, 
lending by the System to YBS producers continued to show solid gains. 
Nevertheless, YBS results as a percentage of total loans have either 
dipped a few points or remained relatively flat over the past several 
years. However, since the percentage of young and small farmers is 
decreasing in general, the System's YBS dollar results are noteworthy 
because institutions have managed to expand loan volume. FCS 
institutions may use a variety of tools to fulfill their commitment to 
YBS lending. Many associations revised their YBS policies and 
procedures in the past year, or reported plans to do so in 2009. The 
changes were in response to guidance issued in an August 2007 FCA 
Bookletter, which allowed for more flexibility in lending to YBS 
borrowers and encouraged use of credit enhancements so YBS borrowers 
could qualify for credit. This indicates that FCA's oversight 
activities are accomplishing the goal of helping institutions' 
management and boards stay focused on this important mission area.
Working With Financially Stressed Borrowers
    Agriculture involves significant inherent risks and volatility 
because of many factors, including adverse weather, changes in 
government programs, international trade issues, fluctuations in 
commodity prices, and crop and livestock diseases. The significant 
risks in agriculture can sometimes make it difficult for borrowers to 
repay loans. The System (under provisions of the Farm Credit Act) 
provides borrowers certain rights when they apply for loans and when 
they have difficulty repaying loans. For example, the Act requires FCS 
institutions to consider restructuring a distressed agricultural loan 
before initiating foreclosure. It also provides borrowers an 
opportunity to seek review of certain credit and restructuring 
decisions. If a borrower's loan goes through foreclosure, the Farm 
Credit Act and implementing regulations provide borrowers who qualify 
the opportunity to buy back their property at the appraised fair market 
value or to make an offer to buy the property back at less than this 
value.
    FCA enforces the borrower rights provisions of the Farm Credit Act 
and examines institutions to make sure that they are complying with 
these provisions. It also receives and reviews complaints from 
borrowers regarding their rights as borrowers. Through these efforts, 
FCA ensures compliance with the law and helps FCS institutions continue 
to provide sound and constructive credit and related services to 
eligible farmers and ranchers. As the economy has deteriorated and 
affected FCS borrowers, FCA has received an increase in the number of 
borrower complaints. Generally, borrowers who contact FCA with 
complaints are seeking clarification, additional information, and 
options to redress their concerns. To the extent there are potential 
violations of law and regulations, FCA requires corrective actions by 
the institutions.
Conclusion
    The lending environment for the FCS going forward will be more 
challenging than the System has faced for many years. As agriculture 
and rural America contend with the challenges of these difficult and 
uncertain times, we are mindful that the System was designed to be a 
dependable lender to agriculture and rural communities in both good 
times and bad. FCA remains committed to ensuring that the System can 
fulfill its public policy mandate to both current and future 
generations of farmers and ranchers and the rural areas in which they 
live.

    The Chairman. Thank you, Mr. Strom.
    Members are reminded that they will be recognized in order 
of seniority as long as they were here at the beginning of the 
hearing. If not, they will recognized based on their time of 
arrival.
    Mr. Caruso, you talked about the backlog that you are 
facing. Can you just repeat those numbers one more time? And 
how many states have run out of money?
    Mr. Caruso. The backlog itself in the Direct Operating Loan 
Program, we have 1,440 approved loans that are not funded to 
the tune of $96 million, and in the Direct Farm Ownership 
Program we have 1,566 approved loans that are unfunded at this 
time to the tune of $277 million.
    We also have approximately 3,000 loan applications on hand 
that are being processed and have not yet been processed and 
acted on, which could obviously, as those become approved or 
meet our standards, would add to the demand for funds that we 
do not currently have the funds for.
    The Chairman. How about the states? How many states are out 
of money?
    Mr. Caruso. That might take just a moment--all of them.
    The Chairman. I thought she said that.
    I mentioned in my opening statement the troubles we are 
facing in Pennsylvania and, really, across the country, with 
dairy farmers. How much of that backlog are dairy farmers? Can 
you tell me that?
    And also are the MILC checks getting to the mailbox on 
time?
    Mr. Caruso. Let me answer the second question first and 
then seek some help on the first one.
    On MILC, the MILC payments, we put out $404 million thus 
far for production in the months of February, March and April, 
so about $130 million a month. And that will continue at some 
uncertain rate, depending on market prices, until markets 
recover.
    Additionally, in dairy, we purchased about 240 million 
pounds of nonfat dry milk under the Price Support Program. Over 
200 million of that has been moved into Domestic Feeding 
Programs, getting it out of the commercial market. And we have 
also been involved with the Food and Nutrition Service in 
bartering some of our nonfat dry milk for cheese that the 
School Lunch Program can use on pizza, and in other ways so 
that our school children will consume it.
    In terms of the backlog, whether we know its relevance to 
specific sectors, I am going to look to our Director of Farm 
Loan Programs, Carolyn Cooksie.
    Ms. Cooksie. No, we don't.
    Mr. Caruso. We don't have that broken down, but I will say 
that the livestock sector, dairy in particular, being as 
stressed as it is by low prices is an area of incredible 
demand, because it makes it obviously very difficult for 
traditional producers to get credit.
    The Chairman. Mr. Strom, given the situation at Farmer Mac 
last year, do you believe there was enough oversight into their 
investment decisions? And what have you learned from that 
situation?
    Mr. Strom. Mr. Chairman, you are referring to the losses 
that Farmer Mac incurred in their investment holdings in Lehman 
and in Fannie Mae?
    The Chairman. Correct.
    Mr. Strom. Those investments were made much earlier, and in 
the process, as they looked at that, they came to the Agency, 
and they had the authority to make those investments.
    At the time those investments were made, obviously 
unbeknownst to everyone, Fannie Mae and Lehman were still 
solid. As the deterioration of last September occurred and they 
took the losses on that, they were able to take some actions to 
raise capital through some preferred stock offerings.
    The investment decisions--obviously hindsight is always 20/
20 on these, and as you look back, for liquidity purposes they 
seem to be solid investments. I think in our oversight, going 
forward, we as an agency will apply appropriate examination and 
scrutiny on those types of investments.
    The Chairman. Thank you.
    The chair recognizes the Ranking Member.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Gentlemen, welcome.
    Mr. Caruso, you mentioned dairy farmers, and they seem to 
be facing tough times all across the country with high feed 
costs and low prices. Virginia dairymen have let me know that 
they have sought loans through the FSA, but the money is just 
not there.
    Is this the case of oversubscribed programs, or are the 
carve-outs in place for the loan programs keeping some 
producers from accessing loan funds?
    Mr. Caruso. I would say it is largely a case of 
oversubscription. It is pretty much across the board.
    The carve-outs that we have for certain targeted borrowers 
are a minor amount in the entire context. And we believe, based 
upon the trends that we are seeing, that those will be used up 
and perhaps turned into backlogs as well.
    We have done what we can------
    Mr. Goodlatte. But they have not been used up thus far; is 
that correct?
    Mr. Caruso. Not totally. But based upon the trend lines we 
see, they will be used up within the fiscal year.
    We have done what we can, basically, in terms of interfund 
transfers to try and meet the demand, but the demand is just 
exponentially high, based on sort of a perfect storm of 
conditions we have out there.
    Mr. Goodlatte. Do you have any feel for what percentage of 
farmers in the carve-out categories are receiving loans?
    Obviously, so far, all of them have--if you haven't used up 
the backlogs yet--relative to what percentage of other farmers 
are receiving funds?
    Mr. Caruso. We have--we have obligated $848 million in 
direct operating loans, and we have $11 million remaining 
unobligated. That would be the carve-out funds. So that gives 
you some sense of what a small portion of the total it is.
    We have $11 million in unobligated that is carved out, $96 
million in approved but unfunded loans. In direct FO--direct 
farm ownership, excuse me--the carve-out is $1.4 million. We 
have funded $200 million. We have a backlog of $277 million. We 
are still sitting on $1.4 million.
    So it is just a minuscule amount, and we do anticipate that 
those amounts will be needed by those targeted constituents.
    Mr. Goodlatte. So--I am not quite sure I follow you.
    Is it less than \1/2\ of what non-carve-out farmers have 
applied for that they have received?
    Mr. Caruso. We have an approved unfunded for farm ownership 
of $277 million, and we are sitting on $1.4 million.
    Mr. Goodlatte. Got you. But how much have you loaned to 
those farmers, non-carve-out?
    Mr. Caruso. About half of the amount that we have approved 
and funded has gone to targeted constituencies.
    Mr. Goodlatte. Half has gone to targeted and they have been 
pretty much fully met.
    The half that has gone to nontargeted farms, what 
percentage of the subscription is that? Have they received half 
of what they have applied for or is it less than that?
    Mr. Caruso. All of the backlog would be those that don't 
meet the standards for the targeted funds.
    Mr. Goodlatte. I think maybe we need to sit down and look 
at some numbers together. So we will work with you afterwards.
    Mr. Caruso. I would be happy to make Ms. Cooksie and her 
staff available to you and your staff to get to the basics.
    Mr. Goodlatte. Thank you.
    Mr. Strom, your testimony focuses on the Farm Credit 
System's ability to meet increased demands due to higher farm 
input costs. How is this System preparing for the imposition, 
or the possible imposition, of the Waxman-Markey cap-and-tax 
climate change bill?
    Analysis of that bill shows that input costs will go up as 
much as 115 percent. Given the current limit on credit 
availability, do you think your System can provide the 
liquidity needed to get farmers through this?
    Mr. Strom. Congressman Goodlatte, obviously, as that 
climate change legislation is addressed and the impact on 
agriculture, which could be significant--and you referenced the 
added input costs; agriculture producers are already stressed 
due to the volatility of this past year, year and a half, with 
their input costs, as you are well aware. Farm Credit System 
institutions stand ready to serve good, constructive, sound 
credit decisions in rural America for these agriculture 
producers.
    The System has built a strong capital base and has grown 
significantly in the last 5 years. The System now has over $200 
billion in assets, about $160 million outstanding loans in 
agriculture. And cognizant of the fact that this type of 
consideration, if there is impact for producers, could be 
significant to the producers' bottom line, we will still 
encourage System institutions to do what they can to work with 
producers to make safe, sound, dependable credit available to 
agriculture.
    Mr. Goodlatte. But this could put--we have already seen 
from Mr. Caruso's testimony that what is available through USDA 
is oversubscribed already. If this change in the law regarding 
climate control were put into effect, the demands on both 
systems would be dramatically increased, and the 
creditworthiness of some of those seeking to borrow, given the 
dramatic increase in input costs, could also be called into 
question, could it not?
    Mr. Strom. Well, yes. And when you are talking about credit 
underwriting standards, obviously the System is going to look 
at the loans of the producers, make sure that they are safe, 
sound, dependable credits for those producers.
    But, yes, when you look at the System itself, the System in 
the last 5 years has experienced, on an annual basis, double-
digit loan growth in the last 5 years.
    Now we are seeing a slowdown of growth in the first few 
months of this year. The first quarter, the loan growth was a 
little less than one percent in the System when we had double-
digits in previous years.
    But we are--we are not using that as a base and an 
assumption to say that is where that is going to stay. We 
assume that there will be credit needs coming forth; especially 
as the ag industry faces some of the stresses that are going on 
in the various industries from poultry to hogs, and dairy to 
ethanol, that there will be credit needs and demands. And the 
System will still be ready to meet those demands where they 
make good credit decisions.
    Mr. Goodlatte. Thank you.
    Thanks, Mr. Chairman.
    The Chairman. The chair thanks the Ranking Member and 
recognizes the gentleman from North Carolina, Mr. Kissell.
    Mr. Kissell. Thank you, Mr. Chairman.
    Mr. Strom, any idea of how many clients have come forth to 
have their loans refinanced and in what ways are you working 
towards refinancing?
    Mr. Strom. Are you referring, Congressman, to distressed 
borrowers that need refinancing?
    Mr. Kissell. Yes. Yes.
    Mr. Strom. The System, as part of Congress' foresight 20 
years ago in the amendments to the Farm Credit Act, put in 
place borrower rights provisions. So the first step for 
borrowers is, if they face difficult times, go in and sit down 
with their lender, go in and look at what can be done working 
with the lender, working with restructuring the loans.
    If the situation gets to the point where the borrower is 
seriously distressed, there are, again, these borrower rights 
provisions that require the System institution to look at the 
least-cost restructuring method for this producer.
    And so we encourage in our oversight and have--I sent out a 
communication recently to the System institutions to 
refamiliarize themselves with all of the borrower rights 
provisions of the Farm Credit Act, so that they appropriately 
address the needs of and the situations as these develop for 
agricultural producers.
    Mr. Kissell. Any idea, in terms of foreclosures, are we 
seeing an increase there, and how does it compare to the recent 
past?
    Mr. Strom. I can't speak specifically to statistics for 
foreclosures, I simply see what some of the headlines and press 
are reading--are saying also.
    I think as far as System institutions are concerned, we are 
not seeing the deterioration to that point yet. There are 
stresses going on in the portfolio.
    Unfortunately, we are seeing in some of the--outside of 
Farm Credit System lending institutions in the commercial 
banking sector, some failures of commercial banks. FDIC has 
closed a number of banks; some have agricultural portfolios. 
And those producers that may be in that situation, which may be 
looking for a lender, we are making sure that Farm Credit 
System institutions are open to talking to any of those 
displaced borrowers from those types of situations.
    Mr. Kissell. Thank you, sir.
    Mr. Caruso, I congratulate you on the reduction in the 
turnaround time on being able to get back and respond to the 
individuals as they ask for help.
    We were talking about the concerns in the dairy industry. 
Any other aspect, in particular in agriculture, a portion that 
is maybe feeling more stressed than others, or any particular 
part of the country where we are seeing more stress than in 
other parts?
    Mr. Caruso. Well, I think relative to where we were a year 
ago on commodity prices, everybody is feeling the downturn. But 
I would say, anecdotally, my observation is, it is in the 
livestock sector in particular, and dairy in particular within 
that, that my office gets the most phone calls.
    Mr. Kissell. Thank you, gentlemen, for being here today. I 
forgot to mention that to begin with.
    Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Kansas, Mr. Moran.
    Mr. Moran. Mr. Chairman, thank you for very much.
    Gentlemen, thank you for being with us.
    Mr. Chairman, Chairman Strom, explain to me, please, the 
nature, the substantive difference between farm credit as a GSE 
and other GSEs such as Fannie Mae and Farmer Mac?
    Mr. Strom. Congressman Moran, probably the biggest 
difference is--first of all, the Farm Credit System is the 
oldest of the GSEs. But there are strong differentiations 
between that, I mean, the issues around Fannie and Freddie and 
their securitization business.
    The Farm Credit System institutions are different in that 
they hold their loans on their books. This is a cooperatively 
owned System where the borrowers, the farmers and ranchers who 
go into those offices and get loans, then some of them end up 
on the boards of directors elected by the others who use the 
System. And so they are the governing bodies of these 
institutions, these 90 associations and five banks of the Farm 
Credit System nationwide.
    So that cooperative structure--Congressman Goodlatte had 
mentioned in his opening comments, the strength of the past of 
the System under the guidance, again, of Congress--the System 
has set about in the last 20 years building a good, strong 
capital base and has been able to service agriculture in the 
last 2 decades with significant growth, as I mentioned, in the 
last 5 years.
    But I would say that is primarily the difference. I mean, 
this is a cooperatively based lender that holds its loans on 
its books and is well capitalized.
    Mr. Moran. The taxpayers of this country have contributed 
significant resources to other GSEs, to Freddie Mac and to 
Fannie Mae. My impression is that there is unintended--perhaps 
unintended consequences.
    There are consequences that occur, that accrue as a result 
of that taxpayer support, that taxpayer support for the other 
GSEs. And that consequence is the cost of lending, therefore, 
the cost of borrowing money to farmers in Kansas and across the 
country who use the Farm Credit System, has and will increase 
as a result of the Federal support for the other GSEs. My 
assumption is that means that it is more likely that capital 
investment flows into the other GSEs faster than it will into 
farm credit.
    Is that true and would you explain that to me? And if you 
are able to quantify, several of us have criticized--many of us 
have criticized the role that government is taking in regard to 
the private sector, in this case in these other two GSEs. But, 
are my farmers going to pay a price for this at higher interest 
rates; is that true?
    Mr. Strom. Absolutely, Congressman. The issues, again, of 
the GSEs, there has always been the implied backing of the Farm 
Credit System by the Federal Government. It is not explicit; it 
is implied.
    The events of last fall, as they unfolded with the 
financial and banking crisis, caused, in the lack of confidence 
issue, as investors worldwide backed away from investments in 
debt offerings, predominantly in the long end of the maturity.
    The Farm Credit System relies on its ability through the 
consolidated debt obligations of these System institutions, 
through their funding operations in New York, to be able to 
access those debt markets.
    The unintended consequence that you mentioned was that as 
some of the remedies that were put forth--for instance, as an 
example, FDIC's 100 percent guarantee of new bank debt 
issuance--caused investors to look to those types of things 
where there was a more explicit backing and caused even more 
dislocation for the Farm Credit System.
    How did that relate to cost? We saw the cost of spreads of 
U.S. Treasuries, as I mentioned in my opening statement, which 
had typically run 20 to 30 basis points over U.S. Treasuries, 
spike to over 160 basis points, almost a full 1\1/2\ percent 
more interest cost for the System to be able to issue long-term 
debt.
    It has been able to continue to issue on the short-term 
basis, the short-term maturities, but that is risky for it to 
do that in a long-term mode. So those costs ultimately get 
passed on to the producers.
    Now, we have seen a little bit of an easing in that where 
the long-term costs have eased off to about 100 basis points in 
that area right now, but still significantly above because of 
this dislocation. And the farmers and ranchers on these boards 
of directors around the country and those farmers and ranchers 
that are served say, ``Hey, the Farm Credit System has done a 
good job in the last 20 years of building capital, it is a 
strong organization, and it has just been unfortunate, these 
unintended consequences and the relating costs.''
    Mr. Moran. Thank you very much. My time has expired.
    Mr. Caruso, I won't ask you any questions about credit, but 
maybe I will follow up with you.
    But I would encourage you in your capacity at FSA to 
develop a long-term plan in regard to the Conservation Reserve 
Program. We need answers earlier, rather than later, as farmers 
are making decisions. What you do in regard to extensions and 
to new general sign-up needs to be known as quickly as 
possible.
    Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Alabama, Mr. Bright.
    Mr. Bright. Mr. Chairman, thank you very much. Let me 
commend and thank the panelists for being here today.
    Mr. Caruso, I believe we have heard this morning that there 
has been a steep rise in the loan applications. Can you 
describe who these applicants may be and why they are turning 
to FSA at this point in time? Do you have an opinion?
    Mr. Caruso. I don't have specific data on it, but I think 
it is generally across the board. We have seen a downturn in 
agricultural prices, in agricultural income as a result. At the 
same time we have seen a tightening of credit standards due to 
the credit markets in general.
    We would normally expect an uptick with the downturn in 
farm prices. Combined with tighter standards for commercial 
credit, which is a prerequisite to coming to our programs, I 
think it is largely across the board; I don't know that there 
is any particular sector. I think everyone is looking in our 
direction, which is why we have such a huge increase in first-
time participants in our farm loan programs.
    Mr. Bright. Thank you, sir.
    Mr. Strom, just one question for you, how would you compare 
the state of agricultural credit to that of the rest of the 
economy in conjunction with the credit availability, and in 
terms of the safety and the soundness?
    Mr. Strom. Congressman, I guess I would characterize it as, 
there is still credit available to agriculture. It comes, as I 
mentioned in my previous comments, at a higher cost for 
agriculture.
    We have seen interest rates stay at a relatively high 
level, even though there have been these proposed remedies for 
the housing market in an effort to get housing mortgage rates 
down.
    But I would say there is still credit availability. The 
Farm Credit System is still out lending to agriculture, again, 
on a safe and sound basis. That is our job as a regulator, to 
ensure that the System institutions are doing the right thing 
with their borrowers and making that credit available.
    Mr. Bright. Thank you very much.
    Just one last statement that I would like to make as a 
Congressman from a heavily rural, very agricultural dependent 
district, I want you to continue working with the farmers. 
Because as far as I am concerned our farming industry and 
agriculture industry is so key to our--similar to our military 
as far as our national defense is concerned. Once we lose our 
food chain, we lose that bit of security that we have here and 
that sovereignty that we so much enjoy here in America.
    So thank you very much for what you do in continuing to 
support our agriculture industry.
    Thank you, Mr. Chairman. I yield back my time.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Pennsylvania, Mr. Thompson.
    Mr. Thompson. Well, I thank the Chairman and Ranking Member 
for this hearing today. I appreciate it.
    And thanks to the panelists that are here.
    Chairman Strom, despite increases from historic low default 
rates, do you see similarities in today's agricultural 
markets--credit markets, to what we saw in the mid-1980s? And 
what has the System done to make sure we don't have a repeat of 
the 1980s in rural America?
    Mr. Strom. Congressman, let me just reference where we were 
at in that situation, and then address where we are at.
    We have seen some increasing in the nonaccrual loans and 
some of those loans that we classify adversely in the Farm 
Credit System. The amount of that, adversely, has gone back to 
more historic levels, if you look back over the last 20 years. 
The last few years' credit quality was the best in the history 
of the Farm Credit System, and it is reflective of a strong 
agricultural industry in the last decade or 2.
    Yes, there have been issues in particular pockets of 
agriculture; but by and large, land prices have risen, and that 
is the key asset in agriculture, and they are still remaining 
relatively stable.
    And as you asked the question about what we see down the 
road, that, yes, there is going to be, and I think anyone would 
expect that in this financial, banking, and economic climate 
that the country is in right now that you would see and expect 
some deterioration, some stresses. We are monitoring closely, 
as I mentioned earlier, the larger ones, the keys on our radar 
screen in the livestock industry, all the livestock sectors, 
because of the increase in their input cost and feed costs.
    We are looking at issues around the ethanol industry. The 
Farm Credit System is the largest provider of credit to that, 
to the ethanol industry, with about $3 billion outstanding.
    But I would characterize, as you ask the question of, is 
this characteristic of something that would lead us into a 
1980s-type situation--I am a farmer back in Illinois also. I 
lived through the 1980s. I was a Director on Farm Credit System 
institutions at that time, as we set about trying to do the 
right things, we had to make some changes.
    I don't see this being that type, or scope, of an 
agricultural--of a looming agricultural crisis. But there are 
issues, as referenced with some other potential changes, that 
could happen. If changes in climate change legislation did add 
significant cost to agriculture producers, the bottom lines of 
these producers is what makes the solid base for agriculture, 
going forward.
    Mr. Thompson. Now, kind of sticking with the theme that you 
raised there in a little different light with climate change, 
your testimony highlights and compliments the authority this 
Committee provided in the farm bill, allowing Farmer Mac to do 
business with the National Rural Utilities Cooperative Finance 
Corporation. And it is my understanding that business largely 
involves financing of coal-fired rural electric cooperatives 
that faithfully serve the majority of our constituents--I know 
my constituents.
    How is Farmer Mac preparing for the--what I see as the 
devastating impact that the Waxman-Markey ``cap-and-tax'' 
climate change bill will have on rural electric cooperatives?
    Mr. Strom. Congressman, again, in our job as a regulator of 
Farmer Mac and making sure that they are doing the right things 
over at Farmer Mac--and, yes, they are in rural utility 
lending. In the changes in the 2007 Farm Bill, it did provide 
them additional authorities and, in fact, they have about $1.3 
billion of guaranteed rural utility securities at the current 
time, and an agreement to purchase an additional $1 billion in 
rural utility loans.
    As far as preparation for change, I think is what you are 
asking, we simply are wanting to ensure that Farmer Mac, in its 
loan program business and in the volume that it securitizes, 
and puts on its books, is good, solid, constructive credit. If 
you look at what potential risks are down the road, obviously 
we all need to be cognizant of how change like you referenced 
can impact segments of the industry.
    I guess I would also ask--I have my Director of our Office 
of Secondary Market Oversight here present with me, who heads 
up our oversight of Farmer Mac. I don't know if he would have 
any additional reference for me.
    But, in a preparation mode, we are simply trying to do the 
right things, making sure Farmer Mac puts on good, solid 
program businesses.
    Mr. Thompson. I yield back, Mr. Chairman.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from Indiana, Mr. Ellsworth.
    Mr. Ellsworth. Thank you, Mr. Chairman.
    Thank you, gentlemen, for being here. I will try to be 
brief.
    Mr. Caruso, I believe in your testimony you said that there 
weren't--you weren't seeing any delays and the staff at FSA was 
keeping up with the increased applications. If you could delve 
into that, how that is occurring, is it just the dedicated 
workforce that is working extra hours; are you adding staff, 
and how you are accomplishing that.
    And then I would like you to touch on the status of the 
computer system.
    Since I took this office, going back to farmers and the FSA 
offices, I continue to hear about the rather antiquated system 
and not talking--and I would like you to just touch on that for 
me. What the status is and what the future plans are on the 
computer system, so it works and is modernized and is the most 
efficient it can be.
    Mr. Caruso. Certainly, Congressman.
    We have not added staff. It has been the existing staff 
that has largely handled this. And the ability to meet this 
demand has largely been because of the improvement in the IT 
systems for loan-making.
    In that area, within our FSA IT infrastructure, we are way 
ahead of everything else. Our farm loan folks and the IT people 
who work with them are ahead of the rest of FSA in the loan-
making area.
    The one part of our farm loan side that we are not yet up 
to where we would like to be in IT is in loan servicing. And at 
this point we haven't gotten into a great demand for loan 
servicing. But if this downturn in the ag economy pervades for 
an extended period, we may see some increase in demand for 
servicing of loans as farmers struggle. That is the remaining 
piece for IT for farm loans.
    The IT system for our farm programs, our Title I crops, for 
example, is another beast. That is the one that we commonly 
hear about where we have some serious, serious challenges. And 
some fairly costly solutions are being suggested. And I, being 
new in my position, am being asked to look at that entire area 
in terms of trying to bring it forward into the current 
century, and make it as effective and efficient and as producer 
friendly as is our farm loan-making IT system.
    Mr. Ellsworth. Thank you. Anything I can do to work with 
you on that, like you said, bring it up to modern times, or at 
least semi-modern times, would be greatly appreciated.
    Mr. Caruso. Thank you. You could talk to your colleagues on 
the Appropriations Committee.
    Mr. Ellsworth. Okay, will do.
    Mr. Chairman, I yield back.
    The Chairman. I recognize the gentleman from Missouri, Mr. 
Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Just very briefly, Mr. Strom, many pieces of testimony 
today have focused on the System's inability to sell long-term 
debt; 3 years is the longest the market is interested in right 
now.
    Have you seen any change in who is buying long-term debt 
from us?
    Mr. Strom. Congressman, I believe we have seen a little 
change in that. Prior to last year's, last fall's events, 
roughly 30 percent of System debt issuance was purchased by 
foreign interests. Foreign central banks had a fairly good 
appetite for Farm Credit System securities.
    We have seen them basically exit the market. So there is 
no--virtually, at this time, no investment from outside the 
U.S. in that. So that is the biggest piece I can speak to.
    I think, otherwise, this still--there are still 
institutional investors in the United States here that are the 
buyers of debt. But, again, it is extremely difficult to issue 
beyond 5 years. The System is still relying on much shorter-
term maturities.
    Mr. Luetkemeyer. I have a lot of biodiesel and ethanol 
plants in my district, and I know you have been a major 
financier of those. Would you discuss just for a few minutes a 
little about your continued efforts along that line to continue 
to finance ethanol plants, biodiesel plants, and where you 
think it is going to go; if we are solid there yet or if we are 
struggling, or how much you compare to public finance--other 
types of private financing?
    Mr. Strom. Congressman, as I mentioned, the Farm Credit 
System has probably been the most significant financier of the 
growth in the ethanol industry. Of the 158 operational ethanol 
plants, the Farm Credit System participates in financing of 
approximately 60 percent of that, about $3 billion outstanding, 
another $1 billion in commitments yet.
    The ethanol industry, as we are all aware, has been facing 
a stressful time here recently. And System lenders--and whether 
it is System or the other commercial lenders that are involved 
in ethanol--don't have much of an appetite right now to add 
additional ethanol exposure with the uncertainty swirling 
around a variety of issues, and then just the dynamics of 
volatility of commodity prices and the bottom line for those 
ethanol producers.
    I think, as we are very aware of this situation, and in our 
role as a safety and soundness regulator of these 
institutions--and I should mention that there are four lead 
lenders in the Farm Credit System that have the expertise and 
work directly with the financing of these plants, and that $3 
billion is then participated out across System institutions to 
minimize concentration risk for specific farm credit 
institutions.
    But we are active in the process of looking at this. As the 
examiner of the farm credit institutions, obviously our job is 
to maintain the safety and soundness of these institutions that 
have risk in this portfolio. And I should mention that I had a 
visit last week with Secretary Vilsack last Tuesday--last 
Thursday morning, and we talked about this issue and a variety 
of other issues. And I am well aware of USDA's efforts in this 
issue also.
    Mr. Luetkemeyer. Thank you.
    I yield back my time, Mr. Chairman.
    The Chairman. The chair thanks the gentleman, and 
recognizes the gentlewoman from Pennsylvania, Mrs. Dahlkemper.
    Mrs. Dahlkemper. I thank you, Mr. Chairman. I thank the 
Ranking Member, and I thank the gentlemen for coming today and 
speaking in front of us.
    Mr. Strom, I wanted to ask you about a proposed rule that 
the FCS is currently limited to just lending to farmers and 
ranchers with few exceptions, but there is an expansion to this 
that is proposed. I want to ask you where is this at in terms 
of the timeline for approval or for dropping this proposed 
rule?
    Mr. Strom. Congresswoman, I believe you are referring to 
our Rural Community Investment Rule that was put out last year 
and that was open for a comment period. And in that comment 
period we received over 10,000 comment letters. Currently, we 
are in the process, yet, of review of all of those comment 
letters.
    But let me just express that in this, this is the program 
for Rural Community Investment, mission-related types of 
investments that allow System institutions to make investments 
in rural America. And let me just mention that currently there 
are 52 institutions--this was at the end of 2008--52 
institutions held mission-related investments across the System 
totaling almost $5 billion, with commitments for additional 
projects totaling about $51 million.
    The proposed rule has been backed up by a 4\1/2\ year pilot 
program that we have that has granted the authority, or given 
the structure, to this program.
    There are three points, I guess, I would just like to 
comment with you on this, that the Farm Credit Act of 1971 
gives the investment authority to the System to do these types 
of investments. FCA, our role as a regulator, is to ensure that 
this is done in the safe--in a safe and sound manner.
    And as we now review the comments that came in, we are 
going to do the right thing, going forward, on this. Because it 
is good for farmers and ranchers and the communities that they 
live in to have access to these types of investments.
    I can reference one particular item in St. James, 
Minnesota, where a Critical Access Hospital was funded by a 
group of nine Farm Credit System institutions, totaling $16.3 
million in a--again, a Critical Access Hospital unit.
    These are the types of examples that, again, we are 
reviewing, making sure that it works. I believe our job is to 
make sure that System institutions have the capacity and the 
capability under these types of programs to do these types of 
things for rural America.
    Mrs. Dahlkemper. But you are moving forward in approval of 
that?
    Mr. Strom. Well, we have not made that decision yet. We are 
still in the process of reviewing the comment letters.
    Mrs. Dahlkemper. Thank you. I yield back.
    The Chairman. I thank the gentlewoman and recognize the 
gentlewoman from Colorado, Ms. Markey.
    Ms. Markey. Yes, thank you very much, Mr. Chairman, and 
panel members.
    Thank you, Chairman Strom, it was very good to meet with 
you the other day. Mountain Plains Farm Credit does an 
excellent job in my district, particularly in Greeley, 
Colorado, particularly with the failure of one of our large 
commercial ag lending institutions, New Frontier Bank. I know 
that they are doing everything they can to help mitigate that 
situation.
    But apparently ten percent of the associations are 
considered--I guess they are published ratings--FSA 
associations are published, and ten percent have a troubled 
rating of three or four.
    Can you talk a little bit about what is the source of that 
problem? Are there delinquencies, poor management in some of 
these associations? And can you tell me what percentage of FCS 
loans are at these troubled associations? Are they more or less 
than ten percent? And what kind of enforcement is taking place 
right now?
    Mr. Strom. Congresswoman, you are referencing the internal 
rating system we have at Farm Credit Administration that we 
employ as we rate the health of the associations and the banks 
of the Farm Credit System. It is called our FIRS rating, 
Financial Institution Rating System.
    We have seen a decline. As I mentioned in my opening 
statement, we are seeing some stresses and decline in the 
ratings of some of the System institutions. Most recent numbers 
show that we now have about ten institutions that are rated 
three or four in our System.
    But let me characterize, these are typically smaller 
associations than the Farm Credit System. So when you reference 
ten percent of the Farm Credit System, it is actually a much 
smaller percentage of the volume of the System that are in 
these farm credit institutions.
    Now, not all of their portfolio is rated poorly. So, I 
mean, only--I would say, the volume of these institutions is 
less than three percent of the System volume that is comprised 
in these ten institutions. So it is a small, much smaller 
percentage.
    As a--again, I mentioned that we are seeing an increase, 
though, in some of our--stresses in loans, some non-performing 
loan numbers are up and what we would quantify as ``adverse 
credits.''
    Ms. Markey. I appreciate that clarification.
    Mr. Strom. Let me mention, Systemwide the System is still 
in a very strong position, again, with good capital.
    Ms. Markey. I have one question for Mr. Caruso. Right now 
there seems to be more emphasis on guaranteed loans versus 
direct loans at USDA. I know it keeps business flowing at 
commercial banks. But there is more of a demand right now for 
direct loans as compared to guaranteed loans. Can you comment 
on the significance of this change?
    Mr. Caruso. Well, I think that there also is an uptick in 
demand for guaranteed loans as well. So we are seeing it in 
general. But the direct loan program is the program for those 
producers who are unable to even obtain a commercial loan with 
one of our guarantees behind it. And so it is sort of the entry 
point into our Federal loan programs.
    Our goal is to graduate our borrowers from direct loans 
that we fund with tax dollars to commercial credit backed by 
our guarantee, and eventually to commercial credit without any 
government backing. But we are seeing an uptick across the 
board in loan demand.
    Ms. Markey. Thank you, Mr. Chairman.
    I yield back.
    The Chairman. The chair thanks the gentlewoman, and 
recognizes the gentleman from North Dakota, Mr. Pomeroy.
    Mr. Pomeroy. Thank you, Mr. Chairman. Our background 
material from the Congressional Research Service indicates that 
debt-to-asset ratio is less than ten percent, which is 
historically low. It indicates healthy circumstances relative 
to leverage. Land prices have generally held. Yet, a couple of 
things warrant, at least, questions.
    The increase in direct loans, the substantial increase in 
direct loan demand, about a doubling of last year, and an 
increase in non-performing loans, the highest in about 10 
years, albeit a very low rate--how do we look at that? Are 
these indications in this larger troubled economy of something 
that ought to cause alarm, or just points to note indicating a 
period of extraordinary good times has come to an end, and we 
are back to more business as usual.
    Each of your thoughts on that.
    Mr. Caruso. I don't know that I have a quantifiable answer 
to your question. I think it is a very good one. I guess a 
personal observation is that agriculture and producers seeking 
credit are facing a small piece of what is going on, in a 
larger sense, in our economy and in the credit markets. But I 
don't have data to support that. That is just a personal 
observation.
    Mr. Strom. Congressman, I guess I would characterize in 
that as we have seen some deterioration, obviously there are 
specific stresses that have caused good portions of this. The 
poultry situation of the last year, which has been very 
difficult. You have the recent impact of the H1N1 on the hog 
industry. And we all know, as the Chairman referenced, the 
dairy industry. Fluid milk prices are half of what they were a 
year ago.
    There are significant stresses going on within certain 
sectors within agriculture. But then you look to the producers 
all across rural America. The financial crisis of the last year 
and the resulting impact on small businesses--more businesses 
going out of business, and some of those are located in rural 
America. Job opportunities for farm families off-farm income-
type of things aren't there also.
    So there are a series of compounding factors here. And you 
ask about is this something that--I don't know if I use the 
term ``systemic possibility'' in agriculture, but there are 
pieces we can put together here that, taken in the whole, could 
be considered somewhat troublesome.
    Mr. Pomeroy. A larger economy aside, looking at the 
extraordinary volatility in ag prices over the last couple of 
years--period, that kind of price weighing doesn't do anybody 
any good. We all like the extraordinary upside moment, but the 
downdraft is very disturbing.
    Is it a fair statement that through this cycle, which 
occurred in a relatively short period of time, the profit-
taking went into debt reduction as opposed to leveraging based 
on economics of prices that were unlikely to continue. So, in 
the end, we went through the up and now we are back more to 
normal pricing levels without a considerable disruption in the 
underlying financial underpinnings of farm operations?
    Mr. Strom. Yes, Congressman. As I see the numbers, there 
was significant paydown. I mean farmers are going into this 
period, by and large--again, I realize there are segments that 
are significantly stressed now, but on the whole producers are 
going into this with a fairly strong balance sheet of 
agriculture. They can weather a fair amount because they did 
good practices in recent years of managing their risk, of 
paying down debt, and those types of actions.
    Let me just, if I might; you also referenced the commodity 
volatility. Let me just mention this as an important factor of 
last year and where the Farm Credit System played a role. When 
commodity prices reached unprecedented levels at this time a 
year ago, the Farm Credit System, predominantly CoBank, 
headquartered in Denver, Colorado, stepped forward and was able 
to provide financing. And our calculations are somewhere north 
of $6 billion of financing went in, on a very short notice, to 
keep the grain industry liquid so that it wasn't a fracturing 
of that industry. That is one example of what the Farm Credit 
System is capable of doing, given the need.
    Mr. Pomeroy. Thank you, Mr. Chairman.
    The Chairman. The chair thanks the gentleman and recognizes 
the gentleman from New York, Mr. Massa.
    Mr. Massa. Thank you, Mr. Chair. Mr. Strom, just a quick 
question for you, and my apologies for my arriving late. We 
have multiple hearings ongoing.
    I know there has been some discussion already, alluding to 
current dairy issues. Is there anything that you can bring to 
the table from your position--and I fear not to use the word 
``emergency'' but, frankly, in many of the dairy farms that I 
have visited in the past 2 months, it is an appropriate 
characterization--that will help.
    We are viewing a catastrophic meltdown of smaller family 
dairy farms in my district, and I would extrapolate that out of 
my area as well. I turn to you for ideas as a farm expert on 
some extraordinary partnership that you may be able to forge 
under your leadership.
    Mr. Strom. Congressman, as a regulator of the Farm Credit 
institutions, our duty and responsibility is to maintain safety 
and soundness of these institutions. Those cooperatively loaned 
institutions where farmers sit on those boards of directors 
make decisions and guide that management team in the policies 
of those institutions.
    And I understand the dairy industry is being beset by 
unprecedented issues. Our encouragement--and I have sent out 
communication to encourage System institutions to refamiliarize 
themselves with the issues about borrower rights that were 
afforded under the amendments of 1987 in the Farm Credit Act, 
so that the System institutions is required to look at least-
cost loan restructuring options for producers.
    Now, the Farm Credit System is not the lender of last 
resort. It works alongside the commercial and independent 
banking community to provide agriculture credit. We also 
encourage, though, our System institutions, if a borrower is 
significantly stressed, to recommend that borrower turn to and 
look to FSA. When you go on FSA's website and you look under 
the loan programs, it says: If farmers can't get loans from 
commercial banks or the Farm Credit System, they can turn to 
the Farm Service Agency as an option.
    But, as we heard the gentleman at the table here alongside 
me say, I mean, they are stretched now significantly, too, with 
some funding issues on loans there. But we encourage System 
institutions to work with borrowers as best as possible, but to 
maintain safety and soundness and make proper underwriting 
decisions and loan decisions in their institutions.
    Mr. Massa. I certainly respect and appreciate that. In 
fact, your solvency and strength is a testament to those very 
good banking practices, and I would in no way encourage 
deviating from that, except under the following category. I 
might recommend that perhaps, literally, a financing summit of 
all stakeholders take place to look at if your leadership 
across the three organizations you just mentioned could somehow 
look at some sort of emergency high-risk program that is a 
gated or a fenced set-aside for these extraordinary times and 
this extraordinary sector.
    I believe that men and women of good intention, both those 
in need and those as potential who can solve it, might be able 
to come up with a solution if we view this as the true national 
emergency that it is. And I am, again, not asking you to 
destroy underwriting practices. I am not asking you to go down 
such that 10 years from now we have a collapse that we need to 
deal with. But if there is a one or two percent margin of 
difference that we can come to concurrence on, that will get us 
through the next year, that may be an investment in the short 
term that would be worthwhile. And I commend you to consider 
this possibility.
    Mr. Strom. I appreciate your comments. Let me just 
reference also so that you are aware that the Farm Credit 
System has a significant portion of debt into the dairy 
industry--and I am looking for the number. I thought I saw it 
earlier. I apologize for not having it. The Farm Credit System 
has about $11 billion, almost $12 billion of financing into the 
dairy industry. So it is important.
    Mr. Massa. It is very significant. I appreciate that. And I 
know that you guys are very focused on this. I just add my 
voice as a note of urgency. Thank you very much.
    I yield back my time.
    The Chairman. The chair thanks the gentleman and also 
thanks our witnesses for their testimony today and their 
participation in the hearing.
    I would like to call upon our second panel. Mr. Bob Frazee, 
President, MidAtlantic Farm Credit, Westminster, Maryland; Mr. 
Michael Gerber, President and Chief Executive Officer, Farmer 
Mac, Washington, D.C.; Mr. Fred Bauer, President/Chief 
Executive Officer, Farmers Bank, Ault, Colorado; Dr. Mark 
Drabenstott, Director and Research Professor, Truman School of 
Public Affairs, University of Missouri, Kansas City, Missouri; 
Mr. Patrick Sullivan, Economic Development Specialist and 
Agriculture Mediation Program Project Leader, New Mexico State 
University.
    When everyone is seated, you may begin.

 STATEMENT OF J. ROBERT FRAZEE, PRESIDENT AND CEO, MidAtlantic 
                  FARM CREDIT, WESTMINSTER, MD

    Mr. Frazee. Mr. Chairman, Ranking Member, Members of the 
Subcommittee, my name is Bob Frazee. I am President and CEO of 
MidAtlantic Farm Credit. As a part of the Farm Credit System, 
we are cooperatively owned by more than 10,500 farmers in the 
States of Maryland, Delaware, West Virginia, Virginia, and 
Pennsylvania. Our cooperative structure keeps us focused on the 
needs of our farmer-members and it means that we share our 
profits with them.
    Over the past 4 years, MidAtlantic has returned over $110 
million to our member-borrowers. The Farm Credit System 
returned some $2.6 billion to its owners during the same 
period. That money stays in agriculture and contributes to our 
members' success.
    The Farm Credit System remains very strong. The first 
quarter of 2009 combined net income was $615 million. Total 
loans outstanding were $162.3 billion. The System provided 
almost $1 million in new credit to agriculture during the first 
quarter of this year.
    The Farm Credit Administration is our safety and soundness 
regulator, and because Farm Credit's mission, ownership, 
structure, and authorizing legislation is unique, it would be a 
mistake to include the Farm Credit Administration in any effort 
to consolidate Federal financial institution regulation. And we 
urge this Committee to resist such a proposal.
    Now, let me share some highlights of significant credit 
issues and challenges in the territory that my association 
serves. Poultry, cash grain, and dairy are the major commodity 
types that are prevalent in our territory. Poultry represents 
21 percent of our portfolio. And in 2008, the poultry industry 
had high production costs plus high levels of inventory. This 
resulted in significant losses for the integrators who reduced 
production and conserved cash and ultimately impacted our 
contract growers.
    We have been working with individual borrowers all up and 
down the stream, contract growers and integrators, to help 
maintain their cash flows during these times. We are hopeful 
that the industry is going to return to profitability in the 
near future. There are some encouraging signs there.
    Cash grains represents 19 percent of our portfolio. And 
demand for local grain continues to be good, but is highly 
dependent upon poultry production. Pressures from development 
and environmental concerns will continue to challenge our 
producers.
    Dairy is 11 percent of our portfolio. We have already 
talked today about the impact on the dairy industry. Certainly 
low milk prices and high input costs through 2008 have resulted 
in numerous herd liquidations within the industry. We have 
contacted all of our dairy borrowers, individually, to explore 
the options for working with their businesses. And we hope that 
some positive signs of milk futures will mean that there will 
be higher prices in the coming months.
    Our Start Right program helps young and beginning farmers 
during these times--a farmer like Jeremy Larimore, highlighted 
in my submitted testimony. His story of buying a farm in his 
twenties is just one of many successes. Overall, the Farm 
Credit System provided almost $12 billion in new loans and 
commitments to beginning farmers in 2008.
    Now, how do we work with farmers to ensure that we are 
there for them in good times and in bad? We deal with each 
customer on a case-by-case basis. We use Farm Service Agency 
loan guarantees to help us serve higher risk credits. We see 
crop insurance as an important tool for farmers in managing 
risk in their operations.
    Our farmer-borrowers have specific borrower rights that are 
outlined in my written testimony, including the right to have 
adverse credit decisions appealed to a credit review committee 
of its board. We restructure loans when it is the right 
economic decision for the borrower and the lender.
    Today's financial environment has brought new challenges to 
us in serving our members. Because we issue debt in the 
national financial markets, their problems have been disruptive 
for us. There is decreased access to longer-term debt and 
increasing pricing volatility. This means farmers have less 
access to longer-term fixed rate loans at current low rates. 
And while we have not denied a single member-borrower credit 
because we could not access the nation's money markets, last 
fall's financial market turmoil signaled that our ability to 
access funding could be put at risk through no fault of our 
own.
    Unlike other lenders, Farm Credit has no Federal 
guarantees, no capital support, no explicit borrowing line with 
the Treasury, and no Federal backstop for our insurance fund.
    In summary, the Farm Credit System remains strong. We 
continue to make credit available to all segments of 
agriculture. Access to the national markets across all terms 
would help improve credit availability.
    Agriculture should not be disadvantaged by Federal efforts 
to revive the home mortgage market. And FSA loan guarantees 
should continue to have adequate funding.
    Mr. Chairman, thank you for the opportunity to testify, and 
I will be pleased to respond to your questions.
    [The prepared statement of Mr. Frazee follows:]

Prepared Statement of J. Robert Frazee, President and CEO, MidAtlantic 
                      Farm Credit, Westminster, MD
    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to testify today on behalf of the Farm Credit System. My 
name is Bob Frazee, and I am President and CEO of MidAtlantic Farm 
Credit. MidAtlantic is a part of the nationwide Farm Credit System. My 
remarks today will provide some background on the Farm Credit System, 
comments on current credit conditions and the impact of recent 
financial market disruptions, and discuss how we are working to meet 
the credit needs of agriculture in the geographic area served by my 
institution.
Background on the Farm Credit System
    Established in 1916, the Farm Credit System is a unique set of 95 
private institutions, including five funding banks (four Farm Credit 
Banks and one Agricultural Credit Bank) and direct-lending 
associations, all of which are cooperatively owned by farmers, 
ranchers, agricultural cooperatives, rural utilities and others in 
rural America. We are chartered by the Federal Government to provide 
credit and other related financial services to our owners and others 
consistent with the eligibility criteria set out in the Farm Credit 
Act.
    MidAtlantic is one of these 95 Farm Credit cooperatives. We are 
owned by more than 10,500 farmers that borrow from us in the states of 
Maryland, Delaware, and parts of West Virginia, Virginia, and 
Pennsylvania. As President and CEO, I report to a 23 member Board of 
Directors. Twenty-one of these directors are farmers elected by the 
members of the cooperative. MidAtlantic is required to have at least 
one appointed outside director that has financial experience, and we 
have chosen to have two. In no case are employees allowed to serve as 
directors.
    There are 90 independently operated Farm Credit associations like 
MidAtlantic serving agriculture throughout the United States and Puerto 
Rico. Every Farm Credit association is organized as a cooperative that 
is owned and governed by its farmer-members. Our Board of Directors is 
responsible for establishing our institution's capitalization plan 
consistent with Federal regulations and for ensuring that management 
makes available loan products and financially related services 
appropriate to the unique needs of agriculture in the geographic 
territory that we serve.
    Each Farm Credit association obtains funds for our lending programs 
from one of five wholesale Farm Credit banks. At MidAtlantic, we get 
our funding from AgFirst Farm Credit Bank (headquartered in Columbia, 
SC), which is cooperatively owned by twenty-two local associations. The 
five System banks own the Federal Farm Credit Banks Funding Corporation 
(located in Jersey City, NJ), which, as agents for the banks, markets 
to the investing public the Systemwide debt securities that are used to 
fund the operations of all Farm Credit System institutions. Unlike 
commercial banks, Farm Credit institutions do not have access to 
insured deposits guaranteed by the FDIC and backed by the U.S. Treasury 
as a source of funding for our operations.
Regulatory Oversight by the Farm Credit Administration
    All Farm Credit institutions are regulated by the Farm Credit 
Administration (FCA), which was created by Congress and is subject to 
this Committee's oversight. The Farm Credit Administration is an arm's-
length, independent safety and soundness regulator. FCA's three board 
members are nominated by the President and confirmed by the Senate. The 
FCA has all of the oversight and enforcement powers that every other 
Federal financial regulatory institution has to ensure that Farm Credit 
institutions operate in a safe and sound manner. In some instances, FCA 
has more authority than other comparable Federal regulators.
    I compliment this Committee for its instrumental role in 
reconfiguring the FCA in the mid-eighties. The decisions made by this 
Committee shaped the System's regulator, providing a regulatory 
framework second to none among Federal financial institution 
regulators. Should this Congress move forward with reforms for other 
financial regulators, we ask that you vigorously resist any proposal to 
include FCA in those efforts. I strongly believe the Agriculture 
Committees have done an excellent job providing the appropriate 
statutory framework and ongoing oversight of FCA. Including FCA in a 
financial institution regulatory reform effort likely would cause 
serious repercussions for agriculture in what already is a difficult 
and stressful environment. Simply put, let's not fix what isn't broken.
    The Farm Credit System's mission, ownership structure and 
authorizing legislation is unique among financial institutions. For 
farmers, ranchers and the cooperatives that they rely on, it is 
critically important that our safety and soundness regulator 
understands our unique mission and what it takes to be successful in 
accomplishing it. Changing this would threaten our ability to 
accomplish the mission set out for us by this Committee in the Farm 
Credit Act.
Fulfilling Farm Credit's Mission of Serving Agriculture and Rural 
        America
    MidAtlantic Farm Credit, like all Farm Credit System institutions, 
focuses on accomplishing the mission established for us by Congress: to 
serve agriculture and rural America. We do not take our Congressional 
charge lightly. Our cooperative structure and governance is designed 
specifically to ensure that our lending and financially related service 
activities are driven by the needs of our farmer-members and to ensure 
that there is a reliable and competitive credit source available to 
agriculture that farmers own and control. Our practice is to engage our 
customers in a consultative lending relationship, using our accumulated 
expertise and knowledge of agriculture and finance to craft long term 
lending relationships that are often delivered across the farmer's 
kitchen table
    We understand that farming isn't a short-term investment for our 
member-borrowers. Our cooperative structure allows us to work with our 
farmer-owners with an approach that is not focused on achieving 
quarterly returns to impress investing stockholders. We know that when 
we work with our customer-owners to help them achieve success in their 
business, our business will succeed as well. Our lending relationship 
with our member-borrowers is based on constructive credit over the long 
haul--we do not enter and exit agricultural lending as farm 
profitability waxes and wanes.
Distributing Profits to Farmers Through Patronage
    Our commitment to our farmer-members' business success is 
demonstrated further by the fact that we share our profits directly 
through patronage dividends with the farmers that borrow from us. Each 
year, the MidAtlantic board of directors makes a determination based on 
our profitability and financial strength as to what portion of our net 
earnings will be returned directly to the farmer-members that own our 
institution.
    In just the past 4 years, MidAtlantic has sent back over $110 
million in earnings as patronage dividends to the member-borrowers of 
our cooperative. During the same period, the Farm Credit System in 
total has returned some $2.6 billion to our customer-owners. That is 
money that stays in agriculture and rural America and helps our members 
be successful.
Farm Credit's Financial Strength
    I am pleased to report that the Farm Credit System remains very 
strong financially. At the end of April, the Federal Farm Credit Banks 
Funding Corporation reported the System's combined financial results 
for the first quarter of 2009. Net income earned was $615 million with 
total loans of about $162.3 billion. The System provided almost $1 
billion in new credit to agriculture during the first 3 months of this 
year. Reflective of the overall economy and growing stress in certain 
segments of the farm economy, we are seeing demand for credit decline 
as farmers become wary of expanding operations, purchasing new 
equipment, or taking on additional risk at this time of economic 
weakness.
Current Conditions in Agriculture
    I also am pleased to report to you that MidAtlantic Farm Credit has 
not changed its lending standards in response to the current financial 
and economic disruption. This is particularly important to farmers in 
that there are now fewer choices of agricultural lenders available.
    Let me give you some highlights regarding what we are seeing in 
MidAtlantic's territory when it comes to the local farm economy and 
credit conditions.
    Poultry represents 21% of our portfolio. For several years, the 
industry has been increasing production. In 2008, it found itself in a 
position of high production costs plus high levels of inventory. This 
resulted in significant cash flow losses for the integrators, who 
reduced production and conserved cash. We have been working with 
individual borrowers to help maintain their cash flow during these 
times of lower prices. We expect the industry will work through the 
current distressed environment and return to profitability.
    Cash Grains represents 19% of our portfolio. Demand for local grain 
continues to be good, but is highly dependent on poultry production. 
Demand for grain continues to keep land in production, but pressures 
from development and environmental concerns will continue to challenge 
producers.
    Dairy is 11% of our portfolio. Low milk prices and high input costs 
throughout 2008 have resulted in numerous herd sales within our 
territory. We have contacted all of our dairy borrowers individually 
(most recently in April) explaining the options for sustaining their 
business. Milk prices will be determined by cow numbers, total milk 
production and dairy exports. Slaughter for the year is 12% above last 
year and we hope that the positive signs in milk futures will mean 
higher prices in the next 6 months.
    In addition to the key sectors mentioned above, we also serve 
operations that produce fruit, vegetables, livestock, as well as those 
involved in timber and forestry, nursery and greenhouse, and equine 
operations. Where operations touch the housing industry, we expect to 
see some stress occurring.
A Commitment to Serving Young, Beginning, and Small Farmers
    The Farm Credit System's commitment to agriculture not only extends 
to these typical farming operations, but also to those young, 
beginning, and small farmers who may need some assistance as they start 
out in agriculture. Every Farm Credit association has programs in place 
targeted specifically at meeting the needs of three special categories 
of borrowers, those that are young, those that are just beginning in 
farming, and those that are small farmers. At MidAtlantic Farm Credit, 
we call ours the ``Start Right'' Young, Beginning, Small, and Minority 
Farmer program.
    The Start Right program offers lower interest rates, while 
maintaining our credit standards. In fact, since last April, we've 
written over $45 million of new loans to Young, Beginning, Small and 
Minority Borrowers in our territory. In addition, we are now piloting a 
national online business-planning course targeted at young, beginning, 
and small farmers. This is part of our commitment to training future 
farmers the good credit habits and skills that will help make them 
successful business people in the future. This program encourages skill 
attainment by integrating training with access to lower rates.
    One of these farmers is 27 year old Jeremy Larimore, who now owns a 
small poultry farm on Maryland's Eastern Shore, along with 30 acres of 
grain and soybeans. Jeremy didn't grow up on a farm, but he worked on 
farms owned by his uncles, and he realized early that that's what he 
wanted to do. Seven years ago, when he was twenty, Jeremy wanted to buy 
a used combine so that he could do some custom harvesting for his 
neighbors, bringing him closer to his dream. Farm Credit helped him 
finance the combine.
    Jeremy's Farm Credit loan officer was impressed with Jeremy's drive 
and business sense. The two stayed in touch for years, talking about 
how Jeremy could purchase his own farm. In 2005, when Jeremy was just 
24, the opportunity arose for him to purchase 33 acres with four 
poultry houses on it. Jeremy has said that without Farm Credit, he 
would still be dreaming of buying that farm.
    Today, Jeremy leases an additional 100 acres, for a total of 133, 
and his four poultry houses account for about 90,000 chickens per 
flock. He's currently talking to his loan officer about opportunities 
for buying more land.
    When it comes to serving the needs of small farmers, the Farm 
Credit System stands out. Recently, the American Bankers Association 
released its report on ``farm bank'' performance in 2008. They 
indicated that the 2,247 banks that met their definition of a ``farm 
bank'' had some $32.8 billion in credit outstanding in small farm loans 
(those with an original loan size of less than or equal to $500,000). 
In comparison, the 90 associations of the Farm Credit System had 
slightly more than $58 billion of similar sized loans outstanding at 
the end of 2008.
    Even if we are to look just at the new credit extended in 2008, the 
System clearly continues to demonstrate its commitment to the next 
generation of farmers. Farm Credit institutions provided new loans and 
commitments totaling almost $12 billion to beginning farmers last year 
(those with 10 or fewer years experience). USDA's FSA beginning farmer 
loan programs totaled $1.24 billion in Fiscal Year 2008. Unfortunately, 
there is no comparable data available from commercial banks since they 
are not required to collect this same data.
USDA Programs and Farmer Mac Help Farm Credit Serve Agriculture
    At MidAtlantic we make significant use of USDA's Farm Service 
Agency (FSA) loan guarantees to support our lending. We are pleased 
that our experience and excellent credit management practices have 
allowed us to be recognized as an FSA preferred lender. At the end of 
May, we had over $74 million in our portfolio that had FSA guarantees. 
We believe about 60% of all System associations are FSA preferred 
lenders.
    The guarantees available through FSA are an important tool that 
allows us to serve higher risk credits that might not otherwise meet 
our underwriting standards. The Farm Credit Act requires that we focus 
our resources on meeting the needs of credit worthy borrowers. The FSA 
guarantees permit us to reach some individuals that we might not 
otherwise be able to serve. In fact, in the story I just mentioned 
about Jeremy Larimore, we used both FSA direct money, as well as an FSA 
guarantee to make the loan work.
    Another USDA program which benefits our farmer-members is the Risk 
Management Agency's (RMA) crop insurance program. Crop insurance is an 
important tool for our farmer-members to use in mitigating the risk in 
their operations. MidAtlantic writes almost 25% of the crop insurance 
policies in Maryland. Last year, we paid out $10.3 million in claims.
    These two programs are very important tools in ensuring that we can 
stay with borrowers in stressful times--especially those who are just 
getting started and likely have inadequate equity, as well as those 
that have experienced losses due to adverse weather or economic 
conditions.
    One other tool that this Committee has made available to 
agricultural lenders is the Federal Agricultural Mortgage Corporation 
or Farmer Mac. At MidAtlantic we have used Farmer Mac to help us manage 
the risk of portfolio concentration in certain agricultural sectors and 
to help manage our capital position. At the end of 2008, we had almost 
$16 million in loans in Farmer Mac's long-term standby program, all of 
which are 100% guaranteed. Farmer Mac serves an important function for 
our institution, and we look forward to continuing to utilize it in the 
future.
    In addition to the tools mentioned above, Farm Credit institutions 
also work with many commercial banks of all sizes. When your focus is 
on meeting the needs of the customer, reaching out to a competitor 
easily morphs into finding partnerships that work for the customer. 
These relationships allow us to better manage risk and permit us to 
provide the customer with what they need to succeed. When there are 
services that our borrowers need that they can't get from us it makes 
sense for us to partner with others who can provide those services. We 
have worked with local commercial banks on loan participations. We have 
both bought these participations, and sold them. This allows us to 
diversify our portfolio, manage our risk, and continue to serve our 
marketplace.
    Farm Credit institutions also work with many commercial banks as we 
participate in the pilot program established by the Farm Credit 
Administration that permits System institutions to make mission-related 
investments. Many of our borrowers, especially the young ones, depend 
on off-farm employment to help pay the bills as they get started in 
agriculture. Permitting Farm Credit institutions to help rural 
communities by making mission-related investments just makes good sense 
especially now when so many other sources of investment funds have 
evaporated.
Serving the Vital Needs of Rural Communities and Global Markets
    Lending to companies that serve the needs of rural communities in 
the energy, communications, and water industries is a growing part of 
Farm Credit's overall business. Customers in these industries include 
rural electric generation and transmission cooperatives, electric 
distribution cooperatives, independent power producers, rural local 
exchange carriers, wireless provides, cable television system, and 
water and waste water companies. Farm Credit loans to these customers 
increased to $14.2 billion at the end of the first quarter this year 
from $10.8 billion at the end of 2007.
    Much of the loan growth to these customers came as the broader debt 
capital markets contracted as part of the overall financial market 
crisis. The Farm Credit System, primarily through CoBank (the one Farm 
Credit bank that operates as an Agricultural Credit Bank) has increased 
its lending to these customers ensuring that a continued flow of 
competitively priced credit is available to them. The System's ability 
to expand financing to these customers has been critical as many of 
them, electric co-ops especially, have been forced to modernize 
facilities and expand operations as demand for electricity has boomed 
across rural areas.
    Similarly, as global credit markets contracted, demand for credit 
around the world to purchase U.S. agricultural export products 
increased. Loans made by CoBank to facilitate the export of U.S. farm 
products increased from $2.1 billion at the end of 2007 to $4.5 billion 
at March 31, 2009.
Impact of Financial Market Disruptions
    Because the Farm Credit System relies on our access to the 
financial markets for the funds we need to make credit available to our 
borrowers, a disruption in the efficient operation of those markets can 
adversely impact agriculture. Over the last year the nation's financial 
markets have changed dramatically and this has impacted not only our 
cost of funds but also the term of the funds that are available.
    At this time last year of our nation's grain marketing cooperatives 
were faced with the need to meet unprecedented levels of margin 
requirements due to the volatility of commodity prices. They turned to 
the Farm Credit System because they knew we could access the capital 
markets to get them the credit they needed at a moment's notice. Farm 
Credit increased its borrowing from the market by $21 billion through 
the first half of 2008 just to meet these and other needs. The market 
understood our financial strength and our unique status as 
agriculture's GSE. Margin calls were met and what could have been a 
disastrous situation was averted because of that access to the 
financial markets.
    The dynamic of the financial markets changed quickly late last 
summer in some very unusual ways. While the Federal conservatorship of 
Fannie Mae and Freddie Mac had disastrous impacts on their equity 
holders, it positioned them in the debt markets as having greater links 
to the Federal Government, and ironically created the perception in the 
eyes of investors that they are a less risky credit. This was 
underscored further when the Treasury made available a direct line of 
credit for Freddie Mac and Fannie Mae as well as their sister housing 
GSE the Federal Home Loan Bank System.
    Then utilizing direct backing through the FDIC, the Federal 
Government provided commercial banks the ability to issue debt that 
essentially has a direct Federal guarantee standing behind it. These 
same banks also have Treasury's backing of the FDIC to facilitate them 
generating loanable funds through bank deposits. And this Federal FDIC 
backstop has just been expanded substantially.
    Complicating the national and international debt markets even 
further has been the heavy issuance of U.S. Treasury securities to 
finance our nation's deficit and the substantial increase in foreign 
government backed debt hitting the markets and competing for investors. 
We have seen the investment banking sector collapse that we had relied 
on to facilitate transactions between sellers and buyers of debt. The 
severe economic stress also has resulted in very few investors being 
interested in term debt that exceeds 3 years in maturity.
    While we continue to access the funding we need to serve our 
marketplace, the changes and disruptions in the national financial 
markets have markedly changed the landscape for us. Decreased access to 
longer-term debt and pricing volatility has presented a challenge. 
While the environment has settled since the beginning of 2009, it would 
be a mistake to conclude that we are back to normal. The Farm Credit 
securities margin spread over 5 year U.S. Treasury bonds makes the 
point:





            Pre-2007 norm              32 basis points            0.32%
           Fall 2008 peak             215 basis points            2.15%
               April 2009              92 basis points            0.92%



    The result is that farmers seeking to reduce the volatility of 
their interest expense by locking in longer-term, fixed rate loans at 
low rates do not have options that are available to the average 
homeowner. Low cost home mortgage rates are available to homeowners 
because of direct government intervention targeted at helping them. The 
Federal Reserve action to purchase mortgage-backed securities has 
improved pricing in the home mortgage market, but similar action is not 
being taken to address the needs of agriculture.
    To summarize, commercial banks have been extended a direct Federal 
guarantee on their debt issuance and access to Federal capital support. 
The housing GSEs have enhanced support from the Treasury to facilitate 
their access to the debt markets. Actions are being taken to facilitate 
the liquidity of mortgage-backed securities. Farm Credit institutions 
have no such guarantee, no access to capital support, no explicit 
borrowing line with Treasury and no Federal backstop for our insurance 
fund.
    Despite the fact that we have had no assistance from the government 
throughout these times of extreme stress in the financial markets, we 
are very proud to report to you that we have not had to deny a single 
farmer, cooperative or other eligible borrower access to credit because 
we could not access the nation's money markets. This is testament to 
the financial strength that the System has carefully built up during 
good times through cautious lending and the accumulation of appropriate 
capital reserves.
    Trust has been built with our investors, who know that the Farm 
Credit System has never failed to meet its obligations. They are secure 
in the knowledge that System management and directors are intent on 
preserving this fine organization to ensure that farmers will continue 
to own and govern their credit source through their cooperative in the 
future. However, Farm Credit's operational prudence notwithstanding, 
last fall's financial market turmoil demonstrated to us that our 
ability to access the necessary funding to meet our mission to 
agriculture and rural America may be at risk if circumstances beyond 
our control disrupt our market access.
Loan Restructuring Available for Farm Credit's Farmer-Owners
    As economic stress increases in agriculture we stand ready to work 
with our customers as they deal with their individual challenges. Farm 
Credit System institutions have operated with specific ``borrower 
rights'' requirements for over twenty years. We are required to follow 
``least cost'' restructuring requirements for farmers that can't meet 
the terms of their loans. In addition, if a farmer that applies for a 
loan or one that has a loan with us is faced with a credit decision 
they believe is adverse to them, they have a specific right to appeal 
that decision before a credit review committee that must involve a 
local elected farmer-director from the board of their institution.
    You have probably heard us say that Farm Credit serves agriculture 
in good times and in bad. Borrower rights are one of the ways that we 
serve our marketplace when the environment is more bad than good.
    I'll give you a recent example of this: for years, MidAtlantic has 
had a lending relationship with a customer whose business is sensitive 
to the general economy and in particular the housing industry. Although 
this business was well managed, it began to experience the financial 
stresses that came with the downturn in the housing industry in 2006. 
As you might imagine, those stresses have continued and grown.
    In response, MidAtlantic has worked with this borrower by employing 
a variety of tools from our borrower's rights guidelines: we have 
advanced additional monies during this time, provided principal 
forbearance, and relaxed the financial covenants that had been placed 
on the account. Our goal in taking these actions has been to help this 
account return to profitability.
    As recently as last month, we completely reworked the credit, 
advancing more new money for the purchase of equipment, and working 
with the borrower to help them secure funds from the Pennsylvania 
Machinery and Equipment Loan Fund (MELF), as well as a USDA Business 
and Industry Guarantee.
    We assume, and we hope, that the housing industry will turn around. 
In the interim, what we've done for the borrower--and what the borrower 
has done for themselves--has given them an opportunity to stay in 
business during an extremely challenging down cycle. This company has a 
strong management team, they have implemented efficiencies that are 
serving them well now and will serve them even better when things do 
improve.
    At Farm Credit, we know that the economy, markets and commodity 
prices are cyclical. That comes with 93 years of experience. When we 
say we're there in good times and in bad times, we mean it.
Conclusion
    The Farm Credit System is financially stable, economically vital, 
and serving its mission for agriculture and rural America well. We 
continue to make credit available to all segments of agriculture 
including commercial producers as well as young, beginning and small 
farmers. We have stepped up our lending to vital rural infrastructure 
companies. There is no taxpayer support of the Farm Credit System. 
There are no Federal dollars invested in the Farm Credit System. We 
even pay for the expense of being regulated by the Federal Government 
through an assessment on all Farm Credit System institutions.
    As a network of agricultural and rural lending cooperatives owned 
by the farmers, cooperatives, and rural utilities that borrow from us, 
we have the built in oversight mechanism of our owners holding our feet 
to the fire to keep service quality high. We understand that Farm 
Credit's success depends on our customers' success. To continue serving 
our mission, we must have continued, effective access across all terms 
to the national debt markets and an independent, arm's-length regulator 
that comprehends the unique requirements of agriculture.
    I am testifying to you as a leader of a nationwide lending 
institution in a climate of lapsed supervision by regulators and 
mistrust of institutional intent. But it should not surprise you that I 
am reporting on our successes and service to mission. The Agriculture 
Committee understands why the Farm Credit System exists, and our 
continued success is due in part to the fact that this Committee had 
the foresight to change our structure more than 20 years ago while 
strengthening our regulatory oversight to ensure our safety and 
soundness.
    We are proud of our commitment to rural America. We have maintained 
our focus and continually work to meet our mission. Certain parts of 
agriculture are facing some challenging economic times that may test 
the resolve of many. We urge that you continue to monitor this 
situation closely and continue to provide both FSA and Rural 
Development at USDA with the funding resources and flexibility they 
need so that an adequate guaranteed loan program remains available. And 
we urge that you continue to monitor the Federal programs that are 
being put in place to address the upheaval among commercial banks and 
the disruption of the money markets to ensure that agriculture is not 
disadvantaged in its access to the nation's money markets
    Mr. Chairman, thank you again for the opportunity to testify today 
on behalf of MidAtlantic Farm Credit and the Farm Credit System. I will 
be pleased to respond to your questions.

    The Chairman. Thank you, Mr. Frazee.
    Our witnesses seem to have thrown us a little curve ball 
here. We generally go left to right. But we will be flexible 
and go down the line right to left.
    Dr. Drabenstott.

 STATEMENT OF MARK DRABENSTOTT, Ph.D., DIRECTOR, (RURAL POLICY 
RESEARCH INSTITUTE) RUPRI CENTER FOR REGIONAL COMPETITIVENESS; 
  RESEARCH PROFESSOR, HARRY S TRUMAN SCHOOL OF PUBLIC AFFAIRS,
            UNIVERSITY OF MISSOURI, KANSAS CITY, MO

    Dr. Drabenstott. Chairman Holden, Ranking Member Goodlatte, 
and Members of the Subcommittee, it is an honor to appear 
before this important hearing. I commend your ongoing 
leadership in ensuring that rural America has access to the 
capital it needs to thrive in today's economy.
    I am Mark Drabenstott, Director of the RUPRI Center for 
Regional Competitiveness. My Center helps rural areas think and 
act regionally to compete globally.
    This Committee is rightly concerned about current 
agricultural credit conditions. Conditions have deteriorated 
over the past 9 months, reflecting a softening farm economy and 
turbulent financial markets. These developments are cause for 
concern, but they do not yet translate into alarm.
    This Committee must also keep its sights on a critical set 
of longer-term rural capital issues. Indeed, how the nation's 
financial architecture is refashioned in the months and years 
ahead will likely have a far bigger impact on the rural economy 
than today's concerns about agricultural credit.
    What steps should Washington take to assure effective rural 
financial markets in the future? I offer four views on this 
important question. First, how has the financial crisis 
affected rural financial markets?
    The debate on financial reform now unfolding in Washington 
must take into account the unique financial needs of rural 
businesses. Simply put, financial policy must aim for a 21st 
century rural economy instead of the one now passed. It will 
not be easy to assemble the knowledge base Congress will need 
to design new rural financial markets.
    Number two, how have rural capital needs changed over time? 
The rural economic landscape continues to evolve. Agriculture 
remains a key sector, but its role has declined sharply. 
Meanwhile, manufacturing still supplies 20 percent of rural 
income.
    Rural capital needs have also changed. Rural businesses 
have grown bigger, but are relying more on retained earnings to 
fund their growth, raising questions about the ability of rural 
lenders to keep pace. In recent years, rural businesses have 
also built more equity into their balance sheets, yet with 
limited access to equity capital providers. This reliance on 
retained earnings will be much more difficult in today's 
economy.
    Number three, what principles should guide rural financial 
policy? The principles to guide public policy for rural 
financial markets are well established, and they still ring 
true. The cornerstone principle is that rural businesses should 
have comparable access to capital as urban businesses, in 
competitive markets at market rates.
    There are two big issues I believe will augment this list 
of principles in the period ahead.
    Number one, the cost of bailing out housing-related GSEs in 
the wake of the financial crisis may bring fresh oversight 
scrutiny to all such enterprises, including the Farm Credit 
System. It will be important to weigh each GSE on its own 
merits.
    Second, principles in the past have focused almost 
exclusively on rural credit markets, with a heavy emphasis on 
agriculture. In a more entrepreneurial, innovation-driven 
economy, equity capital has risen in importance relative to 
debt, and this remains mostly a new frontier in rural areas.
    Fourth, how can we bring better information to your 
decisions? To put rural into the financial reform calculus, 
policymakers must engage a fresh set of questions most likely 
to shape rural America's business and economic future. These 
include the following. As banks consolidate and rebuild their 
capital base, what will be the impact on available rural 
credit; how can public policy encourage the emergence of a 
stronger network of rural equity capital institutions; what 
changes in regulation can help rural lenders match the growing 
size and regional scope of larger rural businesses; and, what 
unique role do rural financial institutions play in the 
emerging framework of a regional economic development, and what 
can be done to encourage their participation and leadership?
    Answering these questions will require a better base of 
information than is currently available, and filling this 
information gap will be a tough challenge. Databases that shed 
light on rural business conditions are few, and some of them 
are even being retired.
    Apart from data limitations, much of the research and 
analysis on rural financial markets is still heavily oriented 
on agricultural finance, not rural finance. A national panel of 
experts on rural finance would help in assembling better data 
and in spurring research. And this panel could be modeled after 
RUPRI's highly successful rural health panel.
    Thank you very much, Mr. Chairman. I look forward to 
answering your questions.
    [The prepared statement of Dr. Drabenstott follows:]

Prepared Statement of Mark Drabenstott, Ph.D., Director, (Rural Policy 
     Research Institute) RUPRI Center for Regional Competitiveness;
Research Professor, Harry S Truman School of Public Affairs, University 
                      of Missouri, Kansas City, MO
    Chairman Holden, Ranking Member Goodlatte, and Members of the 
Subcommittee, it is an honor to appear before this important hearing. I 
commend your ongoing leadership in ensuring that rural America has 
access to the capital it needs to help rural businesses compete in 
today's economy. As you know, capital is the lifeblood for businesses, 
not only to survive in today's troubled times but also to create the 
jobs and wealth that sustain the rural economy in the long run.
    I am Mark Drabenstott, Director of the RUPRI Center for Regional 
Competitiveness. My Center helps rural areas think and act regionally 
to compete globally. We provide the tools and technical assistance 
rural regions need to identify their competitive advantage, strengthen 
regional partnerships, and prioritize investments. RUPRI provides 
objective analysis and facilitates dialogue on the impacts of public 
policy on rural people and places.
    This Committee is rightly concerned about current agricultural 
credit conditions. Conditions have deteriorated over the past 9 months, 
reflecting a softening farm economy and turbulent financial markets. 
The most notable change has been a sharp increase in lender credit 
standards. Lenders are requiring more collateral to offset rising 
credit risks. At the same time, farmland values appear to have stalled, 
after one of the biggest booms on record. Last, farm income is 
projected to tumble more than a fifth this year due to a sharp fall in 
commodity prices from last year's peaks.
    These developments are cause for concern, but they do not yet 
translate into alarm. Farm borrowers and their lenders are both coming 
off a period of strong profits, leaving them with solid capital 
cushions. Nevertheless, in a small number of cases, that cushion may be 
tested this year.
    All of these issues merit monitoring, but this Committee must also 
keep in its sights on a set of longer term rural capital issues. The 
financial crisis has grabbed headlines and the attention of nearly 
everyone in Washington. Most of that attention has focused on markets 
and institutions far-removed from Main Street. How Washington responds 
to today's financial crisis, however, will have profound implications 
for future capital availability on Main Street. Indeed, how the 
nation's financial architecture is re-fashioned in the months and years 
ahead will likely have a far bigger impact on the rural economy than 
any current concerns about agricultural credit.
    In my testimony today, therefore, I will focus on this question: 
What steps should Washington take to assure effective rural financial 
markets in the future? To frame this question, I will address four 
subsidiary questions:

   How has the financial crisis affected rural financial 
        markets?

   How have rural America's capital needs changed over time?

   What principles can guide future Federal responses to rural 
        capital markets?

   How can we build a stronger information base for Federal 
        decisions in this area?

The first section of my testimony discusses how the financial crisis 
poses major implications for the future of rural financial markets. The 
second section reviews how capital needs have changed in rural America. 
The third section identifies some key principles that can guide Federal 
policy in rural capital markets. The final section describes some 
recommended steps in improving the knowledge base for Federal action.
The financial crisis and rural financial markets
    Global financial markets have been rocked the past 9 months. A wave 
of losses triggered by collapsing housing derivatives has brought low 
some of the world's best known banks. The same wave brought an end to 
one of the landmarks of U.S. financial prowess--investment banks. The 
turmoil in financial markets resulted in a nearly total freeze in bank 
lending. In response, the United States and many other nations launched 
special measures to lubricate credit channels and shore up bank balance 
sheets. Lending channels have begun to thaw, but the effects of the 
financial crisis still linger throughout the nation.
    No one is sure what U.S. and global financial markets will look 
like when all the dust settles from the current crisis. Two 
observations are warranted, though. First, financial markets will 
operate differently than they did before the crisis, and in ways that 
cannot be fully anticipated now. Second, financial market regulations 
will be dramatically reformed. Policymakers will take a hard look at a 
wide range of regulations with the goal of avoiding in the future the 
very problems that brought about the current crisis.
    What does all this mean for rural financial markets? Rural capital 
markets have not been the front lines in this financial crisis, but the 
impacts clearly extend to Main Street. The global economic downturn is 
dragging down important elements of the rural economy. In particular, 
manufacturing-dependent rural areas have experienced some of the 
biggest job losses in the downturn. (Jobs in manufacturing-dependent 
rural counties have fallen 3.9 percent over the past year, compared 
with 2.9 percent in all rural counties and 3.5 percent in the nation.) 
Finally, credit standards have risen for rural borrowers as losses have 
piled up for lenders.
    That said, it should also be noted that while rural financial 
markets are part of national and international financial markets, they 
also retain important distinct features. In rural areas, there are 
generally fewer lenders than in metro areas, raising ongoing questions 
about whether rural borrowers enjoy the same benefits of competitive 
markets that urban borrowers enjoy. Lack of access to equity capital is 
an even greater issue for rural areas, forcing rural businesses to look 
longer and harder to assemble the equity base that powers new 
businesses.
    A whole new architecture for financial market regulation is likely 
to emerge in weeks and months to come. The issues in that dialogue 
obviously have broad implication for the U.S. economy, including its 
vital rural areas. Nevertheless, for this regulatory and policy debate 
to be successful, it must take into account the unique needs of rural 
businesses and the powerful forces that have swept across the rural 
economic landscape. Put simply, financial policy must aim for a 21st 
century rural economy instead of the one that is now past.
    It is not a simple task to assemble the knowledge base your 
Committee and others in Congress will need to design new rural 
financial markets. First, rural capital markets have not been studied 
extensively. To give but one example, the last major study done by the 
Federal Government on rural capital markets is now more than a decade 
old (ERS, 1997). Second, the databases on which analysis can be 
performed are comparatively scant. Washington has always viewed rural 
financial markets mainly through the lens of agriculture. As a result, 
much more is known about the finances of farm businesses than non-farm 
businesses, even though the non-farm businesses now provide the lion's 
share of rural jobs and income. Finally, no expert panels have been 
created to frame and evaluate rural financial market policy issues. 
This is ironic since President Teddy Roosevelt's Country Life 
Commission provided the landmark report in 1908 that ultimately 
resulted in one of the most significant policy interventions in rural 
financial markets--the Farm Credit System. A lot has changed in the 
past century, so the time may be right for a new commission.
The shifting economic & business landscape in rural America
    The rural economic landscape has undergone dramatic changes in 
recent decades--shifts RUPRI has closely watched and chronicled. Three 
trends are especially notable. Agriculture remains an important sector, 
but its role has declined sharply. Commodity production continues to 
consolidate (farms getting fewer and bigger). This shift has not been 
offset fully by new efforts to add more value to farm production. As 
one indicator of agriculture's changing role, 82 percent of farm family 
income now comes from sources off the farm. Meanwhile, manufacturing 
still supplies almost 20 percent of rural income, but global pressures 
and technological advance are reducing the number of factory jobs. And, 
as noted above, rural factories are especially hard-hit in the current 
downturn. Finally, the service sector is taking root in rural areas, 
although activity appears concentrated in exurban and scenic areas. In 
addition, rural areas have not participated fully in the growth of many 
high-earning service industries.
    Against the backdrop of these long-term trends, the global economic 
downturn will lead to some significant short-term economic shifts. 
Agricultural incomes will drop after a sharp boom. Rural factories will 
be under enormous cost pressures, especially in the troubled auto 
industry. Rural service businesses will struggle as corporate customers 
cut back and tourism declines.
    The shifts in the rural business landscape are difficult to 
pinpoint due to limited data on the businesses in rural America. One 
rich source of data is the Federal Reserve Board's Survey of Small 
Business Finance (Federal Reserve Board, 2008). This survey is 
conducted every 5 years, and captures information from more than six 
million small businesses, defined as firms with fewer than 500 
employees. Roughly a quarter of the businesses in the sample are in 
rural areas. The data is robust, but it becomes available only after a 
long lag. The 2003 data are the most recent available.
    A comparison of data from the 1998 and 2003 surveys points to some 
important shifts in the rural business landscape (Table 1). First, the 
typical rural business was getting bigger and generally more 
profitable. In 2003, the typical rural small business had total sales 
of $915,000 and profits of around $167,000. This sales figure was still 
smaller than the metro counterpart, but the gap had closed (82 percent 
of metro, compared with 64 percent 5 years ago). Rural businesses 
earned profits roughly on par with metro businesses in 2003; by 
comparison rural profits were 23 percent below metro 5 years ago.
    The balance sheet reflects more interesting differences. The 
typical metro small business was far more leveraged in 2003 than its 
rural counterpart (debt/asset ratio of 1.56 versus 0.70). Viewed 
another way, the typical rural small business grew its sales nearly 40 
percent in 5 years, but had to rely almost entirely on retained 
earnings to do so. As a result, liabilities grew only modestly for the 
typical rural business. Moreover, a separate question on the Survey 
suggests that very few rural businesses obtained equity capital from 
sources other than the owner (Table 2). Both urban and rural businesses 
raise equity from individuals, but rural businesses rely mostly on 
their own capital reserves, whereas urban businesses turn to angels, 
employees, and others with much greater frequency.
    The picture that emerges of rural small business finances is 
sketchy, but poses some big questions in this critical period of 
decision for rural financial markets. First, rural businesses have 
grown bigger, but appear to be relying more on retained earnings to 
fund their growth. This poses fresh questions about whether lending 
standards are tighter or the supply of credit is less than in urban 
areas. It also raises questions about whether rural lenders are keeping 
up with the increasing scale of at least some rural businesses. Second, 
rural businesses have built more equity in their balance sheets, but 
they appear to have more limited access to equity capital. The retained 
earnings approach was possible during a time when the national economy 
was growing; such an approach will be much more difficult in the 
economic period through which we are passing today.
Principles for policy intervention in rural financial markets
    The principles that can guide public policy for rural financial 
markets are well-established. These principles still ring true, 
although the practical implication of them has likely changed as the 
rural economy and the financial needs of rural businesses have shifted. 
Looking back over a century of government oversight and policy 
involvement in rural capital markets, a handful of principles have been 
present throughout:

   Rural businesses should have comparable access to capital as 
        urban businesses.

   Policy should aim to encourage competitive markets that 
        yield a steady supply of credit at market rates.

   Where credit markets fail, government policy should 
        encourage the creation of new lenders that fill critical market 
        gaps, but limit the role of such institutions to those market 
        segments.

   Government should be a lender of last resort for segments of 
        rural borrowers who cannot obtain any credit in rural financial 
        markets. In the main, this should be a short-term credit 
        facility.

   Government should provide credit and loan guarantees to 
        ensure that rural areas have adequate access to housing, 
        utilities, and basic infrastructure. This should be a long-term 
        commitment given the fundamental nature of these investments.

This list is still relevant in the current period. That said, other 
considerations may lead to some adjustment in the application of these 
principles in the future. These include:

   The cost of bailing out housing-related government sponsored 
        enterprises (GSEs), such as Fannie Mae and Freddie Mac, in the 
        current crisis may bring fresh oversight scrutiny to all such 
        enterprises, including the Farm Credit System. It will be 
        important to weigh each GSE on its own merits.

   Principles in the past have focused almost exclusively on 
        rural credit markets, with a heavy emphasis on agriculture. In 
        a more entrepreneurial, innovation-driven economy, equity 
        capital has risen in importance relative to debt. There have 
        been several isolated forays by public policy into this arena, 
        but it remains mostly a new frontier in rural areas (Freshwater 
        and others, 2001).
Building a stronger framework for policy decisions
    Experts, rural businesses, and policy officials alike would agree 
that the nation is entering a critical period of decision regarding the 
financial policies and rules that will govern rural financial markets 
for the next several years. However, rural America will only benefit 
from the new financial market architecture if the dramatic shifts in 
the rural economic landscape and the unique needs of rural businesses 
are taken into account.
    To put rural into the policy calculus, policymakers must engage a 
fresh set of questions most likely to shape rural America's business 
and economic future. Answering these questions, however, probably 
demands a better base of information than is currently available.
    The questions at the heart of the upcoming dialogue will span many 
dimensions of rural financial markets:

   In a period when banks are actively rebuilding their capital 
        base, what will be the impact on the credit available to rural 
        businesses?

   In a period of significant consolidation among commercial 
        banks, what will be the impact on the credit available and the 
        interest rates charged to rural borrowers?

   As more rural businesses shift from products to services, 
        what provisions are necessary to help rural lenders underwrite 
        loans increasingly backed by ``knowledge assets''?

   How can public policy encourage the emergence of a stronger 
        network of rural equity capital institutions?

   What changes in regulations may be important in helping 
        rural lenders match the growing size and regional scope of 
        larger rural businesses?

   How can rural financial institutions better meet the 
        widening financial service requirements of rural businesses 
        increasingly engaged with customers all around the world?

   What unique role do rural financial institutions play in the 
        emerging framework of regional economic development, and what 
        can be done to encourage their participation and leadership?

    These questions cannot be answered with the available base of rural 
financial information. Filling this information gap will be a difficult 
challenge. Databases that shed light on rural business conditions are 
few, and some of them are even being retired. For instance, the Federal 
Reserve Board has indicated it will no longer conduct the survey on 
small business finance, even though it is widely regarded as a 
benchmark set of financial data. Apart from data limitations, much of 
the research and analysis on rural financial markets is still heavily 
oriented on agricultural finance, not rural finance.
    A national panel of experts on rural finance would help in 
assembling better data and in spurring new research on rural financial 
markets. This panel might bring together national experts, policy 
advisors, and capital providers to supply an objective, ongoing source 
of information, analysis, and policy insight on rural financial market 
issues. The panel could be modeled after RUPRI's highly successful 
Rural Health Panel. It could issue policy briefs on rural financial 
market issues, including recommendations for shoring up the information 
base for public decision. It could encourage rural finance research and 
strengthen the network of rural finance researchers. Finally, it could 
provide a valuable sounding board for regulators and policy officials 
in current and future policy dialogues.
                               References
    Economic Research Service. 1997. Credit in Rural America. U.S. 
Department of Agriculture, Economic Research Service Agriculture 
Economic Report No. 749.
    Federal Reserve Board. October 15, 2008. Survey of Small Business 
Finances. Accessed January 1, 2008, http://www.federalreserve.gov/Pubs/
Oss/Oss3/nssbftoc.htmXxxx.
    Freshwater, David, David L. Barkley, Julia Sass Rubin, and Ron 
Shaffer. 2001. Nontraditional Venture Capital Institutions: Filling a 
Financial Market Gap. Part 2 of the Final Report. RUPRI Rural Equity 
Initiative.
                               Attachment
Table 1. Financial Characteristics of Metro and Rural Small Businesses.


Table 2. Sources of Equity Capital for Incorporated Rural and metro 
        Small Businesses, 2003.
        
        

    The Chairman. Thank you, Doctor.
    Mr. Bauer.

         STATEMENT OF FRED J. BAUER, PRESIDENT AND CEO,
  FARMERS BANK, AULT, CO; ON BEHALF OF INDEPENDENT COMMUNITY 
                       BANKERS OF AMERICA

    Mr. Bauer. Thank you, Mr. Chairman, thank you for the 
opportunity to testify. My name is Fred Bauer, I am the 
President and Chief Executive Officer of Farmers Bank in Ault, 
Colorado. For those of you that don't know the geography, that 
is about 50 miles north of Denver. It is a 103 year old 
community bank with over 40 percent of our loans in 
agriculture. I am testifying on behalf of the Independent 
Community Bankers of America.
    Many have wondered about the impact of the financial crisis 
on agriculture. Community banks did not cause the financial 
crisis, and have been quite upset at the bailout of Wall Street 
investment firms and our nation's largest banks considered too 
big to fail. Dozens of community banks have been allowed to 
fail the last 2 years. A large majority of the 8,000 community 
banks are in rural areas, and form an extensive credit delivery 
system serving rural America.
    Even in the financial crisis, 40 percent of community banks 
increased their loan origination volumes during the past year. 
While the largest banks saw a 3.2 percent decrease in 2008 net 
loans and leases, banks less than $1 billion grew by 5\1/2\ 
percent. For farm loans, over 6,000 banks under $1 billion in 
assets made over 60 percent of all farm loans from the banking 
sector, while holding only 12 percent of all banking assets.
    Commercial banks extend 53 percent of all farm operating 
loans and 38 percent of farm real estate loans. The banking 
sector increased ag lending by $8 billion for the period ending 
March 31, 2009 versus March 2008.
    Economists state there is ample credit for creditworthy 
farm borrowers and point out that, despite increasing risk, 
credit is being supplied to agriculture at historically low 
interest rates. ICBA received input recently from its Ag Rural 
America Committee, made up of 25 bankers across the country. 
Several bankers stated they had no classified ag loans, in part 
due to some areas having excellent crops in the past 2 years. 
Some bankers have had a significant increase in farm loans and 
little deterioration in portfolios, but are concerned about 
high input costs and lower farm income. Some banks picked up 
farm loans as larger banks cut back on their lines of credit.
    Land loans have remained steady for the highly productive 
farmland, but sales have slowed and less productive farmland 
has fallen five to ten percent.
    Dairy cattle, feed, hogs, poultry, and cow/calf sectors are 
experiencing stress due to lower prices and higher feed costs. 
Several states have been impacted by drought or severe weather.
    Some bankers are under pressure to decrease loan-to-deposit 
ratios. Regulators question some banks' use of Federal Home 
Loan Bank advances, an important funding source for community 
banks. Community banks remain very well capitalized. The ag 
portfolios of rural banks are a strong contributor to banks' 
overall income and stability.
    My testimony discusses the recent failure of a $2 billion 
bank in northern Colorado. Banks are reviewing which farm loans 
they can acquire from that bank.
    A very small percentage of all community banks receive TARP 
funds. A number of banks would like to get TARP funds. Banks 
receiving TARP funds do pay dearly with the tax-effected 
dividend cost as high as 7.7 percent for the first 5 years, 
then rising to 13\1/2\ percent. They are not bailout funds, and 
are repaid with interest.
    My written testimony covers several surveys and references 
a few of the many competitive advantages Farm Credit has over 
community banks. First, keep the farm safety net intact without 
budget cuts. Actually, there are six recommendations.
    First, keep the safety net intact, without budget cuts.
    Second, provide more funds for USDA direct and guaranteed 
loans.
    Third, enhance USDA's B&I loan program, limiting fees to 
one percent; increasing guarantee on loans under $5 million to 
90 percent, or even 95 percent; and, keep the low-doc 
application for USDA loans.
    Fourth, ensure FCA does not proceed with this rural 
community investment proposal. The proposal, not authorized by 
Congress, allows FCS to shift credit away from agriculture, 
contrary to their mission, for manufacturing, commercial 
buildings and businesses, restaurants, dentists' offices, 
apartment complexes, et cetera, taking loans from community 
banks, which also hurt rural America.
    Fifth, ensure regulators don't restrict lending by 
community banks.
    Sixth, avoid unintended consequences for bank customers by 
imposing new requirements on the community banking sector.
    In conclusion, community banks have increased lending in a 
time of economic contraction by providing loans to farmers at 
historically low interest rates. ICBA urges the Subcommittee to 
adopt our proposals, and we look forward to working with you.
    Again, thank you for the opportunity to testify.
    [The prepared statement of Mr. Bauer follows:]

 Prepared Statement of Fred J. Bauer, President and CEO, Farmers Bank, 
    Ault, CO; on Behalf of Independent Community Bankers of America
Introduction
    Mr. Chairman and Members of the Subcommittee, thank you very much 
for the opportunity to testify today on a topic of great interest to 
this Committee, our nation's farmers and ranchers, and the thousands of 
community banks in rural America.
    My name is Fred Bauer and I am the President and CEO of Farmers 
Bank in Ault, Colorado. I am testifying on behalf of the Independent 
Community Bankers of America and I serve on ICBA's \1\ Agriculture-
Rural America Committee. I am also Chairman of the Independent Bankers 
of Colorado. I am pleased to present ICBA's views on credit conditions 
in rural America.
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    \1\ ICBA represents 5,000 community banks throughout the country. 
Community banks are typically independently owned and operated and are 
characterized by personal attention to customer service and are proud 
to support their local communities and the nation's economic growth by 
supplying capital to farmers and ranchers, small businesses, and 
consumers.
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    Farmers Bank of Ault has been in existence for 103 years. The 
present ownership has owned the bank since 2001. We branched to Ft. 
Collins 2 years ago. Ours has always been an ``ag'' bank, but we have 
diversified over the last 10 years given the opportunities in our trade 
area, which is the north front range of Colorado. Agricultural lending 
still accounts for 40 percent or more of our business.
    As an agricultural lender, we are very diversified serving dairies, 
feedlots (cattle and sheep), ranchers, beet, onion, carrot, wheat, 
alfalfa, dry bean, and corn farmers. Our community has approximately 
1,500 people, but there are approximately 300,000 people within 20 
miles of our bank. Additionally, we service small business customers, 
consumers and real estate interests (land holding, development and 
construction).
    This morning I will briefly provide the community bank perspective 
on credit conditions in rural America and offer recommendations for the 
Members of this Subcommittee to consider in order to ensure the 
viability of our farms and ranches and rural economies.
The Financial Crisis
    As the financial crisis spread and deepened last fall many people 
wondered what the impact of the worst economic recession since the 
Great Depression would be on the agricultural sector. At the outset, 
let me emphasize that community banks played no part in causing the 
financial crisis and have been quite upset at the bailout of the Wall 
Street investment firms and our nation's largest banks that have been 
considered ``too big to fail.''
    Dozens of community banks have been allowed to fail during the past 
2 years while the largest banks have been prevented from failing due to 
governmental intervention.
    Community banks did not cause the current financial crisis, which 
was fueled by exotic lending products, subprime loans, and complex and 
highly leveraged investments that went terribly awry. The sharp decline 
in the U.S. housing markets and the distressed credit markets triggered 
a ripple effect throughout the entire nation that continues to strain 
households and impact our economy.
Community Banks Role in the Rural Economy
    Community banks play an important role in the nation's economy. 
There are approximately 8,000 community banks in the U.S. and the vast 
majority of these are located in communities of 50,000 or fewer 
residents. Thousands of community banks are in small rural communities.
    Community banks have only 12 percent of all bank assets but make 20 
percent of all small business loans. This is important since small 
businesses represent a whopping 99 percent of all employer firms and 
employ \1/2\ of the private sector workforce. Small businesses are 
important in rural America since many farmers and/or their spouses have 
off-farm jobs. In addition, the more than 26 million small businesses 
in the U.S. have created 70 percent of the net new jobs over the past 
decade. Community banks are small businesses themselves and specialize 
in small business relationship lending.
    Community banks under $1 billion in assets make over 60 percent of 
all agricultural loans extended by the commercial banking sector. Even 
more astounding, community banks under $500 million in assets extend 
over 50 percent of all agricultural credit from the banking sector. 
Commercial banks extend approximately 53 percent of non-real estate 
loans to the farm sector and 38 percent of the real estate credit.
Aite Study
    The Aite Group LLC released a study,\2\ conducted with the 
assistance of the ICBA, in March on the impact of the financial crisis 
on community banks. The study drew several conclusions that are 
informative regarding the ability of community banks to continue 
serving their customers during the financial crisis.
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    \2\ Impact of the Financial Crisis on U.S. Community Banks, New 
Opportunities in Difficult Times, March 2009, Christine Barry and Judy 
Fishman, Aite Group LLC, Boston, MA. 773 community banks were surveyed 
in February 2009, for this study.
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    Although the current financial crisis is impacting all financial 
institutions, most community banks are well positioned to overcome new 
challenges, take advantage of new opportunities, and reclaim some of 
the deposits lost to larger institutions over the last decade.
    Despite most community banks' lack of participation in subprime 
lending, the implications of larger bank activities have begun to 
trickle down. Of the 773 community banks surveyed, 73 percent stated 
they have seen an increase in their traditionally low loan 
delinquencies and charge-offs since the start of the crisis. The 
significant growth in quarterly net charge-offs for the industry is 
being driven primarily by the largest banks.
    Fifty-five percent of bankers stated they have seen an increase in 
deposits as a result of new customer acquisition. Only 17 percent are 
challenged by customers withdrawing deposits from their institutions.
    Community banks are still lending and 40 percent have seen an 
increase in loan origination volumes over the last year while 11 
percent believe the financial crisis has ``significantly curtailed'' 
their lending ability. In several cases, decreases in community bank 
lending activity, when it has occurred, is not the result of a lack of 
funds or financial instability, but rather part of a reaction to mixed 
messages coming from the U.S. Government. While these banks hear the 
government's requests for them to lend money, they also feel the 
government is dissuading them from lending by putting them through 
overzealous regulatory exams. Moreover, an economic contraction, by 
definition, means fewer loans will be originated; leading to bank's 
curtailed ability to lend.
    While some community banks are faced with new lending challenges, 
they are still lending, especially when compared to larger banks. In 
fact, while the largest banks saw a 3.23 percent decrease in 2008 net 
loans and leases, institutions with less than $1 billion in assets 
experienced a 5.53 percent growth.
    The financial crisis and new documentation requirements are also 
causing some banks to change processes and re-evaluate their credit 
evaluation practices. While most community banks have not strayed from 
traditional prudent lending and underwriting practices, 81 percent have 
tightened their credit standards since the start of the crisis. Of 
banks surveyed, 20 percent described this tightening as significant. 
Banks with more than $100 million in assets have been the most likely 
to tighten their credit standards, while only 15 percent of banks with 
less than $100 million in assets have done so. In most cases, tighter 
standards often means focusing greater attention on risk management and 
requiring more borrower information prior to making lending decisions.
The Agricultural Sector--Farm Income
    Many rural lenders have been quite concerned that a global 
recession would lead to fewer exports of U.S. agricultural products, 
thereby reducing markets and income for American farmers, and causing a 
ripple effect up and down Main Street. The agricultural sector was 
fortunate that at the outset of this severe recession, in which 
unemployment figures continue to march toward double digit levels, U.S. 
net farm income had reached a record high of nearly $90 billion for 
2008.
    This followed the $87 billion level reached in 2007 and a 10 year 
average (1999-2008) of $65 billion. However, production expenses also 
increased dramatically during the past 2 years, and although expenses 
are projected to be approximately nine percent lower this year, net 
cash income is also projected to fall to $71 billion. While still above 
the 10 year average, 2009 net farm income will be 18 percent less than 
last year's record level, according to USDA's Economic Research 
Service.
Perspective on Agricultural Credit
    We agree with various economists who have noted there is an ample 
amount of credit available to the agricultural sector for creditworthy 
borrowers. However, we also point out that there are several problem 
areas of concern that warrant continued monitoring. For example, the 
dairy industry has been hard hit by lower prices and high feed costs 
which have also impacted the livestock sector. In addition, there are 
several states where farmers have been impacted by drought conditions 
that will threaten yields and farm income.
    As was recently pointed out to another Subcommittee in April, 
despite some increasing risks in agriculture, ample credit appears 
available at historically low interest rates.\3\ In addition, the 
FDIC's recent data indicates that farm loans (non-real estate) and farm 
real estate loans increased collectively by $8 billion for the period 
ending March 31, 2009 compared to March 31, 2008.
---------------------------------------------------------------------------
    \3\ Jason Henderson, Federal Reserve Bank of Kansas City before the 
Subcommittee on General Farm Commodities and Risk Management, April 1, 
2009, page 2.
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ICBA's Agriculture-Rural America Committee Input
    ICBA conducted a conference call last week with its Agriculture-
Rural America Committee to further assess credit conditions. This 
Committee consists of twenty-five agricultural bankers from every 
region of the U.S. representing virtually every agricultural commodity 
grown in the country.
    A number of these bankers stated they had no classified 
agricultural loans. This is in part due to several areas of the country 
having excellent crops during the past 2 years, allowing farmers to 
increase their cash reserves or pay down their lines of credit. Some 
bankers have seen a significant increase in agricultural loans and have 
seen little deterioration in their agricultural portfolios but are 
concerned that higher input costs will reduce farm income. Some 
community banks have picked up agricultural loans as larger banks have 
cut back their lines of credit. Land values have remained steady for 
highly productive farm land although sales have slowed considerably.
    Land values for less productive farmland have fallen five to ten 
percent in some areas. Some banks have tightened underwriting 
standards, including taking a stronger collateral position, slightly 
shortening loan maturities, or requiring greater documentation from 
borrowers. The dairy, cattle feeding and cow/calf sectors are areas 
experiencing stress.
    Several bankers stated they are concerned with the potential for 
their regulators to second-guess their desire to make additional loans 
and some bankers are under pressure from their regulators to decrease 
their loan-to-deposit ratios. In addition, several bankers stated their 
regulators do not want them to utilize Federal Home Loan Bank (FHLB) 
advances as a means of funding their loans. The regulators are 
suggesting that FHLB advances are not as ``stable'' as core deposits. 
Bankers disagree, noting that it is quite easy for depositors to 
withdraw funds in search of higher yields in the stock market, which 
has risen rapidly in recent months, or in shopping for higher rate CDs 
at other institutions.
    The real issue, bankers believe, is that regulators do not want to 
be in a secondary security position behind the FHLB if there are 
widespread bank failures. FHLB advances have become an important source 
of funding for community banks that must be allowed to continue.
    A number of bankers also complain about a very harsh examination 
environment from field examiners and believe there is a disconnect 
between the public statements from agencies in Washington, D.C. and the 
treatment of local banks during examinations.
    At least one banker relayed that when he called to inquire about 
receiving TARP funds he was questioned on why he needed the money. When 
he explained he wanted to supplement his capital position and also make 
more loans, the regulator told him the agency didn't want banks making 
more loans in this environment. This type of attitude has led many 
community banks to conclude there is a reluctance to extending TARP 
money to community banks and that the program was primarily designed to 
assist large, troubled banks. Community banks in danger of failing 
would not be eligible for TARP funds.
    In addition, many banks have concluded that TARP funds are an 
expensive source of capital both in terms of the dividend cost as well 
as the administrative costs.\4\ There is also the threat that 
requirements will be changed after banks receive funding and new 
conditions will be imposed.
---------------------------------------------------------------------------
    \4\ The cost of TARP funds includes a five percent dividend payment 
for the first 5 years increasing to nine percent after 5 years. On an 
after tax basis, ICBA estimates the cost would be 7.5 percent the first 
5 years and 13.5 percent after the first 5 years.
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    Generally, the bankers' assessment is that ample credit is 
available for credit worthy borrowers; they would like to make more 
loans; and they're concerned about heavy-handedness from their 
regulators going forward. Community banks remain very well capitalized 
and are in a good position to assist with new borrowing needs as the 
economy strengthens.
    There are some sectors of agriculture that are struggling, but the 
agricultural portfolios of many rural banks are currently a very strong 
contributor to the bank's overall income and stability.
New Frontier Bank Failure
    Recently, a $2 billion bank with heavy involvement in agriculture, 
and located in northern Colorado, failed. The bank apparently took a 
lot of risks in its effort to grow quickly, achieving all of its growth 
in the past 10 years. As Chairman of the Independent Bankers of 
Colorado, I facilitated a meeting a few weeks ago between the local 
bank presidents, the State Division of Banking, representatives of the 
Federal Reserve, and the local representatives of the FDIC in charge at 
New Frontier, providing a venue to exchange information about what 
everyone could expect over the next few months. The meeting was also an 
opportunity to voice concerns over what would or could happen to an 
already struggling local economy given New Frontier's demise. One 
concern was the potential negative impact upon existing farmers and 
ranchers if there was a large and sudden glut of real estate for sale 
due to a number of foreclosed properties. Also of concern was dealing 
with the many customers seeking new credit relationships.
    We agreed to meet again after the dust had settled. Many of the 
banks are reviewing New Frontier's loan portfolio to determine if there 
are bankable loans that they could add to their own portfolio. Bankers 
of course want to be sure that the borrowers are capable of repaying 
their loans if they extend them credit. Regulators also expect banks to 
lend to borrowers that can repay. Our bank looked at a number of these 
loans and will acquire at least four in our trade area.
    One limiting issue is that regulators recently decided to require 
community banks to increase their capital levels once again. 
Previously, regulators increased our capital level from eight percent 
to ten percent. Now the regulator requires banks to have a 12 percent 
capital level for all banks that have commercial real estate loan 
volumes three times their level of capital (e.g., $30 million in 
commercial loans and $10 million of capital). Obviously, the regulators 
believe that commercial real estate loans are more vulnerable in the 
current economic climate. Many banks in northern Colorado exceed this 
threshold due to the region's fast growth in recent years. However, 
since capital is leveraged approximately ten times for new lending, a 
$2 million required increase in capital reduces the amount of lending 
the bank is able to provide by $20 million. Many bankers in our area 
believe this new requirement is unnecessarily restrictive.
Federal Reserve Agricultural Surveys
    Several of the Federal Reserve District banks (Kansas City, Dallas, 
Chicago, Minnesota, and Richmond) conduct quarterly agricultural 
surveys of bankers in their regions. A summary of these surveys 
follows.
    The Federal Reserve Bank of Kansas City \5\ notes that the average 
return on assets (ROA) and equity (ROE) at agricultural banks steadily 
declined in 2008. ROE at ag banks last September declined to 7.6 
percent and ROA declined to 0.8 percent. Yet, these returns were much 
stronger than returns at other commercial banks. Contributing to the 
decline in ag bank profits were lower interest rates which have dropped 
significantly below 2006 levels. At smaller banks, delinquency rates on 
agricultural loans actually declined. Delinquency rates and net charge-
offs on agricultural loans remain well below other types of loans and 
help explain the relative strength of agricultural banks. The 
delinquency rate on all types of loans and leases in the third quarter 
of 2008 was almost triple the rate on agricultural loans. Ag banks 
report ample funds for operating loans.
---------------------------------------------------------------------------
    \5\ The Kansas City region, the Tenth Federal Reserve District, 
includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern 
half of New Mexico and the western third of Missouri.
---------------------------------------------------------------------------
    Banks have tightened lending standards to preserve capital and 
manage risk arising from the economic downturn. Collateral requirements 
rose almost 20 percent above year-ago levels but this increase does not 
appear to have severely restricted loan activity as farm real estate 
accounted for approximately 17 percent of the collateral used for the 
nation's farm operating loans. Bankers report deteriorating loan 
quality as livestock profits were elusive and margins declined for the 
crop sector. Carry-over debt appears to be rising as more ag banks 
report an increase in operating loan renewals and extensions during the 
fourth quarter. In response to rising risks, banks reduced the length 
of operating loans to approximately 12 months.
    Rising job losses from the recession pose a risk to deposit growth 
because people could lose their income stream and tap savings for 
household needs. Ag banks are increasing their use of USDA guaranteed 
farm loans.
    Continued deterioration in the ag economy could further erode the 
creditworthiness of ag borrowers. Farmland values edged down in the 
fourth quarter.
    The Federal Reserve Bank of Minneapolis \6\ reports that farm 
income, capital expenditures and household spending decreased in the 
first quarter. Loan demand was flat and collateral requirements 
increased. Banks reported no shortage of funds and interest rates 
decreased from the fourth quarter of 2008. Survey respondents expect 
decreases in income and capital expenditures during the second quarter. 
Dairy producers are hard hit as the price of milk has fallen to below 
break-even levels. Most respondents from Wisconsin report below average 
income for their borrowers. One quarter of Minnesota respondents 
reported above average income, but 49 percent reported below average 
income. Producers are responding to lower spending by reducing capital 
equipment spending. Approximately 25 percent of respondents reported 
lower levels of loan repayments and 19 percent reported higher levels. 
Twenty-five percent saw higher renewals or extensions and only eight 
percent saw lower levels.
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    \6\ The Minneapolis Fed, serves the six states of the Ninth Federal 
Reserve District: Minnesota, Montana, North and South Dakota, 26 
counties in northwestern Wisconsin and the Upper Peninsula of Michigan.
---------------------------------------------------------------------------
    The Federal Reserve Bank of Dallas \7\ includes the states of Texas 
and portions of New Mexico and Louisiana, a region which has been 
impacted by a severe drought. Many ranchers are unable to reach a 
break-even point, forcing livestock liquidations. The dairy industry is 
suffering from large losses. The outlook for crop production, due to 
the lack of moisture, remains bleak. Eighty-four percent of bankers 
report that loan demand remains unchanged or has decreased compared to 
last quarter.
---------------------------------------------------------------------------
    \7\ The Federal Reserve Bank of Dallas covers the Eleventh Federal 
Reserve District, which includes Texas, northern Louisiana and southern 
New Mexico.
---------------------------------------------------------------------------
    The Federal Reserve Bank of Chicago \8\ reports sale of farms were 
below the levels of the prior year. Bankers anticipate declines in land 
values during the second quarter. For the second quarter of 2009, 
respondents expect higher loan demand for operating loans and USDA 
guaranteed loans. As of April 1, District interest rates had reached 
historically low levels with the level for operating loans at the 
lowest since the early 1970s. The average loan-to-deposit ratio was 76 
percent, or four percent below the desired level. As land values have 
stalled, cash rental rates for farmland increased seven percent for 
2009. Twenty-one percent of bankers reported that more funds for 
lending were available than a year ago and nine percent reported that 
fewer funds were available.
---------------------------------------------------------------------------
    \8\ The Chicago Fed serves the Seventh Federal Reserve District, a 
region that includes all of Iowa and most of Illinois, Indiana, 
Michigan and Wisconsin.
---------------------------------------------------------------------------
    Bankers expect the volume of non-real estate farm loans to grow 
during the second quarter compared to year ago levels and expect higher 
FSA guaranteed loan demand. They expect farm machinery, grain storage 
construction, feeder cattle and dairy loan volumes to decrease.
    The Federal Reserve Bank of Richmond's \9\ fourth quarter 2008 
survey reported the demand for farm loans was little changed from its 
sharp drop off in the third quarter, which bankers attributed to 
variations in commodity prices and production costs. Lenders expressed 
concern about escalated feed costs which had reduced profits for 
livestock production. Requests for loan renewals or extensions 
increased at a quicker pace. Agricultural lenders reported that farm 
loan availability turned positive, and collateral requirements eased 
slightly from third quarter levels. Reports also indicated that 
interest rates for agricultural loans moved lower across all 
categories. Compared to third quarter levels, rates for intermediate-
term loans decreased 34 basis points and rates for operating loans 
moved down 28 basis points. In other categories, interest rates for 
long-term real estate loans fell 19 basis points, and interest rates 
for feeder cattle loans dropped ten basis points.
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    \9\ The Federal Reserve Bank of Richmond, (Fifth district) 
comprises Maryland, the District of Columbia, Virginia, North Carolina, 
South Carolina, and most of West Virginia.
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    In the fourth quarter, 75 percent of lenders reported that they had 
actively sought new farm loans, up slightly from last quarter's reading 
of 73 percent. Fourth quarter land prices were slightly below the 
previous quarter and considerably lower than year ago levels. Bankers 
expected farm loan volumes in the first quarter of 2009 to continue a 
downward trend led by further weakness in the demand for dairy and 
feeder cattle loans.
National Ag Risk Education Library Survey
    In an effort to better understand what is happening in the 
agricultural economy, a survey \10\ was conducted in January 2009 by 
the Extension Risk Management Education Regional Centers and the Center 
for Farm Financial Management at the University of Minnesota, funded 
through the USDA CSREES Risk Management Education Program. Twenty-three 
hundred agricultural professionals responded to the survey, whose 
respondents represented various agricultural disciplines: Lenders--21 
percent; educators--43 percent; crop insurance representatives--7 
percent; consultants--6 percent--elevators, cooperatives, marketing 
brokers and nonprofits 22.5 percent.
---------------------------------------------------------------------------
    \10\ This survey can be accessed at: http://www.agrisk.umn.edu/
Library/Display.aspx?RecID=3971.
---------------------------------------------------------------------------
    Currently, 63 percent of respondents stated that ten percent or 
less of the producers they work with are experiencing financial stress, 
with 15 percent indicating that less than two percent of the producers 
they work with are currently experiencing financial stress.
    In the next 3 years, however, more than 28 percent of respondents 
expect at least 30 percent of their agricultural clients will 
experience financial stress. Seventy-five percent of respondents expect 
11 percent or more of producers will experience financial stress in the 
next 3 years.
    Twenty-six percent of lenders think the probability is very high 
that producers will experience financial stress in the next 3 years. 
Fifty-four percent of lenders expect the probability of financial 
stress to be ``high.''
    It is particularly interesting to note the reasons stated for 
expected financial stress in agriculture over the next 3 years. The 
first five reasons given were: Price/input cost margins; price 
volatility; negative cash flows; inadequate business planning; and lack 
of financial planning skills. Tightening credit availability was sixth 
on the list of thirteen reasons and was cited as having ``moderate'' 
impact. The lowest rated factors expected to have an impact on farm 
financial stress were rising interest rates and declining land values.
Farm Credit System Considerations
    The Farm Credit System (FCS) is a government sponsored enterprise 
(GSE) that is unique in that, unlike other GSEs, it competes with 
private sector lenders at the retail level. The financial crisis has 
proven that not only do GSEs have the implicit backing of the Federal 
Government; they also have the explicit backing of the Federal 
Government. Just like the nation's largest banks, they would not be 
allowed to fail in times of financial difficulty. The FCS, as a 
competitor of community banks, also has unique advantages--it can 
typically raise funds cheaply in the government debt markets and FCS 
institutions have numerous tax advantages enabling them to offer lower 
rates than commercial bank competitors.
    This has led to FCS entities cherry picking prime farm loans from 
community banks as FCS institutions seek the very best customers from 
bank portfolios. Allowing this practice, unintended by Congress, can 
discourage community bank involvement in the agricultural sector, 
reducing the amount of resources and institutions available to farmers.
    The performance numbers of the FCS indicates this as well. Compared 
to commercial ag banks' ROE of 7.6 percent and ROA of 0.8 percent for 
September 2008, FCS associations' ROE for the same time period was 
10.85 percent and associations' ROA was 1.70 percent.
    Community banks serving agriculture should receive the same tax 
benefits as FCS associations. In this century, it no longer makes sense 
to provide billion-dollar and multi-billion dollar FCS institutions tax 
advantages over much smaller commercial lenders to compete for the same 
customers. The benefit of equalizing the playing field will accrue to 
the end-user, the farmers and ranchers.
ICBA Recommendations to Congress
    While it is difficult to predict accurately what will happen in 
American agriculture 2 or 3 years down the road, we believe that 
Congress can have a positive influence by making wise decisions now on 
a number of key policy choices. Our recommendations are as follows:
    1. Keep the farm safety net intact without budget cuts. The 2008 
Farm Bill was difficult to enact but represented an important 
investment in rural America's future. As such, the funding commitments 
should be kept in place because many lenders and farmers have made long 
term planning decisions based on the farm bill's safety net. ICBA has 
joined over three dozen other interested organizations in recent 
letter(s) \11\ to Congress explaining the rationale for requesting no 
further cuts to the farm bill.
---------------------------------------------------------------------------
    \11\ Letter to Chairman DeLauro and Ranking Member Kingston, June 
4, 2009 from 41 organizations.
---------------------------------------------------------------------------
    2. Provide additional funding for USDA direct and guaranteed farm 
loans. Appropriations bills in both the House and Senate contain 
significant new money to meet recent projections for increased demand 
for direct and guaranteed farm loans. It is our understanding that the 
dollar numbers in the House bill are closer to meeting expected demand 
for direct operating loans. The House Agriculture Appropriations bill 
would provide $400 million of direct operating loans, $300 million in 
direct ownership loans and $50 million in guaranteed operating loans. 
However, it appears that approximately $150 million in guaranteed 
operating loans will be needed to meet demand so more money should be 
added for guaranteed operating loans. These programs assist borrowers 
who cannot obtain credit elsewhere and are an important backstop for 
farmers who need temporary assistance until they are able to graduate 
to commercial credit.
    3. Enhance USDA's Business and Industry (B&I) loan program. 
Congress added significant new money for USDA's rural development 
efforts as part of the recently enacted economic stimulus package (P.L. 
111-5). The new funding would allow an additional $3 billion of 
business and industry loans in addition to $1 billion of loans provided 
as part of USDA's regular budget. However, the funds to provide $3 
billion in new B&I loans will expire October 1, 2010. It will be 
important for USDA to aggressively market the program to lenders and 
provide adequate information in order to utilize these new funds.
    Even more importantly, we believe the B&I program needs to be 
enhanced (at least for the new funding) by: (A) implementing no more 
than a one percent origination fee; (B) increasing guarantees on loans 
under $5 million from the current 80 percent level to 90 percent--
perhaps even 95 percent on smaller loans; and (C) not eliminating the 
low doc application as USDA appears to be on the verge of doing for 
smaller loans.
    These changes would help ensure the program is attractive enough 
for lenders and their customers and will ensure that Main Street rural 
America has the resources necessary to ride out any storms on the 
horizon that could result from stress in the agricultural sector.
    4. Ensure that the FCA does not proceed with its Rural Community 
Investments Proposal. This proposal poses significant new risks to the 
FCS and its borrowers and should not be adopted. The proposal appears 
to be illegal and was never considered or authorized by Congress. It 
allows FCS to extend credit, mislabeled ``investments,'' for a vast 
array of purposes never intended by Congress. These purposes include 
extending credit for non-farm business financing, apartment complexes, 
construction projects and virtually any other purpose. This wide non-
farm reach of FCS institutions will move FCS lenders further away from 
serving farmers and ranchers--the specific reason it was created and 
granted GSE tax and funding privileges.
    5. Ensure that regulators not unduly restrict lending by community 
banks. Regulators can have a major impact on the ability of lenders to 
extend credit particularly if they engage in unduly harsh examinations 
at the local level. Many community banks believe this is occurring. 
Members of Congress should interact with regulatory agencies and stress 
the need to allow the banking sector to work with farm customers during 
difficult financial times that may lie ahead. Such regulatory 
flexibility allowed many farmers to survive the turbulent times of the 
1980's farm crisis but was the result of clear and strong messages sent 
by Congress.
    6. Avoid unintended consequences resulting from imposing new 
requirements on the banking sector. In recent months there have been 
various proposals aimed at bank recipients of TARP funds that would 
impose unnecessary costs and regulatory burdens on banks. Such 
proposals have included requiring commercial banks to write down 
principal and interest on troubled loans as the first option to 
consider when restructuring loans. Bankers already work with their 
customers and utilize a wide variety of options to keep customers in 
business. Seeking to dictate from Washington formulaic regulatory 
regimens will only add to the costs and complexity of working with 
borrowers and is unnecessary.
Conclusion
    Thank you, Mr. Chairman, for the opportunity to testify today. 
Clearly, community banks did not cause the problems that resulted in 
the financial crisis but have done their part to work with borrowers 
and have even increased their lending during a period of economic 
contraction. In addition, thousands of community banks are providing 
loans to farmers and ranchers at historically low interest rates. ICBA 
urges the Subcommittee to adopt the recommendations provided in our 
testimony to enable the community banking sector to do even more to 
serve American agriculture and our rural communities. We look forward 
to working with you and the Members of this Subcommittee and full 
Committee.
                               Attachment




U.S. Commercial Banks: Total Non-Real Estate Farm Loans



U.S. Commercial Banks: Total Farmland Loans



    The Chairman. Thank you, Mr. Bauer.
    Mr. Gerber.

  STATEMENT OF MICHAEL A. GERBER, PRESIDENT AND CEO, FEDERAL 
   AGRICULTURAL MORTGAGE CORP. (FARMER MAC), WASHINGTON, D.C.

    Mr. Gerber. Chairman Holden, Ranking Member Goodlatte, and 
Members of the Subcommittee, thank you for inviting Farmer Mac 
to testify here today.
    I am Mike Gerber. I am the President and CEO of Farmer Mac. 
Farmer Mac was created by Congress in 1987 to provide lenders 
in rural America with enhanced liquidity and lending capacity. 
We do this by providing a secondary market for agriculture real 
estate lines, rural housing mortgage loans, and rural utility 
credits. As a result, lenders are able to offer agricultural 
and rural borrowers loan products that provide longer-term 
funding at stable rates.
    Farmer Mac is not a direct lender. Instead, we work through 
the network of commercial banks, insurance companies, Farm 
Credit institutions, rural utilities, lenders, and others who 
work directly with agricultural and rural borrowers.
    In addition to providing a secondary market for real estate 
and rural utilities loan assets in rural America, Farmer Mac is 
also an active purchaser of USDA-guaranteed loans. All of these 
loans can be pooled and those securities can then be sold to 
investors in the capital markets, retained on the lenders' 
books, or retained by Farmer Mac as part of its portfolio.
    Loans in our portfolio grew to a record $10.1 billion in 
2008. Portfolios performed well, with the notable exception of 
ethanol loans. Delinquencies on non-ethanol loans as of March 
31 remained near historically low levels at .67 percent.
    Farmer Mac funds its purchases of eligible loans by issuing 
debt. While our access to the debt markets has been 
uninterrupted, the recent turmoil in the financial markets has 
presented challenges to that access. In particular, placing 
medium-term notes for terms longer than 5 years continues to be 
a challenge. It is crucial that we have access to the medium-
term note market at reasonable cost if we are to provide 
lenders a full range of competitive projects.
    Farmer Mac maintains a liquidity portfolio also in 
compliance with governing regulation. That portfolio allows us 
to manage our short-term funding needs, as well as to protect 
us in the event of an interruption in our funding sources.
    In September of 2008, Farmer Mac suffered losses totaling 
$106.2 million on two investments: Fannie Mae Preferred Stock 
and Lehman Brothers Senior Debt Securities. Without additional 
capital, Farmer Mac would have been below regulatory minimum 
and out of capital compliance with a key safety and soundness 
measure. To offset those losses and to ensure compliance, we 
raised over $124 million in additional capital through the 
preferred stock offerings, with investors representing all 
segments of our business partners: A commercial bank, the Farm 
Credit System, the National Rural Utilities Cooperative Finance 
Corporation, and an institutional investor. We appreciate this 
strong display of support from our business partners.
    As of March 31, our capital access above the regulatory 
minimum was above $67 million. That private capital assistance 
was necessary because Farmer Mac does not receive appropriated 
funds, and has not received any government assistance through 
Treasury programs.
    The combination of the investment losses and market 
disruption necessitated quick action on the part of the board 
of directors to ensure the financial health of Farmer Mac. They 
removed the CEO and CFO, and I was asked to step in as the CEO 
and President on an acting basis and was hired as a permanent 
CEO replacement in March of this year.
    Our focus since that time has been on assuring the 
stability of our business, mitigating the risk on our balance 
sheet, enhancing our capital position, and continuing to look 
for ways to provide financial products for our customers.
    While we still have some work to do, we have made progress. 
We have taken no more losses in our investment portfolio. We 
have been able to place debt every day in the marketplace to 
fund our new business and replace maturing debt.
    Delinquencies and charge-offs remain within manageable 
levels. We generated $33.5 million worth of net book earnings 
in the first quarter of 2009, even with allowance charges for 
ethanol.
    We do believe there will continue to be opportunities to 
grow our business and meet the needs of lenders who serve rural 
America.
    Today, we have loans purchased from over 370 different 
lending institutions. We continue to grow our partnership with 
the ABA. We have a partnership with the Independent Community 
Bankers of America. We continue our relationships with many 
Farm Credit institutions. We now have the opportunity to work 
with the National Rural Utilities Cooperative Finance 
Corporation. We look forward to working with these entities to 
serve rural America.
    Our Congressional mission is clear and our focus is on 
rural America. We believe Farmer Mac has a unique opportunity 
and is in a unique position to help serve rural America.
    Thank you.
    [The prepared statement of Mr. Gerber follows:]

  Prepared Statement of Michael A. Gerber, President and CEO, Federal 
       Agricultural Mortgage Corp. (Farmer Mac), Washington, D.C.
    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to appear today to testify on behalf of the Federal 
Agricultural Mortgage Corporation known as Farmer Mac. My name is 
Michael Gerber and I am the President and Chief Executive Officer of 
Farmer Mac, headquartered here in Washington, D.C.
    Farmer Mac provides a secondary market for agricultural real 
estate, rural housing mortgage loans and some rural utilities loans. 
This secondary market increases the availability of long-term credit at 
stable interest rates to America's rural communities, including 
farmers, ranchers and rural residents, and provides those borrowers 
with the benefits of capital markets pricing and product innovation. 
Farmer Mac is a stockholder-owned, federally chartered instrumentality 
of the United States and part of the Farm Credit System.
    Created by Congress in the aftermath of the agricultural credit 
crisis of the 1980's when land values fell, credit policies tightened 
and there was a wave of farm foreclosures, Farmer Mac helps ensure 
liquidity and lending capacity for agricultural lenders. Every day 
Farmer Mac interacts with all types of rural lenders (banks, Farm 
Credit System members and insurance companies) throughout the country. 
We serve as a bridge between institutional investment pools of capital 
and main street Rural America.
    Farmer Mac maintains a portfolio of investments to manage risk, 
liquidity and short term surplus funds. Last fall, when the global 
credit crisis adversely affected the values of many securities, Farmer 
Mac's portfolio of investments, which at the time included Fannie Mae 
preferred stock and Lehman Brothers senior debt securities, was 
dramatically impacted. Reflecting primarily the severe market declines 
in these two securities in September, Farmer Mac recognized a total 
loss of $106 million during 2008, necessitating quick action on the 
part of its Board of Directors to assure the financial health of the 
organization and its capabilities to fulfill its ongoing mission to 
Rural America. The Board responded by replacing the CEO and beginning a 
process to revaluate the business model. In the last 8 months 
management has raised over $124 million of capital to assure it is in 
capital compliance. Though challenges exist in the ethanol segment of 
our loan portfolio, the other segments are performing very well. As a 
result, despite the difficult economic times generally, Farmer Mac has 
continued to provide access to our programs for banks, Farm Credit 
System members and other agricultural lenders in a sound manner.
Farmer Mac Programs
    Farmer Mac accomplishes its Congressional mission of providing 
liquidity and lending capacity to agricultural and rural utilities 
lenders by:

   purchasing eligible loans directly from lenders;

   guaranteeing securities representing interests in, or 
        obligations secured by, pools of eligible loans; and

   providing credit enhancements that enable lenders to 
        transfer risk and enhance their capital position.

    Farmer Mac conducts these activities through three programs--Farmer 
Mac I, Farmer Mac II and Rural Utilities. Farmer Mac offers loan 
products designed to increase the liquidity of agricultural real estate 
mortgage loans and the lending capacity of financial institutions that 
originate those loans. As of December 31, 2008, the total volume in all 
of Farmer Mac's programs was $10.1 billion.
    Under the Farmer Mac I program, Farmer Mac purchases or commits to 
purchase eligible agricultural mortgage loans or securities backed by 
eligible loans. Loans must meet credit underwriting, collateral 
valuation, documentation and other specified standards. Small farms 
account for 65% of Farmer Mac guarantees and commitments and the 
average outstanding loan balance for Farmer Mac I loans is $279,000.
    Under the Farmer Mac II program, Farmer Mac purchases the 
guaranteed portions of loans guaranteed by the U.S. Department of 
Agriculture. Eligible USDA-guaranteed portions include Farm Service 
Agency Guaranteed Farm Ownership and Term Operating Loans and Rural 
Development Business and Industry and Community Facility Guaranteed 
Loans.
    In May 2008, Congress expanded Farmer Mac's charter to authorize 
the Corporation to purchase, and to guarantee securities backed by, 
loans made by cooperative lenders to cooperative borrowers who have 
received or are eligible to receive loans under the Rural 
Electrification Act of 1936 (REA). These loans are for the financing of 
electrification and telecommunications systems in rural areas. This 
expansion has been very successful, with Farmer Mac working with 
National Rural Utilities Cooperative Finance Corporation to provide 
nearly $1.8 billion of funding for electric coops to date. Last month 
we created a structure that could provide an additional $1 billion in 
funding, bringing the potential total of the program up to nearly $3 
billion. We are grateful to the support from Congress in approving this 
farm bill provision.
    After buying a loan, Farmer Mac can pool the loans together, 
securitize them, and guarantee the timely payment of interest and 
principal. Securities Farmer Mac guarantees are sold to investors in 
the capital markets, swapped in exchange for the loans and retained by 
the seller of the loans or held by Farmer Mac.
    Farmer Mac funds its purchases of Farmer Mac Guaranteed Securities 
and eligible loans primarily by issuing debt obligations of various 
maturities in the capital markets. Farmer Mac's regular debt issuance 
and non-program investment assets support its access to the capital 
markets. While Farmer Mac's access to the debt markets has been 
consistent and uninterrupted, the recent turmoil in the financial 
markets has caused such access to be more challenging. As lenders seek 
Farmer Mac's products and services, favorable loan terms ultimately 
depend on Farmer Mac's access to the capital markets. In the face of 
these challenges, Farmer Mac has worked to develop new products to meet 
customer demand. Further, financial institutions that Farmer Mac 
currently conducts business with face a host of challenges beyond their 
agricultural lending product lines. Farmer Mac aspires to position 
itself as a critical element in delivering solutions to lenders that 
meet all of the financing needs of Rural America.
Strong Statute and Oversight
    When Congress created Farmer Mac in the aftermath of the collapse 
of the agricultural credit delivery system, the legislators added 
requirements not previously included in any of the statutes 
establishing other Government-Sponsored Enterprises (GSEs).
    Unlike the other existing GSEs at the time, the initial 1987 
legislation required Farmer Mac to be regulated by a separate office 
(Office of Secondary Market Oversight) of an independent regulator, the 
Farm Credit Administration, for safety and soundness. The statute 
creating Farmer Mac expressly required that qualified loans meet 
minimum credit and appraisal standards that represent sound loans to 
profitable farm businesses. Farmer Mac's statutory charter (Title VIII 
of the Farm Credit Act of 1971 as amended), requires offerings of 
Farmer Mac Guaranteed Securities to be registered under the Securities 
Act of 1933 unless an exemption for an offering is available. This 
provision leads to the requirement that Farmer Mac comply with the 
periodic reporting requirements of the Securities Exchange Act of 1934, 
including quarterly reports on the financial status of the Corporation 
and reports when there are significant developments. This also put 
Farmer Mac under the regulatory authority of the Securities and 
Exchange Commission.
    As required by its statutory charter, Farmer Mac has established 
underwriting, appraisal, and repayment standards for eligible loans 
taking into account the nature, risk profile, and other differences 
between different categories of qualified loans. These standards for 
agricultural real estate mortgage loans under the Farmer Mac I program 
at a minimum are intended to:

   provide that no loan with a loan-to-value ratio (``LTV'') in 
        excess of 80 percent be eligible;

   require each borrower to demonstrate sufficient cash-flow to 
        provide adequate debt service on the loan; and

   protect the integrity of the appraisal process with respect 
        to any loan.

    Farmer Mac is required to set aside in a segregated account a 
portion of the fees it receives from its guarantee activities. This 
segregated account must be exhausted before Farmer Mac may issue U.S. 
Treasury obligations against the $1.5 billion that it is statutorily 
authorized to borrow in order to fulfill its guarantee obligations. 
That borrowing authority is not intended to be a routine funding source 
and has never been used.
Focus on Minimizing Financial Market Volatility, Capital Strength, and 
        Access to Debt Markets
    As a result of the amount of losses in 2008 on its Fannie Mae and 
Lehman holdings, Farmer Mac conducted an extensive review of its 
investment policies and operations with a view to strengthening 
policies, procedures and oversight of its investment portfolio and 
related funding strategies. Farmer Mac is implementing initiatives and 
controls recommended as a result of this review, with the goals of 
minimizing the Corporation's exposure to financial market volatility, 
preserving capital and supporting the Corporation's access to the debt 
markets.
Maintenance of Regulatory Capital Levels
    The Farm Credit Act established capital requirements for Farmer 
Mac. Farmer Mac must comply with the higher of the minimum capital or 
risk-based capital requirement. Its level of excess capital was $102.4 
million at the end of 2005, $69 million in 2006, $40.4 million in 2007, 
$13.5 million in December of 2008 and $67 million as of March 31, 2009.
 Core Capital meets regulatory requirements


    Since September of last year, Farmer Mac has been able to raise 
over $124 million in additional capital through preferred stock 
offerings with investors representing all segments of our partners--a 
commercial bank, Farm Credit System institutions, the National Rural 
Utilities Cooperative Finance Corporation and an institutional 
investor. Farmer Mac does not receive appropriated funds and has not 
received any government assistance through Treasury programs.
    To ensure that it has adequate regulatory capital to support new 
business, in fourth quarter 2008 Farmer Mac began to require that 
lenders who place pools of loans in excess of $20 million into a Farmer 
Mac program purchase an equity interest in Farmer Mac in the form of 
Farmer Mac preferred stock.
Current Credit Conditions
    As of March 31, 2009 Farmer Mac's ethanol portfolio consisted of 
loan participations with a cumulative unpaid principal amount of $293.3 
million, with exposure to 29 different plants in 11 states. At the end 
of 2008 adverse developments in its ethanol portfolio caused a 
substantial increase in Farmer Mac's delinquencies and non-performing 
assets. However, other than the delinquent ethanol loans, the vast 
majority of loans underlying the Corporation's guarantees and 
commitments continue to perform well, with delinquencies on non-ethanol 
loans remaining near historically low levels consistent with the 
strength of the U.S. agricultural economy through the end of the year. 
Agriculture is a cyclical, weather driven business. At this time, the 
segment of the loan portfolio we are watching most closely is dairy. In 
addition, we are focused on non-irrigated loans in the west that 
continue to be pressured by water supply issues exacerbated by drought 
conditions.
 Absent ethanol, delinquencies remain low


 Geographic Diversification             Industry Diversification
                                       
                                       
 2008 Program volume set new record
[GRAPHIC] [TIFF OMITTED] T1.8 b RESULTED IN $1.

illion of new program volume for Farmer Mac to date. This volume 
        contributed greatly to the record level of $3.1 billion in new 
        growth in 2008 and contributed additional diversification when 
compared with the agricultural loans in Farmer Mac's portfolio. 
        New Loan Business increased in 2008
        
        
Relationships
    As of December 31, 2008, more than 370 lenders were participating 
in one or both of the Farmer Mac I or Farmer Mac II programs. Farmer 
Mac has initiated partnerships with the American Bankers Association 
and the Independent Community Bankers of America to increase 
participation by banks. We have continued our long standing 
relationships with many Farm Credit System institutions and our ongoing 
relationship with National Rural Utilities Cooperative Finance 
Corporation is providing new products to help rural electric 
cooperatives improve their financing. Our business partners are the 
conduits to providing the benefits of Farmer Mac programs to farmers, 
ranchers, rural utilities and rural residents and we will continue our 
efforts to expand these relationships.
Conclusion
    Our focus since last fall has been on assuring the strength of our 
business, mitigating the risk on our balance sheet and enhancing our 
capital position. We are succeeding in our efforts, and we are 
beginning to realize the benefits.
    While lenders in both the agricultural and rural utilities sectors 
continue to face both capital markets and challenges brought on by 
these economic times, Farmer Mac is continuing to work with its 
partners to provide products to respond to their needs. As evidenced 
through our commitment to meet the challenge Congress put before us 
just last year in the form of expanded authority for rural utilities 
lending, we stand ready to support additional expectations.
    We thank you for the opportunity to present Farmer Mac to you 
today. We look forward to working with Members of Congress and our 
partners to fulfill our mission of bringing liquidity and the benefits 
of the secondary market to Rural America.

    The Chairman. Thank you, Mr. Gerber.
    Mr. Sullivan.

            STATEMENT OF PATRICK SULLIVAN, ECONOMIC
   DEVELOPMENT SPECIALIST AND LEADER, AGRICULTURAL MEDIATION 
               PROGRAM PROJECT, NEW MEXICO STATE
 UNIVERSITY, LAS CRUCES, NEW MEXICO, LAS CRUCES, NM; ON BEHALF 
     OF COALITION OF AGRICULTURAL MEDIATION PROGRAMS (CAMP)

    Mr. Sullivan. Mr. Chairman and distinguished Members of the 
Subcommittee, thank you for the opportunity to testify before 
you today. My name is Patrick Sullivan. I am with Mexico State 
University. And I am here today testifying on behalf of the 34 
state Coalition of Agricultural Mediation Programs that are 
scattered across the United States.
    The Coalition of Mediation Programs, or CAMP, is a 
clearinghouse; basically a forum for sharing ideas, 
information, and commonalities amongst the various state 
programs.
    These programs originated back in the late 1980s as a 
result of the ag credit crisis. They were actually authorized 
under the 1987 Farm Credit Act at that time to try to work with 
borrowers and lenders that were suffering from financial 
distress at that time.
    Since the inception of this program, what we have tried to 
do is provide a neutral forum to discuss complex agricultural 
issues. Furthermore, the nature of this process provides 
stability and diversity that allows farmers, ranchers, and 
agricultural producers a forum to work out their own agreements 
with lenders and suppliers of credit for these operations.
    Today, the state-certified mediation programs assist 
agriculture producers and creditors from various USDA agencies 
to address loan problems and USDA adverse decisions as a result 
of the Reorganization Act of 1994. These mediation processes, 
as I said, allow people to develop their own solution based on 
the uniqueness of their situation.
    I would like to reference, Mr. Chairman, a recent survey 
that was put out by the University of Minnesota, along with the 
Centers for Risk Management, whereby they surveyed 2,300 
respondents from different agriculture professions--ag 
creditors, educators, crop insurance representatives, 
consultants, and other people--and based on the results of that 
survey, 84 percent of the respondents expected the probability 
that producers will experience some kind of financial distress 
in the next 3 years was rated as high to very high.
    When this was broken down by lenders only, that was still 
54 percent of the lenders believed that the likelihood that 
agriculture producers would experience financial stress is 
high. And 20 percent of the agriculture lenders in this survey 
thought that it would be very high.
    In this same survey, when questioned about factors 
contributing to farm financial stress, the respondents to the 
survey ranked the price and input cost margins and price 
volatility as having the highest impact on agricultural 
producers.
    The survey respondents also were asked about changes in the 
amount of documentation required by lenders for loans. In 
response to that, 26 percent of the respondents indicated that 
they had seen, or yet to see, any change in documentation; 56 
percent indicated a slight increase in the amount of 
documentation; and only 17 percent indicated that they had seen 
substantial increases in the amount of loan documentation.
    Perhaps the most interesting element of this survey, 
though, was the respondents were asked how well they thought 
producers were equipped in terms of financial management skills 
to deal with business through these tough financial and 
economic times. And the response indicated that 74 percent 
thought that most farmers were moderately well prepared or 
equipped to deal with this, and that only eight percent were 
very well equipped to do this.
    I am going to provide some regional responses that we 
received from the different states, real quick: many of the 
things we have hit on today, some of the factors that we are 
seeing the most, as far as financial disputes, is in the dairy 
industry. We see that basically from coast to coast. The 
poultry integrators have suffered a multitude of financial 
problems. Again, most of it is related to the high cost of 
their inputs and the feed cost that they are having to bear at 
this time.
    By and large, most states indicate that they haven't seen 
huge or large number of increases in the type of agricultural 
cases that we mediate across the country. There have been some 
pockets in the Midwest that have seen substantial increases, 
particularly in areas like Kansas and Minnesota, but by and 
large most of the states have reported that their ag credit 
cases have remained consistent, although they do anticipate 
that they will see increases later.
    The largest single element that we are seeing right now is 
the unfunded or under-funded FSA loans, which has forced a 
number of borrowers in the interim to try to have to bridge 
this through credit cards and other means of credit. But by and 
large, like I stated, we haven't seen a real falter or problem 
with people being able to get credit for those that are 
creditworthy.
    This concludes my testimony.
    [The prepared statement of Mr. Sullivan follows:]

    Prepared Statement of Patrick Sullivan,\1\ Economic Development 
  Specialist and Leader, Agricultural Mediation Program Project, New 
  Mexico State University, Las Cruces, New Mexico, Las Cruces, NM; on 
                               Behalf of
          Coalition of Agricultural Mediation Programs (CAMP)
    Mr. Chairman and distinguished Members of the Subcommittee, thank 
you for the opportunity to testify on the credit conditions in rural 
America. I am here today representing the USDA state certified 34 state 
Coalition of Agricultural Mediation Programs (CAMP). The purpose of 
CAMP is to serve as a presence and voice for the use of mediation in 
rural disputes. CAMP serves as a clearinghouse and forum for sharing 
ideas; examining commonalties and differences; and for enhancing 
decisions about the conduct of rural mediation programs.
---------------------------------------------------------------------------
    \1\ Economic Development Specialist and Agricultural Mediation 
Program Project Leader, New Mexico State University, Las Cruces, New 
Mexico.
---------------------------------------------------------------------------
    State certified agricultural mediation programs were originally 
authorized by Congress in 1988 as a result of the 1980's agricultural 
credit crises. In 1988 Congress authorized USDA to develop and 
participate in State Certified Farm Mediation Programs under the USDA 
Farm Loan Mediation program as part of the Agricultural Credit Act of 
1987.
    At their inception, these programs functioned as Federal-state 
partnerships to provide a confidential, neutral forum to discuss and 
resolve complex agricultural credit issues. These programs facilitated 
rapid decision making by the involved parties and streamlined 
government involvement. Furthermore, because of the nature of the 
process, stability and diversity was supported in rural economies. 
Allowing states the flexibility to develop their own programs based on 
the needs of their state has proven to be a key element in the success 
and popularity of the programs.
    In 1994, Congress expanded the program beyond agricultural credit 
under the USDA Reorganization Act. This Act authorized USDA to offer 
mediation as an option as part of the formal appeals process with 
respect to adverse decisions on USDA farm program issues.
    Today, USDA state certified mediation programs continue to assist 
agricultural producers, their creditors and various USDA agencies to 
address loan problems, USDA adverse decisions and other disputes. The 
programs do this in a confidential and non-adversarial setting outside 
the traditional legal process of foreclosure, bankruptcy, appeals and 
litigation. The mediation process allows people to develop their own 
solutions based on the uniqueness of their situations.
Outlook
    A survey conducted by the University of Minnesota Center for 
Financial Management in conjunction with the regional Centers for Risk 
Management Education on ``Agricultural Financial Conditions 2009'' 
resulted in 2,300 responses from agricultural professionals across all 
50 states. The distribution of the respondents to this survey is as 
follows:
     Ag Lenders                                                     21.1%
    Educators                                                      42.8%
    Crop insurance                                                  7.3%
    Consultants                                                     6.3%
    Other (Elevators, Cooperatives, Marketing brokers,             22.5%
     Nonprofits
    Based on the results of this survey, 84 percent of the respondents 
expect the probability that producers will experience financial stress 
in the next 3 years is high or very high. Lender only responses showed 
that 54 percent of the lenders believe that the likelihood that 
agricultural producers will experience financial stress in 2009 is high 
and 26 percent believe the likelihood is very high.
    In this same survey, 63 percent of the respondents indicated that 
ten percent or less of the agricultural producers they work with are 
currently experiencing financial stress. However, 28 percent of the 
respondents indicated that they expect at least 30 percent of the 
producers will experience financial stress in the next 3 years.
    When questioned about the factors contributing to farm financial 
stress, the respondents to the survey ranked price/input cost margins 
and price volatility as having the highest impact. These were followed 
by negative cash flows, inadequate business planning, lack of financial 
management skills, and tightening credit availability.
    Survey respondents were also asked about changes in the 
documentation required of agricultural producers requesting financing 
from lenders in recent months. In regard to this question, 26 percent 
of the respondents indicated no change, 56 percent indicated a slight 
increase, and 17 percent indicated a substantial increase.
    Perhaps the most interesting element of this survey was the 
response to ``How well are producers equipped in terms of financial 
management skills to manage their business through a period of 
financial stress?'' The responses indicated that 74 percent are 
moderately equipped and that eight percent are well equipped. The 
survey results indicated that only 18 percent are poorly equipped.
CAMP Observations
    As previously stated, there are 34 USDA state-certified 
agricultural mediation programs. Participating states include: Alabama, 
Arizona, Arkansas, California, Colorado, Florida, Illinois, Indiana, 
Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, 
Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New 
York, North Carolina, North Dakota, Oklahoma, Rhode Island, South 
Dakota, Texas, Utah, Vermont, Virginia, Washington, Wisconsin, and 
Wyoming.
    While not all states have a USDA state-certified program, those 
that do, represent a broad cross section of agriculture in the United 
States. Furthermore, while there is some commonality of the 
agricultural credit issues affecting each of these states, many more 
are regional in nature. Therefore, for the purpose of this testimony, I 
will make observations based on three separate geographic regions of 
East, Midwest, and West.
East
    CAMP states in eastern United States have indicated that overall, 
agricultural credit is available. However, the consensus is that there 
are challenges related to obtaining credit/financing that have not 
existed in the past. Most of these challenges are risk related in that 
lenders are more closely reviewing credit worthiness. Ultimately, 
because of overall economic instability, lenders are following good 
lending policies and practices and are being disciplined in their 
credit principals. Concern exists in several states that there is not 
sufficient funding for Farm Service Agency direct loans to meet the 
current demand.
    All CAMP states indicated high input costs and low prices were the 
primary concern of most producers and that margins appear to be tight 
across the board. However, states in the East and particularly in the 
Northeast are reporting dire conditions for both conventional and 
organic dairy farmers. Many if not most dairy farms are unable to cash 
flow under the current conditions and their equity positions have 
eroded. As a result, several states have indicated that some dairy 
farmers are now using personal credit in an attempt to meet short-term 
farm credit needs.
    Overall, the major issue appears not to be the availability of 
credit but rather the time it takes to secure credit. This is 
particularly true in situations where the producer has had to find a 
``new'' agricultural lender or obtain credit through the Farm Service 
Agency.
    As a result of these conditions, eastern states indicated an 
increase in stress for both the borrower and the lender. Mediation is 
proving effective in resolving agricultural credit disputes quickly and 
efficiently through the use of a neutral third party. By bringing the 
parties to the mediation table, the process has allowed for farmers to 
determine how or if they will continue farming while working with their 
lenders to explore and develop options.
Midwest
    Most of the mid-western state programs echoed the observations made 
by the eastern states regarding the agricultural credit situation. The 
majority of states indicate a reasonably stable agricultural credit 
market. However, several states indicate that there as been a 
substantial increase in demand for both direct and guaranteed Farm 
Service Agency loans and while many of these loans have been approved, 
many loans remain unfunded. Also, several states indicate substantial 
increases in financial stress calls and an increase in complexity when 
compared to last year.
    Several states indicate an anticipated increase in the value of 
farm production. However, this anticipated increase is being 
outstripped by the increase in production costs. States with dairy 
continue to see an economic decline in the industry. Also, poultry 
integrators, pork producers, cow/calf and feeder cattle operations are 
experiencing profit losses as a result of high input cost and low 
prices. The poultry industry has experienced closed facilities, reduced 
flock placements, and a reduction in grower contracts.
    Isolated bank failures have resulted in farmers having a short time 
period to find financing and when financing can be found, collateral 
requirements are more stringent. Also, bank mergers and 
decentralization have resulted in changes in the way farmers have 
traditionally been financed. On longer can a farmer amortize a loss 
year over several years but rather the farmer is forced to obtain 
outside financing.
    As interest rates increase, farmers that are dependent on financing 
will continue to see downward pressure on profitability and their 
ability to cash flow. Lenders are more closely scrutinizing cash flow 
and the value of collateral. Because of increased credit restrictions, 
more and more farmers may be forced to use credit cards to finance 
their operations.
    USDA state-certified mediation programs in the Midwest are 
utilizing mediation to empower individuals to resolve difficult 
financial situations by providing them with confidence and the ability 
in a neutral setting to make and consider objective, business-based 
solutions. This allows producers and their creditors to mediate and 
resolve the situation rather than being subjected to a decision imposed 
by a court.
    Several Midwest state programs provide free financial counseling 
prior to mediation. Ono-on-one intensive counseling allows the producer 
to consider the feasibility of restructuring. Ultimately, this assists 
both the borrower and the lender to negotiate objectively and 
effectively in the course of mediation.
    Mediation has a substantial impact on rural communities. Helping 
one farmer restructure their operation to stay in business has an 
impact on: fuel dealers, seed and input suppliers, agricultural 
lenders, commodity storage facilities, schools, local businesses, 
extended family members involved in the operation, and many others. In 
Kansas, statistics indicate that one in five individual's occupations 
relate to agriculture. From the standpoint of the multiplier effect, it 
is estimated that for every dollar of farm income, $2.38 are generated 
in other income throughout the state.
West
    Generally, the overall crop situation in the West is strong. 
Adequate sources of credit are available to strong borrowers with fewer 
sources available to moderate or weak agricultural borrowers. Not 
unlike other parts of the country, high input prices have taken a toll 
on profitability. Also, the low milk prices and high feed costs have 
adversely affected dairy producers throughout the West.
    Conditions are worse in Colorado as a result of the FDIC takeover 
of New Frontier Bank, the largest agricultural lender in the state. 
Again, dairy producers, particularly those that were financed at New 
Frontier Bank are suffering from the current credit situation. Many 
dairy producers are finding it extremely difficult to find new 
financing.
    Cattle feeders throughout the West are exercising extreme caution 
as a result of reduced profitability. Also, many input suppliers have 
constrained their credit policies such that all but the most 
creditworthy are COD and those with strong credit are net 30.
    While traditional sources of agricultural credit for small and 
medium sized operations remain stable, agricultural credit for very 
large and/or specialized operations seems to be more limited or at 
least less time sensitive. Also, there are states in the West where 
Farm Service Agency lacked sufficient funding to fund all direct loan 
requests. As a result, there are producers midway through the 
production cycle that have loans approved that have not yet received 
the loan proceeds.
    USDA state-certified mediation programs continue to utilize 
mediation and financial counseling to assist both borrowers and lenders 
in resolving agricultural credit disputes. The mediation process 
promotes calm and rational discussion by the parties to identify goals 
and options and to construct a plan that will benefit both the borrower 
and the creditor. Also, early intervention and counseling has proved 
effective in avoiding potential crisis that would otherwise lead to 
court ordered actions.
Summary
    Overall, agricultural producers and agribusinesses that depend 
heavily on credit could be constrained. This is especially true with 
respect to dairy, poultry, cattle feeding and pork production. Farmers 
that are closely tied to local rural banks tend to have secure long-
term relationships that should mitigate much of the economic crisis's 
effect on farm loans. However, without adequate funding for Farm 
Service Agency direct loans, many producers that have weak to 
moderately weak credit could find it difficult to secure adequate 
financing.

    The Chairman. Thank you, Mr. Sullivan.
    Mr. Frazee, Mr. Strom testified that the dairy portfolio 
for the entire System was about $12 billion. I think you said 
that reflected about 60 percent. What are the numbers at 
MidAtlantic?
    Mr. Frazee. We are at about 12 percent of our portfolio. 
That would be something in the neighborhood of $250 million.
    The Chairman. You also raised concerns that this Committee 
should keep sole jurisdiction over the farm system. I think 
that is an opinion all of us on this Subcommittee and Committee 
share. But would you care to elaborate why that is so 
important?
    Mr. Frazee. We have been charged with the unique mission of 
providing a steady and reliable source of credit to 
agriculture; with that goes good times and bad. That means in 
lending institutions it is important that we dig deeper and 
understand the particular risks of agriculture, and they are 
unique. We have heard about the volatility that our producers 
are experiencing today. And we have all experienced that.
    My fear is that if we get under a regulatory regime that 
covers all financial systems, given that agriculture is a 
comparatively small part of the overall banking system, that we 
might get lost in that. We won't have the unique expertise from 
a regulatory side that is necessary to provide the oversight 
that this Committee expects of the lender who is going to be 
there in good times and bad.
    The Chairman. Mr. Gerber, beside higher review, can you 
elaborate what changes Farmer Mac made after the experience 
that you faced last year with Fannie Mae and Lehman Brothers?
    Mr. Gerber. Sure. We have done a number of things: 
tightening hold positions; tightening our structures around 
buying and selling of pieces within our investment portfolio. 
We have looked at hold positions on the credit side of our 
business to make sure that we were managing the risks in the 
business. We have relooked at our policies and structures 
around all of the operations and are in the implementation 
phase of those things now.
    In addition, we have looked at funding structures and 
reestablished or established some processes around which to do 
that. All of that was made available, or made possible, by the 
ability to raise capital. We did that twice in the last 
quarter, if you will; once in September and once in December. 
In addition, we raised new capital as part of a process as new 
business comes on the books.
    The Chairman. For anyone on the panel--about access to the 
bond market. How has it changed since the event of last fall? 
How much more difficult is it? Anyone care to elaborate?
    Mr. Gerber. From our perspective on the debt side of 
things, funding is tighter across the board and, as one of the 
panelists said earlier, it was a struggle as a result of, 
especially in the longer-term maturities, very challenging--
anything over 5 years--to really place any debt.
    The Chairman. Anyone else care to comment?
    Mr. Frazee. I just echo that we saw those same challenges 
as well. It resulted in about a 150 basis point spike in rates 
last fall that either compressed our margins or were passed on 
to borrowers.
    The second piece is that I have had borrowers say to me, 
``I have a loan now that is priced at 3 to 5 years, but what 
about over the long term?''
    So it does raise questions in terms of what is going to be 
there for the longer term.
    Mr. Bauer. The shorter term is actually at a historical 
low. Just the opposite of the curve on the long term. Right 
now, wholesale funding is at less than one percent for one year 
CDs. I have been a banker for 40 years and I have never seen 
that part that low.
    The Chairman. Thank you.
    The chair recognizes the Ranking Member, Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman. I would like to ask 
all of the panelists about the poor performance of the ethanol 
and biofuels loans due to the overcapacity in the biofuel 
sector. A number of you testified about that.
    Why was the Farm Credit System so eager to finance this 
overcapacity? Anybody want to jump in on that? Mr. Gerber?
    Mr. Gerber. Well, from Farmer Mac's perspective, our 
mission says we are to provide liquidity to rural America, and 
as financial institutions finance businesses, we provide that 
liquidity in whatever it is they are financing.
    That said, ethanol, biofuels, the alternative fuel 
structure certainly is a part of rural America. It is a part of 
the business of agriculture. And we believe there is a role for 
Farmer Mac in that.
    Mr. Goodlatte. Do you think that the RFS standard and other 
artificial government mandates encourage the System to finance 
this overcapacity? I will ask you and Mr. Bauer and others as 
well.
    Mr. Gerber. I wouldn't want to speak for the System. I 
guess I would let others do that.
    Mr. Bauer. I don't participate in any ethanol financing, so 
I wouldn't have a good answer for you. But I am sure Mark 
Scanlon from ICBA can provide information on that.
    Mr. Goodlatte. Do any of you have any direct financing of 
ethanol or have an opinion about this?
    Mr. Frazee. My association has no direct financing of 
ethanol, but we will be happy to get information to you for the 
record.
    Mr. Goodlatte. I am concerned that part of the problem that 
we find ourselves in is that there was a lot of over-promising 
built around the hope that somehow government could lead the 
way, and the ethanol sector overbuilt, and now the government 
is being asked to step in again and come to its rescue again.
    I would predict that the industry is in difficulty unless 
the government does step in. I think that that is simply 
digging an already deep hole even deeper. If there isn't 
additional policy interference, is the domestic ethanol 
industry viable?
    Any of you have an opinion on that?
    Mr. Gerber. I would say I believe the ethanol industry 
continues to change. It continues in the stage of changes in 
the technology and the understanding of how to do that. We 
believe the industry is here to stay in some form. That may 
change. And, as I said, we believe it to be part of that rural 
America structure. So, as lenders look at those, Farmer Mac has 
the opportunity and the responsibility to look at if we can 
underwrite those in a safe and sound manner to provide that 
liquidity where possible.
    Mr. Goodlatte. Thank you.
    Dr. Drabenstott. Congressman, if I could just add. While, 
you are correct that there are some financial concerns that 
surround the ethanol industry as we have known it, we have been 
involved in a major regional development project in southern 
Minnesota that I think speaks in part to this issue. And it is 
very encouraging to see the high level of interest in the 
private sector to look beyond corn-based ethanol. And there is 
a very active pursuit of biomass-related ethanol technologies.
    Mr. Goodlatte. I fully agree with that. And I don't object 
to the government even helping to do some of the research and 
incentivize the startup of cellulosic ethanol, because clearly 
that is a source of energy that is less in friction with our 
food and feed supply production, which causes a number of us to 
chafe at the idea that the government ought to be favoring one 
group of customers for corn products over other such customers.
    That is a different avenue than the ongoing desire to 
increase the mandates on how much ethanol needs to be used in 
automobiles and the continued tariff barriers on bringing in 
ethanol from elsewhere, when we are concerned about high energy 
costs and the mandate that I have already referred to, and the 
tax credit, the Blenders Tax Credit.
    It is a concern to me that the industry, instead of finding 
its footing to sustain itself, is finding a greater and greater 
need for government support because of the fact that there was 
an overextension of credit and an over-construction of capacity 
in that area that couldn't be sustained without that government 
support, and may not be sustained even with it, with the 
existing level.
    Mr. Chairman, I would like to ask Mr. Frazee about an 
entirely different subject.
    MidAtlantic's status as a USDA preferred lender, what does 
that mean and what does that mean for your farmer borrowers?
    Mr. Frazee. It means quicker turnaround, quicker service. 
As a preferred lender, basically I would agree with the FSA, 
that they will use our loan documents and our underwriting and 
empower us to make decisions on the spot. That comes with 
oversight.
    We have an annual review by FSA of our portfolio and our 
credit administration practices, and, then on an annual basis 
situation, a decision is made whether we continue to have that 
kind of authority. Ultimately, what that allows us to do is to 
be able to respond much more quickly to our farmers' needs and 
structuring the packages they need to be successful.
    Mr. Goodlatte. Do you require your farm loan applicants to 
have crop insurance?
    Mr. Frazee. We look at those on a case-by-case basis. 
Depends on the risk in the individual operation and the 
capacity of that individual borrower to bear risk.
    Mr. Goodlatte. Do you consider direct payments when 
calculating collateral?
    Mr. Frazee. If you are referring to our evaluation 
repayment capacity.
    Mr. Goodlatte. Yes.
    Mr. Frazee. We do look at direct payments and give 
consideration to that. We look at any source of repayment and 
have to make an assessment of the likelihood of those 
continuing. So we give some factoring to that as we look at our 
sensitivity analyses.
    Mr. Goodlatte. Has your definition of a creditworthy or 
eligible borrower changed since 2007?
    Mr. Frazee. It has not. It has not changed since 2000 when 
we were formed. We did not loosen our underwriting standards 
and we have not tightened them.
    Mr. Goodlatte. I commend you on the stability that has 
benefited farmers in the Mid-Atlantic region, which includes 
Virginia, and hope that we will continue to see that kind of 
stability in the area of Farm Credit for agriculture which, as 
we have obviously discussed today, is a major concern, but has 
weathered this very difficult financial crisis better than some 
other sectors.
    The Chairman. The chair thanks the Ranking Member and 
recognizes the gentleman from Missouri, Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    For Mr. Bauer, have you seen a situation or have you 
endured recent regulatory examinations or folks in your area 
that have caused you, as a result of the examinations, to 
restrict credit or take a second look at processes and 
procedures, as a result, that impact the credit availability to 
farmers?
    Mr. Bauer. Mr. Congressman, we have. In addition to being 
about 40 percent agriculture, about 40 percent of our loans in 
our bank are classified CRE, or commercial real estate. And 
along with that classification there has been a new definition 
of well capitalized that has come from the examiners.
    Years ago, eight percent tiered to a risk-based capital was 
well-capitalized. That was raised to ten percent a number of 
years ago. And if you have levels above the supervisory-
recommended levels of 300 percent of capital for defined loans, 
or 100 percent of capital for other defined CRE loans, the new 
rule of thumb is 12 percent capital.
    What that means is I have to have 20 percent more capital 
to stay the same size if I am going to stay well-capitalized. 
So that limits my ability to make more loans, whether they be 
in the real estate sector or in the ag sector.
    I am at about 117 percent risk-based capital, so that means 
I stay the same, shrink, or grow my capital through profits. So 
when somebody like the bank in Greeley, a $2 billion, probably 
50 percent ag bank, folds up, it limits what I can do to absorb 
any of those ag customers. We have probably looked at about 60 
ag customers in the last 90 days from that bank. We have made 
very few loans. We didn't even look at the larger ones, simply 
because we had no ability to grow the bank and take on 
customers in the $2, $3, or $4 million category.
    So, yes, to answer your question, we were examined in 
October. And I have been a banker for 40 years, and that was 
the most unpleasant situation I have ever been through.
    Mr. Leutkemeyer. Well, yours is not an uncommon story. I 
hear from a lot of my constituents in the banking community 
especially, independent communities bankers. They are kind of 
the backbone of rural America, yet they seem to be taking the 
brunt of the regulatory outcry instead of the big banks, which 
obviously one in your neighborhood failed as well.
    Most of the smaller banks seem to be well-capitalized and 
seem to be run fairly efficiently, but yet they seem to be 
bearing the brunt of the regulatory angst or what is going on.
    Do you know of other banks in your area that are facing 
that same problem--restricting credit?
    Mr. Bauer. How many would you like to talk to?
    Mr. Leutkemeyer. That is what I needed to know.
    Mr. Bauer. Not one that I have talked to that--well, up and 
down the front range, you have to remember that is a lot of 
growth in northern Colorado, and so it involves a lot of CRE 
lending. And every one of them is singing the same song.
    Mr. Leutkemeyer. It seems as though there is a disconnect 
between what is going on here in D.C. When you talk to the 
folks in D.C., they will tell you, We haven't changed 
standards, we haven't changed the way we looked at loans or 
bank capitalization. Yet, when you go out to the field and talk 
to the folks who are dealing with examiners who are there in 
their banks, it is a whole different story.
    There is a disconnect there. I think that is something we 
need to take a look at at some point. I have had some 
discussions with the FDIC folks and the Federal Reserve folks, 
and it doesn't seem like--they have a hard time recognizing 
that fact. But I appreciate your testimony today because that 
tells me that, again, there is not just one area of the 
country, it is similar to everybody out there. So, thank you 
very much.
    With regards to, Mr. Sullivan, very quickly, one of the 
things that you talked about in your testimony was some free 
counseling for the mediation for some folks who have some 
difficulties. Have you seen that go up? Do a lot of people take 
advantage of this? And what is the result of the credit 
counseling that people take advantage of?
    Mr. Sullivan. Not all states offer counseling. Some 
programs do and some don't. Those programs that do have seen an 
increase in their credit counseling. Particularly states like 
Minnesota and Kansas have seen a larger number of credit 
counseling cases come on.
    Also, of course, it is important to note that there was 
recently an article in the Denver Post where they talked about 
the number of crisis calls that have come in over the last I 
believe 4 years, or something like that, and a doubling of the 
number of suicides of agricultural producers.
    Again, I don't think we are anywhere close to where we were 
back in the eighties in the ag credit crisis of that time, but 
we are seeing a steady incline. Not that overnight emergency-
type situation that we were seeing back in the 1980s, but we 
are seeing more and more people that are calling, coming to us, 
asking questions, trying to figure out how they are going to 
resolve this.
    Again, a lot of it reverts back to borrowers that were 
forced for the very first time to go to FSA for direct 
operating loans, only to be told that they were approved, but 
there was not funding for those types of loans. Of course, the 
credit counseling comes in handy at that time because it is a 
mechanism to try to help those people bridge that gap in the 
short term and try to work with their suppliers, their feed 
dealers, their fuel suppliers, people like that, to get them 
across that gap until, hopefully, we have adequate funding for 
those loans.
    Mr. Luetkemeyer. Thank you very much. I see my time has 
expired. Thank you, Mr. Chairman.
    The Chairman. I recognize the gentleman from Nebraska, Mr. 
Smith.
    Mr. Smith. Thank you, Mr. Chairman. My questions have been 
answered.
    The Chairman. The chair would like to thank our witnesses 
for the participation in the hearing today. Thank you very 
much.
    Under the rules of the Committee, the record of today's 
hearing will remain open for 10 calendar days to receive 
additional material and supplementary written responses from 
the witnesses to any questions posed by a Member.
    This hearing of the Subcommittee on Conservation, Credit, 
Energy, and Research is adjourned.
    [Whereupon, at 12:00 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
          Submitted Statement by American Bankers Association
    The American Bankers Association (ABA) is pleased to submit this 
testimony for the record to the Subcommittee on Conservation, Credit, 
Energy, and Research of the House Agriculture Committee. We greatly 
appreciate the opportunity to provide information to the Subcommittee 
about agricultural credit conditions. The topic is extremely important 
and timely. Our nation is certainly facing difficult economic 
conditions which are affecting all businesses, including banks. The 
core business of banking is lending. That is what banks do. Banks will 
continue to be the source of financial strength in their communities by 
meeting the financial needs of businesses and individuals. Banks in 
every state in the country are actively looking for good farm and ranch 
loan opportunities.
    Banks currently provide over $123.5 billion in loans to farmers and 
ranchers, which is more credit to farmers and ranchers than any other 
industry. We are pleased to report that the overwhelming majority of 
banks are highly capitalized, sound, and fully engaged in doing what 
they do best--making the widest range of credit and related financial 
services available to all Americans to keep our economy strong, 
growing, and vibrant.
    The American Bankers Association brings together banks of all sizes 
and charters into one association. ABA works to enhance the 
competitiveness of the nation's banking industry and strengthen 
America's economy and communities. Its members--the majority of which 
are banks with less than $125 million in assets--represent over 95 
percent of the industry's $13.9 trillion in assets and employ over two 
million men and women.

    Since the Start of the Economic Crisis the American Bankers 
Association has Increased Communications to Farm and Ranch Customers.

    Since the beginning of the financial crisis, the American Bankers 
Association has ramped up communications to farmers, ranchers and all 
rural Americans about the availability of credit. ABA staff, our 
affiliated state bankers associations, and hundreds of volunteer 
bankers nationwide have actively communicated to their customers and 
communities that banks have adequate resources to make loans, that 
banks have a desire to make agricultural loans at competitive rates and 
terms, and that banks believe that agriculture is a good business to 
lend to.
    At the same time, we have pointed out to our customers that 
economic conditions have changed and that agricultural producers (along 
with all other business borrowers) must recognize that the economic 
disruptions we have experienced has changed the nature of lending in 
general. We have pointed out that customers have to improve their 
firm's business risk profile. Bankers are asking their farm and ranch 
customers to provide more detailed information about their farm's 
financial performance, more details about their assets and liabilities, 
and have requested more information about their farm and ranch 
marketing plans. Our industry has increased credit underwriting 
scrutiny because there is a need for bankers to clearly demonstrate to 
their shareholders and to their regulators that prudent credit 
decisions are being made and that risks are being properly managed. 
Farm and ranch customers understand this as they too have had to 
request more information about the financial strength of their 
suppliers, buyers and others they do business with on a daily basis. To 
help farm and ranch customers meet the challenges they face in this 
harsher business climate, ABA has published numerous tip sheets for 
farmers and ranchers to help them increase their financial management 
skills. All of the tip sheets are available to the public on our web 
site, www.aba.com.
    For the past 10 years, U.S. agriculture has enjoyed one of the 
longest periods of financial prosperity in history. Financially, 
American agriculture has never been stronger. In 2007 and 2008, 
American farmers and ranchers enjoyed some of their most profitable 
years ever. The balance sheet for U.S. agriculture at the end of 2008 
(according to USDA) is the strongest it has ever been with a debt to 
asset ratio of less than ten percent. USDA projects that at year end 
2009 farm and ranch net worth will be $2.171 trillion. This 
unprecedented high net worth is due in part to a robust increase in 
farm asset values (mainly farm real estate), but is equally due to 
solid earned net worth as farmers used their excess cash profits to 
retire debt and to acquire new plant and equipment. As a result, 
farmers and ranchers in 2009 have the capacity to tap their equity 
should there be a significant decline in farm profitability resulting 
in diminished cash flows. While no farmer or rancher wants to take on 
additional debt, the strength of the U.S. farm and ranch balance sheet 
gives producers options to do so if the need arises.
    While the past 10 years may be looked back upon by historians as a 
``golden era'' of farm prosperity, not all sectors of the farm economy 
are doing well in 2009. The livestock sector is under considerable 
financial pressure. Dairy prices have dropped to below break-even 
levels for many producers as demand has declined and dairy production 
continues to increase. The cattle feeding business has lost money for 
over twenty-four months. Poultry producers have been hurt by lower 
prices and by the collapse of the largest poultry integrator in the 
country in 2008. The hog industry, which was poised to recover from low 
prices in 2008, has been badly hurt by misguided fears of the H1N1 
virus and the subsequent closure of some key export markets. Bankers 
are working closely with their customers who have been impacted by 
these developments. Bankers are restructuring, rescheduling, and re-
amortizing debt to help their customers weather tough economic 
conditions. Most of these negative conditions can be clearly traced to 
the economic conditions that exist on a world-wide basis and will not 
completely turn around until the global economy improves.

    ABA's Annual Survey of Farm Bank Performance Indicates that Farm 
Banks are Strong and Well Positioned to Lend.

    For the last twenty plus years, the American Bankers Association 
has reviewed the performance of banks that we define as ``farm banks''. 
These are banks that specialize in making agricultural loans and that 
have a concentration of agricultural loans on their books. The data we 
analyze annually is generated by reports from the Federal Deposit 
Insurance Corporation (FDIC). Some of the highlights from our recently 
released report about 2008 farm bank performance (the entire report is 
available at www.aba.com):

   With strong farm income, farm banks \1\ posted solid 
        performance in 2008.
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    \1\ Farm banks are defined by the American Bankers Association as 
banks with assets less than $1 billion whose ratio of domestic farm 
loans to total domestic loans greater than or equal to 14.20 percent 
for 2008. Twenty-one banks with more than $1 billion in assets had a 
ratio of farm loans to domestic loans greater than or equal to 14.20 
percent.

   Banks are a major source of credit to small farmers. The 
        banking industry reported holding approximately $69.1 billion 
        in small farm loans with almost $26.0 billion in micro-small 
        farm loans on the books.\2\ The number of small farm loans on 
        the books of banks surpassed 1.2 million with the vast 
        majority--almost 1.0 million loans--under $100,000.
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    \2\ A small farm loan is defined as a loan with an original value 
of $500,000 or under. A micro-small farm loan is a loan with an 
original value of $100,000 or less.

   The demand for farm credit rose in 2008 and banks have met 
        the challenge by increasing loans. Agricultural loans for farm 
        real estate and production at farm banks increased almost 9.2 
        percent to $55.1 billion in 2008 from $50.5 billion in 2007.
        
        
   Moreover, farm banks are meeting the credit needs of small 
        farmers.
        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        percent to $26.6 billion in 2008 and core capital increased by 
        almost $1.3 billion to $24.9 billion. Farm bank equity capital-

to-average asset ratio was 10.71 percent at year end 2008.   
        The loan-to-deposit ratio at farm banks remained high by 
        historical standards. The ratio increased to almost 80.3 
        percent in 2008--up from 73.1 percent in 2001. However, the 
        overwhelming majority of farm banks reported no shortage of 
        funds in meeting the credit needs of their farm customers.
While Challenges May Lie Ahead for Agriculture, the Banking Industry is 
        Well Positioned to Meet Their Customer's Needs
    Since the collapse of the agricultural economy in the 1980s, the 
banking industry has provided the majority of agricultural credit to 
farmers and ranchers. While other lenders greatly shrank their 
portfolios of agricultural loans or exited the business altogether, 
banks expanded their agricultural lending. Bankers saw opportunity 
where others did not. Farmers and ranchers remember who helped them 
when the chips were down. This solid foundation of trust that was built 
during great the last period of great economic uncertainty is what the 
banking industry continues to build upon.
    Thank you for the opportunity to submit this statement for the 
record.
                                 ______
                                 
                         Submitted Questions *
Questions Submitted By Hon. Stephanie Herseth Sandlin, a Representative 
        in Congress from South Dakota
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    * There was no response from the witnesses by the time this hearing 
went to press.
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Responses from Doug Caruso, Administrator, Farm Service Agency, U.S. 
        Department of Agriculture, Washington, D.C.
    Question 1. Is the FSA seeing an increase in young and beginning 
farmers applying for credit as a lender of last resort?

    Question 2. What impact have the loan guarantees or programs for 
young and beginning farmers authorized in the farm bill helped to ease 
the situation, if at all?

    Question 3. One of the largest hits to most ag loan portfolios 
across the banking system appears to have been from the volatility in 
the ethanol industry. Are you still making new loans for ethanol 
operating costs or facilities, or has lending to this industry stopped 
or dramatically slowed?
Responses from Hon. Leland A. Strom, Chairman and CEO, Farm Credit 
        Administration
    Question 1. Are Farm Credit System (FCS) institutions still able to 
provide credit to young and beginning farmers and ranchers, or are 
increased underwriting standards you mention in your testimony making 
it harder for these producers to obtain necessary credit?

    Question 2. Do you know what percentage of loans made by FCS 
institutions that are non-performing come from young and beginning 
farmers or ranchers?
Responses from J. Robert Frazee; Mark Drabenstott, Ph.D.; Fred J. 
        Bauer; Michael A. Gerber; Patrick Sullivan
    Question 1. Have certain regions of the country been more hardly 
hit by the changes in agricultural lending and increased production 
costs?

    Question 2. What are some of the more effective tools or resources 
producers, agricultural lenders, and grain elevators can use to 
mitigate the impact of the economic downturn in their region and ensure 
that they will have access to credit despite increased caution now 
being exercised by most lenders, both commercial and through FCS 
institutions?
Questions Submitted By Hon. Timothy J. Walz, a Representative in 
        Congress from Minnesota
Response from Hon. Leland A. Strom, Chairman and CEO, Farm Credit 
        Administration
    Question. Mr. Strom, as you probably know the rural communities 
that seem to be most successful at attracting employers are the ones 
that find ways to ensure that the essential community facility needs in 
their towns are met, such as in the area of healthcare facilities; good 
schools, reliable utilities. I know that Farm Credit can play a role in 
helping our rural communities have access to the capital required to 
put needed community facilities in place. Often this program brings 
together Farm Credit, commercial banks and USDA's rural development 
programs to make a project work.
    I encourage this sort of activity and want to know what we can do 
to make sure that it continues to help other rural communities.
Responses from Mark Drabenstott, Ph.D., Director, (Rural Policy 
        Research Institute) RUPRI Center for Regional Competitiveness; 
        Research Professor, Harry S Truman School of Public Affairs, 
        University of Missouri
    Question 1. How does the Southern MN Regional Competitiveness 
Project point to the kinds of financial market needs for rural 
communities in the future?

    Question 2. Can rural America benefit from having greater access to 
debt or equity markets for these types of projects?

    Question 3. How can public policy help rural communities prioritize 
their investment needs?

                                  
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