[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
          HEARING TO REVIEW CREDIT CONDITIONS IN RURAL AMERICA

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

                                HEARING

                               BEFORE THE

      SUBCOMMITTEE ON DEPARTMENT OPERATIONS, OVERSIGHT, AND CREDIT

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 14, 2011

                               __________

                           Serial No. 112-12


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



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                        COMMITTEE ON AGRICULTURE

                   FRANK D. LUCAS, Oklahoma, Chairman

BOB GOODLATTE, Virginia,             COLLIN C. PETERSON, Minnesota, 
    Vice Chairman                    Ranking Minority Member
TIMOTHY V. JOHNSON, Illinois         TIM HOLDEN, Pennsylvania
STEVE KING, Iowa                     MIKE McINTYRE, North Carolina
RANDY NEUGEBAUER, Texas              LEONARD L. BOSWELL, Iowa
K. MICHAEL CONAWAY, Texas            JOE BACA, California
JEFF FORTENBERRY, Nebraska           DENNIS A. CARDOZA, California
JEAN SCHMIDT, Ohio                   DAVID SCOTT, Georgia
GLENN THOMPSON, Pennsylvania         HENRY CUELLAR, Texas
THOMAS J. ROONEY, Florida            JIM COSTA, California
MARLIN A. STUTZMAN, Indiana          TIMOTHY J. WALZ, Minnesota
BOB GIBBS, Ohio                      KURT SCHRADER, Oregon
AUSTIN SCOTT, Georgia                LARRY KISSELL, North Carolina
STEPHEN LEE FINCHER, Tennessee       WILLIAM L. OWENS, New York
SCOTT R. TIPTON, Colorado            CHELLIE PINGREE, Maine
STEVE SOUTHERLAND II, Florida        JOE COURTNEY, Connecticut
ERIC A. ``RICK'' CRAWFORD, Arkansas  PETER WELCH, Vermont
MARTHA ROBY, Alabama                 MARCIA L. FUDGE, Ohio
TIM HUELSKAMP, Kansas                GREGORIO KILILI CAMACHO SABLAN, 
SCOTT DesJARLAIS, Tennessee          Northern Mariana Islands
RENEE L. ELLMERS, North Carolina     TERRI A. SEWELL, Alabama
CHRISTOPHER P. GIBSON, New York      JAMES P. McGOVERN, Massachusetts
RANDY HULTGREN, Illinois
VICKY HARTZLER, Missouri
ROBERT T. SCHILLING, Illinois
REID J. RIBBLE, Wisconsin

                                 ______

                           Professional Staff

                      Nicole Scott, Staff Director

                     Kevin J. Kramp, Chief Counsel

                 Tamara Hinton, Communications Director

                Robert L. Larew, Minority Staff Director

                                 ______

      Subcommittee on Department Operations, Oversight, and Credit

                  JEFF FORTENBERRY, Nebraska, Chairman

TIMOTHY V. JOHNSON, Illinois         MARCIA L. FUDGE, Ohio, Ranking 
STEVE KING, Iowa                     Minority Member
ERIC A. ``RICK'' CRAWFORD, Arkansas  JAMES P. McGOVERN, Massachusetts
STEPHEN LEE FINCHER, Tennessee       JOE BACA, California

               Brandon Lipps, Subcommittee Staff Director

                                  (ii)


                             C O N T E N T S

                              ----------                              
                                                                   Page
Fortenberry, Hon. Jeff, a Representative in Congress from 
  Nebraska, opening statement....................................     1
    Prepared statement...........................................     2
Fudge, Hon. Marcia L., a Representative in Congress from Ohio, 
  opening statement..............................................     2

                               Witnesses

Dolcini, Val, Acting Administrator, Farm Service Agency, U.S. 
  Department of Agriculture, Washington, D.C.; accompanied by 
  Chris Beyerhelm, Deputy Administrator for Farm Loan Programs, 
  FSA, USDA......................................................     3
    Prepared statement...........................................     5
Strom, Hon. Leland A., Chairman and Chief Executive Officer, Farm 
  Credit Administration, McLean, VA..............................    13
    Prepared statement...........................................    14
Henderson, Ph.D., Jason R., Vice President and Omaha Branch 
  Executive, Federal Reserve Bank of Kansas City, Omaha, NE......    21
    Prepared statement...........................................    23
Gerber, Michael A., President and Chief Executive Officer, 
  Federal Agricultural Mortgage Corporation (Farmer Mac), 
  Washington, D.C................................................    36
    Prepared statement...........................................    38
Stark, Doug, President and Chief Executive Officer, Farm Credit 
  Services of America; on behalf of Farm Credit System...........    45
    Prepared statement...........................................    46
Williams, Matthew H., Chairman and President, Gothenburg State 
  Bank; Vice Chairman, American Bankers Association, Gothenburg, 
  NE.............................................................    52
    Prepared statement...........................................    53
Starline, Matthew, Owner, Starline Organics, LLC; Member, Ohio 
  Ecological Food and Farm Association, Athens, OH...............    58
    Prepared statement...........................................    59


          HEARING TO REVIEW CREDIT CONDITIONS IN RURAL AMERICA

                              ----------                              


                        THURSDAY, APRIL 14, 2011

                  House of Representatives,
 Subcommittee on Department Operations, Oversight, 
                                        and Credit,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 1301 of the Longworth House Office Building, Hon. Jeff 
Fortenberry [Chairman of the Subcommittee] presiding.
    Members present: Representatives Fortenberry, Johnson, 
Crawford, Fudge, and McGovern.
    Staff present: Patricia Barr, Tamara Hinton, John Konya, 
Brandon Lipps, Josh Maxwell, Debbie Smith, Nona Darrell, Liz 
Friedlander, Lisa Shelton, Anne Simmons, and Jamie Mitchell.

OPENING STATEMENT OF HON. JEFF FORTENBERRY, A REPRESENTATIVE IN 
                     CONGRESS FROM NEBRASKA

    The Chairman. The hearing of the Subcommittee on Department 
Operations, Oversight, and Credit to review credit conditions 
in rural America, will come to order. Thank you all for joining 
us today. Before I give my opening statement, I would also like 
to recognize the Ranking Member, Ms. Fudge, from Cleveland, 
Ohio. It is a pleasure to begin working with you. This is our 
first hearing of the 112th Congress of the Subcommittee. And 
thank you to our witnesses for coming today. We appreciate your 
willingness to testify.
    When this Committee last reviewed rural credit conditions 
in June of 2009, crop prices were down. The Department of 
Agriculture was predicting the average farm income would 
decrease by 20 percent. Non-performing loans were on the rise 
and credit conditions were generally tight that year. A short 
year and a half later, the Federal Reserve Bank of Kansas City 
reported that rural America was at the forefront of our 
nation's economic recovery. Now, credit conditions in rural 
America are generally good. Various factors include strong 
demand, tight supplies, and low interest rates. These have 
resulted in high prices and increased net farm income. The Farm 
Credit Administration reports that the Farm Credit System 
remains fundamentally sound, is well capitalized, and continues 
to generate strong earnings.
    However, the FCA reports that a few sectors of the ag 
economy are experiencing problems that may result in portfolio 
stress. The Farm Service Agency reported that its direct and 
guaranteed loans have increased in 2009, 2010, and are 
projected to increase in 2011. Both the FDIC and the Federal 
Reserve Bank of Kansas City have expressed concern over rising 
farmland values, and the FCA reports that it is closely 
monitoring this trend.
    While the current agriculture economy and high farm prices 
are resulting in overall good credit conditions, we must be 
cautious moving forward. As we know, the agricultural economy 
is highly cyclical. History teaches us that interest rates will 
eventually go up and record-high prices will eventually come 
down. We must ensure that good farm and agricultural credit 
policies are in place to sustain an abundant supply of both 
food and fiber.
    I hope to hear more from you, our witnesses, on the current 
credit conditions and how we can ensure the availability of 
credit for America's farmers now, as well as into the future.
    [The prepared statement of Mr. Fortenberry follows:]

   Prepared Statement of Hon. Jeff Fortenberry, a Representative in 
                         Congress from Nebraska

    I would like to welcome our witnesses and guests to today's 
hearing.
    When this Committee last reviewed rural credit conditions in June 
of 2009, crop prices were down, the Department of Agriculture was 
predicting that average farm income would decrease by 20 percent, non-
performing loans were on the rise and credit conditions were generally 
tight. A short year and a half later the Federal Reserve Bank of Kansas 
City reported that rural America was at the forefront of our nation's 
economic recovery.
    Now, credit conditions in rural America are generally good. Various 
factors including strong demand, tight supplies and low interest rates 
have resulted in high prices and increased net farm income. The Farm 
Credit Administration reports that the Farm Credit System remains 
fundamentally sound, is well-capitalized, and continues to generate 
strong earnings.
    However, FCA reports that a few sectors of the ag economy are 
experiencing problems that may result in portfolio stress. The Farm 
Service Agency reported that its Direct and Guaranteed Loans have 
increased in 2009, 2010, and are projected to increase in 2011. Both 
the FDIC and the Federal Reserve Bank of Kansas City have expressed 
concern over rising farmland values, and the FCA reports that it is 
closely monitoring this trend.
    While the current agricultural economy and high farm prices are 
resulting in overall good credit conditions, we must be cautious moving 
forward. As we know, the agricultural economy is highly cyclical. 
History teaches us that interest rates will eventually go up and record 
high-prices will eventually come down. We must ensure that good farm 
and agricultural credit policies are in place to sustain an abundant 
supply of food and fiber.
    I hope to hear more from our witnesses on current credit conditions 
and how we can ensure availability of credit for America's farmers now 
and in the future.

    The Chairman. So with that I will turn to the Ranking 
Member for her opening comments.

OPENING STATEMENT OF HON. MARCIA L. FUDGE, A REPRESENTATIVE IN 
                       CONGRESS FROM OHIO

    Ms. Fudge. Thank you so much, Mr. Chairman. I certainly 
look forward to working with you. Having had the opportunity to 
get to know you a little bit over the last few months, I could 
not have asked for a better Chairman. So I thank you. And I 
thank you for holding this hearing to review the status of 
credit in rural America.
    As a new Member of the Committee, I am pleased to have the 
opportunity to both listen and to ask questions of today's 
expert witnesses. I understand that the purpose of this hearing 
is to look at the credit conditions in rural America. As our 
nation's economy continues to recover, now is an important time 
for this Subcommittee to assess rural ag credit.
    I represent the Cleveland area so there are not a lot of 
farmers in my district. So my focus will be on the soundness of 
the credit extended to farmers and how that credit affects the 
larger economy and the food American's serve their families. I 
am also interested in learning how ag lenders are keeping up 
with some of the developments I see in our cities and suburban 
areas.
    There has been an increasing demand for locally produced 
food and growth in neighborhood farmers' markets along with 
other innovative ways to improve access to healthy and fresh 
foods especially in food deserts.
    Finally, I will have some questions about how lenders are 
reaching out to small, beginning, and minority farmers. It 
seems to me with initiatives like USDA's ``Know Your Farmer, 
Know Your Food,'' there are opportunities for young and 
ambitious entrepreneurs who have a good, wholesome product and 
a good idea and a willingness to work hard. Are they being 
served by lenders who have an understanding of these smaller 
enterprises? Adequate credit is the lynchpin for successful 
farming and ranching for operations of all sizes in all states 
and all locales.
    So again, welcome to our witnesses. I look forward to 
hearing your testimony. Mr. Chairman, I yield back.
    The Chairman. Thank you, Congresswoman. I would like to, 
first of all, welcome Mr. Crawford to the Subcommittee, and any 
opening statement you have will be submitted for the record.
    I would also like to welcome our first panel of witnesses 
to the table. Mr. Dolcini, who is the Acting Administrator of 
the Farm Service Agency of the Department of Agriculture here 
in Washington, he is accompanied by Mr. Chris Beyerhelm, the 
Deputy Administrator for Farm Loan Programs, Farm Service 
Agency of the Department of Agriculture here in D.C. I would 
like to also recognize Mr. Leland Strom, the Chairman and CEO 
of the Farm Credit Administration in McLean, Virginia; as well 
as Dr. Jason Henderson, Vice President of the Federal Reserve 
Bank of Kansas City. Welcome, gentlemen.
    Mr. Dolcini, you may proceed.

 STATEMENT OF VAL DOLCINI, ACTING ADMINISTRATOR, FARM SERVICE 
                   AGENCY, U.S. DEPARTMENT OF
AGRICULTURE, WASHINGTON, D.C.; ACCOMPANIED BY CHRIS BEYERHELM, 
     DEPUTY ADMINISTRATOR FOR FARM LOAN PROGRAMS, FSA, USDA

    Mr. Dolcini. Thank you, Mr. Chairman, Ranking Member Fudge, 
Mr. Crawford. And thanks for the opportunity to discuss credit 
conditions in rural America.
    My name is Val Dolcini. I am the Acting Administrator of 
the Farm Service Agency, and I am joined today by Chris 
Beyerhelm, my Deputy Administrator for Farm Loan Programs. And 
today, we will focus our remarks on the current state of farm 
loan programs at FSA.
    Let me begin with a brief overview of our farm loan 
programs. Farmers and ranchers who were denied commercial 
credit can turn to loan programs administered by FSA. And while 
we have been known as the lender of last resort by some, I 
think we have really become the lender of first opportunity to 
many in rural America.
    The Agency assists farmers through both direct and 
guaranteed loans. Direct loans are made and serviced by FSA 
employees who provide supervision to direct loan borrowers. 
Direct loans are not intended to be a permanent source of 
credit. Rather, they are intended to help borrowers transition 
to commercial credit.
    Guaranteed loans, on the other hand, are made and funded by 
a commercial lender, and FSA guarantees up to 95 percent of the 
loan principal and interest. Guaranteed lenders are then 
accountable for loan servicing under this guarantee.
    All FSA farm loan programs are discretionary programs 
funded through annual appropriations and because the vast 
majority of the loans are repaid, FSA loans carry a low cost 
for the taxpayer. Last year, for example, $155 million in 
appropriations supported over $5.2 billion in loans to about 
36,000 borrowers. And as of March 31 of this year, $70.7 
million in Fiscal Year 2011 appropriations had supported more 
than $2.4 billion in lending.
    As in recent years, demand for loans has remained quite 
high, as the Chairman pointed out. While higher commodity 
prices have been beneficial for some producers, input costs 
such as fuel and fertilizer have remained high. And higher feed 
costs for livestock and dairy producers have helped sustain the 
demand for operating credit. As land prices continue to rise, 
commercial lenders in many regions are continuing to maintain 
relatively tight credit standards overall.
    Term limits on our loans are also having an added effect on 
loan availability. Federal statute presently limits borrowers 
with guaranteed operating loans to 15 years of total 
eligibility. This has been suspended in the past, but the 
latest suspension expired on December 31 of last year, making 
about 4,500 guaranteed loan borrowers ineligible for further 
guaranteed loans as a result.
    Given this high demand, we at FSA are always working to 
improve the way we administer and service our loan portfolio. 
And in Fiscal Year 2010, I am proud to report that the loss 
rate in our Direct Loan Program fell to 1.2 percent, which was 
the second-lowest level since 1986. The direct loan delinquency 
rate stood at 5.6 percent in Fiscal Year 2010, its lowest point 
in 2 decades, and the foreclosure rate in the FSA direct loan 
portfolio overall stood at just \1/10\ of a percent last year.
    While hoping to keep troubled loan numbers low, we were 
also able to graduate more than 2,000 direct loan borrowers to 
a guaranteed loan last year. And I am particularly proud of 
that statistic because helping farmers build those 
relationships with their local community banks is a key step in 
establishing their future success in agriculture.
    As I explained in greater detail in my written statement, 
we are processing loans more quickly now than ever before. And 
this improvement is largely due to modernized IT systems which 
help our field office staff to deliver these programs more 
efficiently. For example, business plans are now processed 
through a web-based system which allows real-time access to 
loan data, and these modernized systems allow us to manage loan 
applications more quickly.
    I would note that support in Congress for this critical 
infrastructure improvement has made these great strides in 
service possible, and I am grateful for your continued support.
    Finally, Members, I would like speak briefly on the issue 
of equal access to our loans. As you know, Secretary Vilsack 
has been extremely clear that improper and inequitable 
treatment of those that USDA and the Farm Service Agency serve 
will not be tolerated. We have worked diligently to improve the 
processing of civil rights complaints, requesting an external 
analysis of program delivery by USDA service center agencies 
where appropriate. And I would reiterate that I, along with all 
the members of the FSA management team both here and across the 
country--and we do have 2,248 service centers in all 50 
states--remain fully committed to equal access and opportunity 
for all the customers that FSA serves.
    Mr. Chairman, Members of the Subcommittee, thank you for 
allowing me to share this snapshot of FSA loan activities with 
you. I am available and happy to answer any of your questions 
now or in the future. Thank you.
    [The prepared statement of Mr. Dolcini follows:]

 Prepared Statement of Val Dolcini, Acting 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
    The farm economy strengthened in 2010. However, farm income, 
especially net farm income, is very unevenly distributed. Much of the 
improvement in farm economic conditions is driven by higher commodity 
prices. While higher prices have been beneficial for some crop 
producers, they have also resulted in higher feed costs which are 
squeezing profits among livestock and dairy producers.
    A combination of higher commodity and energy prices is 
significantly increasing the amount of capital required to finance 
agricultural production. Crop-related expenses grew 77 percent between 
2002 and 2008, and are expected to rise by 9.5 percent in 2011. 
Livestock expenses increased by 64.4 percent between 2002 and 2008, and 
are forecast to increase by 6.8 percent in 2011. These higher 
production costs increase the demand for operating credit, increase 
financial leverage, and strain liquidity.
    Recent Federal Reserve Surveys indicate commercial lenders in most 
regions are continuing to maintain stringent credit standards. 
Concerned that a combination of factors may be pushing farmland values 
quite high, the Federal Deposit Insurance Corporation has issued 
guidance to its examiners to scrutinize farm loans more rigorously, 
particularly in financial institutions with a concentration of farm 
lending. The combination of high feed and other input costs, increased 
operating capital needs, and a continued high level of loan scrutiny by 
lenders means some farmers are still being denied commercial credit.

FSA Farm Loan Programs
    Family farmers who are denied commercial credit due to lender 
standards, but are otherwise creditworthy, can turn to the farm loan 
programs administered by FSA. The Agency assists farmers through direct 
and guaranteed farm loans. Direct loans are made and serviced by FSA; 
agency employees provide supervision and technical assistance to direct 
loan borrowers. Direct loans are not intended to be a permanent source 
of credit and borrowers agree to obtain commercial credit and refinance 
their FSA debts when they are able to do so.
    Guaranteed loans are made, funded and serviced by a commercial 
lender. FSA guarantees up to 90 percent of the loan principal and 
interest. FSA employees must evaluate and make a credit decision on all 
guaranteed loans. Guaranteed lenders must retain at least the non-
guaranteed portion of the loan in their portfolio and are accountable 
for loan servicing under the FSA guarantee.
    Funding. FSA farm loan programs are discretionary programs funded 
through annual appropriations. In accordance with the Federal Credit 
Reform Act of 1991, appropriations for FSA farm loans are based on the 
projected total cost of loans when they are made. Because the vast 
majority of these loans are repaid, the programs operate at a 
relatively low cost; Federal budget resources are significantly 
leveraged through the loan programs. In Fiscal Year (FY) 2010, for 
example, $155.3 million in appropriations supported $5.29 billion in 
direct and guaranteed FSA loans.
    Loan Demand. Activity in FSA's farm loan programs indicates that a 
significant number of farmers continue to be unable to obtain 
commercial credit under current conditions. Farm loan program demand is 
usually a reflection of financial conditions in the farm economy: when 
the over-all farm economy is strong, farm loan activity declines; 
during times of financial stress in the farm economy, demand for FSA's 
loans rises. This makes sense, since a basic requirement to qualify for 
the loan programs is to be unable to meet the criteria for commercial 
credit.
    In early FY 2009, loan demand surged to levels that had not been 
seen since the early 1980s. Demand for farm loan program assistance in 
FY 2009 and FY 2010 reached its highest levels since FY 1985. Demand 
has continued at, and in some programs increased above, those near-
record FY 2009 levels (Chart 1). Use of the guaranteed farm ownership 
program in FY 2010 reached an all-time high. FY 2010 direct operating 
and farm ownership obligations nearly doubled compared to FY 2008 
levels. Application activity in FY 2011 reflects demand levels similar 
to the higher levels of FY 2009 and FY 2010.
    Over the past 2\1/2\ years, an unusually high number of direct 
operating loan applications have been received from new customers. 
Normally, about 20 percent of direct operating loan applications are 
from farmers who do not have FSA loans. Since 2009, over 40 percent of 
direct operating loan applications have been from farmers who are not 
FSA borrowers. As of April 4, 2011, 43 percent of the direct operating 
loans made in FY 2011 were to customers who did not have existing FSA 
operating loans.

Performance and Portfolio Condition
    Farm loan programs continue to emphasize the importance of 
processing applications in a timely manner. Between FY 2001 and FY 
2011, farm loan programs reduced its direct loan application processing 
timeframes by 11.5 days (31 percent), and reduced guaranteed loan 
processing timeframes by 2 days (10 percent). As of March 30, 2011, the 
average time from application receipt to final decision for direct 
loans was 25.9 days, and for guaranteed loans, 7.8 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 
Information Technology (IT) solutions farm loan programs has deployed.
    The quality of our portfolio has also continued to improve, with 
foreclosure and loss rates falling alongside an increase in borrower 
``graduation'' to commercial loans.
    Loss Rates. In FY 2010, losses in the direct loan program fell to 
their second lowest level since 1986--just 1.2 percent (Chart 2). 
Losses for FY 2010 in the guaranteed loan program were 0.6 percent, 
(Chart 2).
    Delinquency Rates. As with losses, the direct loan delinquency 
rates have been at historic lows for the past 2 decades at 5.9 percent 
for FY 2010 (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 
loan obligations with Federal payments, salaries and income tax refunds 
to delinquent borrowers. In the guaranteed program, the FY 2011 
delinquency rate was 1.69 percent, the second lowest since 1995 (Chart 
3).
    Foreclosures. Foreclosure rates continue to be very low in the 
direct loan program. In 2010, FSA completed 64 foreclosures. This 
represents less than \1/10\ of 1 percent of the agency's direct loan 
caseload. The extremely low foreclosure rate is the result of use of 
all available servicing tools and a structured review process to ensure 
that all options to assist the borrower have been exhausted before a 
foreclosure action is started.
    Inventory Properties. Inventory farm properties--those that have 
come into government ownership through voluntary conveyance or 
foreclosure--are also at historic lows, with just 86 farms totaling 
10,900 acres in FY 2010 (Chart 4). In 1995, FSA held nearly 1,800 farms 
totaling 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 2,221 direct loan borrowers were 
able to graduate in FY 2010.

Equitable Treatment and Participation
    Secretary Vilsack has been extremely clear that improper and 
inequitable treatment of individuals the United States Department of 
Agriculture (USDA) and FSA serve will not be tolerated. On April 21, 
2009, the Secretary announced several actions in a comprehensive 
approach to ensure fair and equitable 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 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 that our producers, program 
applicants, and employees receive fair and equitable treatment. I want 
to update you on a few key activities dealing with these important 
issues.
    Program participation. An examination of the composition of FSA's 
loan portfolio indicates that FSA finances socially disadvantaged 
farmers at a much higher rate than that groups' proportion of the farm 
population (Chart 5). FSA has significantly increased the amount of 
loan funds provided to socially disadvantaged applicants. Between 1995 
and 2010, the FSA direct socially and disadvantaged caseload increased 
from 3,260 to 14,840 borrowers. Between 1997 and 2010, the FSA 
guaranteed socially disadvantaged caseload increased from 1,730 to 
2,998 borrowers.
    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 ranchers 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 
27,111 borrowers in 2010. 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 9,477 borrowers in 
2010.

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 2011, FSA 
has processed nine percent more loan requests than in FY 2010. There 
has been a steady increase in loan requests since FY 2009 when the 
demand jumped 41 percent over the previous year; however, 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 the opportunities of our borrowers 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 loan 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 overnight, 
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, such as the Direct Loan System (DLS) and the Program Funds 
Control System (PFCS), were a key factor in our ability to provide such 
timely service.
    This past year we have completed the final phase of moving all 
automated farm loan systems to the Web. With the completion of this 
project, duplicate data collection is eliminated and farm loan services 
are being delivered even more efficiently. Our employees are able to 
conduct USDA business from any location where there is broadband, WiFi 
or dial-up Internet access. This allows us to conduct business with 
producers at locations and times convenient to them. Additionally, this 
information is stored on a centralized server allowing employees to 
quickly access portfolio information and provide real time management 
reports. FLP no longer relies on antiquated operating systems for 
program delivery.
    In addition to the business plan and loan accounting systems, other 
IT systems have been developed and implemented which also enhance the 
efficiency of FSA employees. Agency appraisers have recently been 
provided state of the art agricultural software that allows collateral 
valuations to be done more expeditiously, which facilitates faster 
access to capital for loan applicants. Automated Web-based systems have 
been developed for program oversight, including Farm Loan Programs Risk 
Assessment (FLPRA) & the District Director Oversight System (DDORS), 
which help to ensure the integrity of FSA's farm loan programs.

Ongoing Challenges
    FSA will continue to face 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 have an excellent employee recruitment and 
training program which will be critical to maintaining our staffing 
needs. On average, it requires about 2 years to fully train a loan 
officer. The 2 year training window for new loan officers complicates a 
somewhat 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. FSA loan officers provide this financial supervision 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 4,200 FSA borrowers who can only receive 
        direct operating loan assistance one more year from the agency; 
        and

   There are more than 6,900 FSA borrowers who can only receive 
        direct operating loan assistance 2 more years from the agency.

    Without FSA direct loan assistance, 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 will be able to obtain 
conventional financing.
    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. As of April 5, 2011, over 4,500 guaranteed loan borrowers do 
not qualify for additional loan guarantees. At the end of FY 2010, an 
additional 1,447 borrowers are projected to become ineligible for 
guaranteed loans; at the end of 2012, 1,896 borrowers would become 
ineligible under term limits.
    These limits have come at a difficult time for many borrowers who 
have been affected by the unpredictable, cyclical nature of agriculture 
and its influence on farmers' businesses. There is a critical need to 
maintain a strong agricultural credit safety net for our hardworking 
farmers and ranchers. With thousands of family farmers across rural 
America facing the tightest agricultural credit markets in 20 years, 
USDA loan programs can mean the difference between surviving a tough 
year and losing the family business.

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 socially disadvantaged farmers, reflects remarkable 
success as well.
    However, we continue to face challenges. Government resources are 
increasingly limited and the agriculture production landscape is 
changing. We are experiencing a unique set of 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 our delivery 
systems, 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 
providing high quality delivery of existing programs and new 
initiatives to assist small, beginning, and socially disadvantaged 
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.
Chart 1
Total All Loans
Comparison of Obligations
(in Billion Dollars)



  Thank you, Mr. Dolcini. Mr. Strom, please proceed.STATEMENT OF HON. 

   LELAND A. STROM, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, FARM CREDIT
                       ADMINISTRATION, McLEAN, VA

    Mr. Strom. Thank you, Mr. Chairman. Chairman Fortenberry, Ranking 
Member Fudge, Members of the Subcommittee, I am Leland Strom, Chairman 
and Chief Executive Officer of the Farm Credit Administration. On 
behalf of my colleagues on the FCA Board, Kenneth Spearman and Jill 
Long Thompson and the dedicated men and women at FCA, I am pleased to 
participate in this important hearing today.
    FCA is an independent arms-length agency responsible for examining 
and regulating the banks, associations, and related entities in the 
Farm Credit System, including the Federal Agricultural Mortgage 
Corporation, or Farmer Mac.
    I am pleased to report that the overall condition and performance 
of the System remains safe and sound and continues to meet its 
Congressionally-directed mission. The System continues to have 
acceptable credit quality and is well capitalized. We have increased 
supervisory oversight and dedicated additional resources at a number of 
institutions that are experiencing stress. These institutions represent 
less than four percent of the System assets, and while they may not 
pose a systemic risk, they are important to the farmers and ranchers 
they serve and the fabric of the System.
    Farmer Mac has made strides in rebuilding its capital position 
since 2008 when it experienced difficulties with non-program investment 
losses. It continues to provide an important outlet for financial 
institutions to better manage their risk and increase liquidity and 
funding to rural America through several business solutions.
    During the economic downturn, the Farm Credit System maintained its 
presence in the agricultural marketplace by providing competitively-
priced loan products to creditworthy farmers, ranchers, and 
agricultural cooperatives. In fact, the System did much during the past 
year to help producers and rural America. For example, recently in the 
7 days following the March 31 crop report, a System institution loaned 
almost $2 billion to farmers and grain elevators to meet their 
financing needs, primarily to cover the margin calls due to the crop 
reports' bullish impact on corn prices.
    Farm income is expected to remain strong in 2011. Grains, soybeans, 
and cotton largely account for the increase. High grain prices, 
however, will present challenges for the livestock sector and 
potentially the ethanol industry. Although grain producers are doing 
well at this time, their input costs are rising rapidly. Consequently, 
crop farmers could face declining profit margins if grain prices 
retreat from current levels. Therefore, we must remain vigilant and 
respond quickly to changes in the risk environment.
    High grain prices combined with extremely low interest rates are 
also propelling farmland values to record highs in parts of the 
Midwest. The associations of the Farm Credit System are the largest 
source of farm mortgages in the U.S. with a market share estimated by 
USDA at about 43 percent. The average Farm Credit association has over 
55 percent of its loan portfolio in farmland mortgages.
    We at the agency have been taking a proactive approach to 
addressing the rising farmland values issue. Recently, we hosted a 
regulator roundtable that was attended by FDIC, the Comptroller of the 
Currency, the Federal Reserve Board, and Federal Reserve banks. We plan 
to continue to work together to identify risks we see for the future 
and what further actions may be needed regarding our regulated 
entities.
     At FCA we have emphasized appropriate and sound agricultural real 
estate underwriting standards in our policy guidance and examination 
activity in these volatile times.
    The System focuses on lending to young, beginning, and small 
farmers and ranchers by offering them specially-designed programs and 
services. In 2010, the System's loans to YBS producers continue to show 
solid gains, indicating Farm Credit System institutions are staying 
focused on this very special mission responsibility.
    The Farm Credit Act established specific consumer protections for 
System borrowers. For example, the Act requires Farm Credit System 
institutions to review and consider restructuring a distressed 
agricultural loan before initiating foreclosure. These borrower rights 
requirements have served the System and its borrower-owners well for 
the past 25 years.
    In closing, as agriculture and rural America contend with the 
challenges of these uncertain times, we are mindful that the System was 
designed to be a dependable lender to agricultural and rural 
communities in both good times and bad. FCA 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 and I will happy to 
answer any questions you may have.
    [The prepared statement of Mr. Strom follows:]

    Prepared Statement of Hon. Leland A. Strom, Chairman and Chief 
       Executive Officer, Farm Credit Administration, McLean, VA

Introduction
    Chairman Fortenberry, Ranking Member Fudge, 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 colleagues on the FCA Board, Kenneth Spearman of Florida, Jill Long 
Thompson of Indiana, 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.

FCA Mission
    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 protects the safety and soundness of the FCS by 
examining and supervising all FCS institutions, including Farmer Mac, 
and ensures that the institutions comply with applicable laws and 
regulations. Our examinations and oversight strategies focus on an 
institution's financial condition and any material existing or 
potential risk, as well as on the ability of its board and management 
to direct its operations. We also evaluate each institution's 
compliance with laws and regulations to ensure that it serves all 
eligible borrowers, including young, beginning, and small 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 take 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, 
capital, and mission; 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.
    Through the oversight and leadership of the House and Senate 
Agriculture Committees, many important reforms were made to the Farm 
Credit Administration and the FCS as a result of the agricultural 
credit crisis of the 1980s. This included restructuring FCA as an 
independent arm's length regulator with formal enforcement powers, 
providing borrower rights to System borrowers with distressed loans, 
and establishing the Farm Credit Insurance Fund (Insurance Fund) to 
protect System investors.
    Over the ensuing 2 decades, the Farm Credit System, which FCA 
regulates, has restored its financial health and the trust of its 
borrowers. With its authority as an arm's length regulator, FCA has 
been able to ensure that System institutions adhered to safety and 
soundness standards. The Insurance Fund also helped by restoring 
investor confidence.
    Both the System and FCA learned much during the crisis of the 
1980s, and those lessons helped build a much stronger Farm Credit 
System, as well as a stronger regulator. 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. Today the System is a dependable provider of credit to 
agriculture and rural America as intended by Congress.

Farm Credit System Mission
    The FCS is a government-sponsored enterprise (GSE) created by 
Congress in 1916 to provide American agriculture with a dependable 
source of credit. It is a nationwide network of cooperatively organized 
banks and associations that are owned and controlled by their 
borrowers, serving all 50 states and the Commonwealth of Puerto Rico. 
The System provides credit and other services to agricultural producers 
and farmer-owned agricultural and aquatic cooperatives. It also makes 
loans for agricultural processing and marketing activities, rural 
housing, farm-related businesses, rural utilities, and foreign and 
domestic companies involved in international agricultural trade. In 
addition, the System provides funding and discounting service to 
certain ``other financing institutions'' and forms partnerships with 
commercial banks to provide credit to agriculture and rural America 
through participations and syndications.
    As required by law, System borrowers own stock or participation 
certificates in System institutions. The FCS had nearly 880,000 loans 
and approximately 488,000 stockholders in 2010. Approximately 85 
percent of the stockholders were farmers or cooperatives with voting 
stock. The remaining 15 percent were nonvoting stockholders, including 
rural homeowners and other financing institutions that borrow from the 
System. The U.S. Department of Agriculture's latest data show that the 
System's market share of farm debt was 40 percent, second only to the 
44 percent share held by commercial banks.
    One of FCA's oversight roles is to ensure that the System, with its 
mission devoted to agriculture and rural America, maintains its 
presence in the agricultural marketplace to provide competitive and 
dependable credit for all eligible and creditworthy farmers, ranchers, 
and agricultural cooperatives. In fact, the System has maintained its 
mission service during the difficult markets of the past 3 years 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 and worked 
with livestock producers, especially dairy and hog producers, as they 
made difficult decisions during stressful market conditions. The System 
also provided funding for critical infrastructure projects in 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. Overall the System 
continued to have access to funds and was able to increase its lending 
to agriculture and rural America during a financial crisis and severe 
recession.

Condition of the FCS
    Farm income is expected to be very strong in 2011. The U.S. 
Department of Agriculture forecasts $98.6 billion in farm net cash 
income--the highest since 1974, after adjusting for inflation. The high 
prices that grain, soybean, and cotton farmers will receive for their 
products will largely account for this increase. High feed costs, 
however, will present challenges for livestock producers. Already tight 
supplies of corn and soybeans in the United States could lead to 
significantly higher feed costs in 2011 and 2012 if growing conditions 
are unfavorable. High grain prices combined with extremely low interest 
rates are also propelling farmland values to record highs in parts of 
the Midwest.
    We are carefully watching factors such as higher interest rates 
that could cause a reversal in the factors that have contributed to a 
strong farm economy and land values. We are also watching carefully how 
higher oil prices may influence the global economy and undermine the 
demand for farm products. Although grain producers are doing well at 
this time, their input costs are rising rapidly. For example, fuel and 
fertilizer prices, which account for about \1/3\ of the non-land costs 
of a Central Illinois corn farm, have increased 22 percent and 31 
percent, respectively, since August 2010. Consequently, crop farmers 
could face declining profit margins if grain prices retreat from 
current levels.
    The System remained fundamentally safe and sound in 2010 and is 
well positioned to withstand the continuing challenges affecting the 
general economy and agriculture. Total capital increased to $33.3 
billion at December 31, 2010, up from $30.0 billion a year earlier. In 
addition, more than 81 percent of total capital is in the form of 
earned surplus, the most stable form of capital. The ratio of total 
capital to total assets increased to 14.5 percent at year-end 2010, 
compared with 13.9 percent the year before, as strong earnings allowed 
the System to continue to grow its capital base.
    Loan growth picked up in 2010, especially in the second half of the 
year when commodity prices increased sharply. In total, loans grew by 
6.4 percent in 2010 compared with 2.1 percent in 2009. The greatest 
contributors to the System's loan growth last year were loans to 
cooperatives and real estate mortgage loans, as they increased $5.7 
billion and $2.7 billion, respectively. Credit has been available to 
eligible creditworthy borrowers. Outstanding loans to producers of most 
major commodities increased in 2010 compared with the prior year. 
However, loans outstanding did decline in 2010 for forestry, poultry 
and eggs, hogs, and biofuels industries that have struggled recently.
    Nonperforming loans decreased modestly to $3.4 billion as of 
December 31, 2010, and represented 10.2 percent of total capital at the 
end of 2010, down from 11.8 percent at the end of 2009. Two of the most 
troubled industries in 2009, hogs and ethanol, experienced a 
substantial improvement in 2010 because of much stronger prices for 
their products. Other sectors that have had difficulties over the past 
few years, such as cattle, dairy, and forestry, recorded relatively 
small changes in their nonaccrual rates in 2010. Dairy improved 
slightly, while cattle and forestry registered somewhat higher 
nonaccrual rates. Although credit quality is satisfactory overall, the 
volatility in commodity prices and weaknesses in the general economy 
have increased risks to some agricultural operators, creating the 
potential for future declines in asset quality.
    The System reported significantly higher earnings in 2010, with a 
combined net income of $3.5 billion, up 22.6 percent from 2009. Return 
on assets remained favorable at 1.60 percent. System institutions, as 
cooperatives, distributed 29 percent of their earnings in patronage to 
their borrower-owners in 2010.
    Further strengthening the System's financial condition is the 
Insurance Fund, which holds more than $3.2 billion. Administered by the 
Farm Credit System Insurance Corporation (Insurance Corporation), this 
fund protects investors in System-wide consolidated debt obligations.
    The System's access to capital markets returned to normal during 
2010, which helped the System further augment its solid overall 
financial strength, serve its mission, and maintain the Insurance Fund. 
As a GSE with solid financial performance, the System benefited from 
monetary policy actions that helped to foster historically low domestic 
interest rate levels. Tepid investor demand for longer-term System-wide 
debt securities in 2009 improved appreciably in 2010, particularly for 
those with maturities of more than 5 years. While the System expects to 
have continued reliable access to the debt capital markets to support 
its credit mission in 2011, it has also taken steps to enhance the 
liquidity of its investment portfolio to provide flexibility in the 
event of restricted market access. The System's overall liquidity 
position equaled 173 days at December 31, 2010, well in excess of the 
90 day regulatory minimum.

Rising Farmland Values
    We are in an optimistic period for U.S. agriculture, as rising 
world and domestic demand for commodities has been coupled with very 
low interest rates. Not surprisingly, profitability and expectations 
for further growth in returns are being bid into the value of U.S. 
farmland. Farmland values rose in 2010, especially in the latter half 
of the year, with much of the Midwest showing strong double-digit 
annual gains. While data for this past winter are incomplete, anecdotal 
evidence suggests that farmland values continued to rise this past 
winter, especially in the major corn and soybean producing regions. The 
importance of farmland values to the agricultural economy and to 
agricultural credit markets cannot be overstated, as farmland accounts 
for the overwhelming majority of the $2 trillion in farm equity that 
USDA is projecting for the end of this year.
    History has shown that substantial downward adjustments to the 
value of farmland can occur. The severe correction in the 1980s 
reshaped farming and agricultural lending alike. We studied the land 
markets of both periods, and while there are some similarities, there 
are also some important differences. The most significant difference is 
that the level of debt or leverage used to purchase farmland today is 
much less than it was in the 1980s. Nonetheless, FCA is closely 
monitoring the situation because FCS associations are the largest 
supplier of farm mortgages in the United States, with a market share 
estimated by USDA of about 43 percent.
    Although the current economy generally supports today's average 
land prices, some factors, such as higher interest rates, geopolitical 
developments that could undermine global demand for farm products, and 
an unexpected decline in grain prices because of a global supply 
response, could lead to a sharp drop in the value of farm real estate. 
Indeed, farm commodity markets have become more volatile in the past 5 
years. The volatility is no more evident than in corn, the single 
biggest U.S. crop. Just since last summer the spot price of corn has 
more than doubled in value, helping to drive the latest surge in 
cropland prices.
    To address the risks associated with rising farmland values, FCA 
has issued guidance on collateral risks to FCS lenders through a series 
of Informational Memoranda. FCS institutions are improving underwriting 
standards, implementing appraisal guidelines, and capping the amount 
per acre they will lend on the basis of sustainable agricultural value 
analysis. They are also improving efforts to identify portfolio risk 
through land value studies and the stress testing of land value 
changes.
    To further address the issue of rising farmland values, FCA 
recently organized a meeting with the other Federal financial 
regulators to discuss concerns and observations regarding agricultural 
land values and associated risks to loan collateral. Our intent also 
was to foster a broad-based interchange on the appropriate regulator 
response to these risks and to develop a productive working 
relationship among banking regulators. We plan to hold additional 
meetings to continue our focus on topics important to agriculture.

Examination Programs for FCS Banks and Associations
    The Agency's highest priority is to maintain appropriate risk-based 
oversight and examination programs to ensure the safety and soundness 
of FCS institutions. Given the increasing complexity and risk in the 
System and human capital challenges at FCA, we have undertaken a number 
of initiatives to improve operations, increase examination 
effectiveness, and enhance staff expertise in key examination areas. 
The Agency bases its examination and supervision strategies on 
institution size, existing and prospective risk exposure, and the scope 
and nature of each institution's business model. FCA also performs 
nationally focused examinations of specific issues and operational 
areas to monitor the condition and operations of the System as a whole. 
On a national level, we actively monitor risks that may affect groups 
of System institutions or the entire System, including risks from the 
agricultural, financial, and economic environment. There are several 
key risk areas on which the Agency is focusing in 2011. They include 
loan portfolio management; large, complex, and shared assets; 
collateral risk management; and compensation programs and corporate 
governance.
    The frequency and depth of examination activities vary based on 
risk, but each institution receives a summary of examination activities 
and a report on its overall condition at least every 18 months. FCS 
institutions are required to have effective loan underwriting and loan 
administration processes to maintain adequate asset-liability 
management capabilities, and to establish high standards for governance 
and transparent disclosures for shareholder oversight. Because of the 
recent increased volatility in the agricultural and credit sectors, FCA 
has increased its on-site examination presence. Also, FCA is closely 
watching rapidly rising real estate values in certain sections of the 
country to ensure that FCS lending practices remain prudent.
    In certain cases, FCA will use its enforcement powers to effect 
changes in the institution's policies and practices to correct unsafe 
or unsound conditions or violations of law or regulations. The Agency 
uses the Financial Institution Rating System (FIRS) as a key method to 
assess the safety and soundness of each FCS institution (see chart). 
The FIRS provides a general framework for evaluating significant 
financial, asset quality, and management factors to assign component 
and composite ratings. FIRS ratings range from one for a sound 
institution to five for an institution that is likely to fail. Overall, 
the System remains financially strong and adequately capitalized. The 
FCS does not pose material risk to investors in FCS debt, the Insurance 
Corporation, or to FCS institution stockholders.
    Although the System's condition and performance remain satisfactory 
overall, a number of FCS institutions are experiencing stress and now 
require special supervision and enforcement actions. These actions 
reflect the weaknesses in the nation's economy and credit markets, a 
rapidly changing risk environment in certain agricultural segments, 
and, in certain cases, management's ineffectiveness in responding to 
these risks. We have increased supervisory oversight at a number of 
institutions and dedicated additional resources in particular to those 
14 institutions rated three or worse. Although these 14 institutions 
represent less than four percent of System assets and do not 
meaningfully impact the System's consolidated performance, they require 
significantly greater Agency resources to oversee. Currently, seven FCS 
institutions are under formal enforcement action, but no FCS 
institutions are in conservatorship or receivership.
    The chart below includes only the five System banks and their 
affiliated direct-lender associations. The figures in the bars reflect 
the number of institutions by FIRS rating.
Farm Credit System FIRS Composite Ratings



Regulatory Activities
    Congress has given the FCA Board statutory authority to establish 
policy, prescribe regulations, and issue other guidance to ensure that 
FCS institutions comply with the law and operate in a safe and sound 
manner. The Agency is committed to developing balanced, flexible, and 
legally sound regulations.
    Some of the Agency's current regulatory and policy projects include 
the following:

   Revising regulations to implement the requirements of the 
        Dodd-Frank Act with respect to imposing margin requirements on 
        non-cleared derivatives transactions and removing references to 
        credit ratings.

   Revising regulations to ensure that FCS funding and 
        liquidity requirements are appropriate and to ensure that the 
        discounts applied to investments reflect their marketability.

   Revising regulations to require that each FCS institution's 
        business plan includes strategies and actions to serve all 
        creditworthy and eligible persons in the institution's 
        territory. In addition, the regulation will encourage serving 
        nontraditional customers, such as women and minorities, who 
        often operate within local food systems by producing organic or 
        specialty crops on small farms. The regulation will also seek 
        to achieve diversity and inclusion in the workforce of System 
        institutions.

   Enhancing our risk-based capital adequacy framework to more 
        closely align it with that of other Federal banking agencies 
        and the Basel Accord. We published an advance notice of 
        proposed rulemaking to solicit comments on amending FCA's 
        regulations to replace the current core and total surplus 
        capital standards with a ``Tier 1/Tier 2'' capital framework.

   Revising lending- and leasing-limit regulations to ensure 
        that FCS institutions maintain effective policies to measure 
        and manage exposure to single counterparties, industries, and 
        market segments, and to large complex loans.

   Revising regulations to allow System institutions to 
        purchase eligible agricultural loans from the Federal Deposit 
        Insurance Corporation.

   Revising regulations to enhance System disclosures of senior 
        officer compensation and supplemental benefit programs. We 
        published an advance notice of proposed rulemaking to solicit 
        comments on ways to clarify and enhance rules related to the 
        disclosure of senior officer compensation, and the 
        responsibilities and authorities of System institution 
        compensation and audit committees.

   Strengthening investment-management regulations to ensure 
        that prudent practices are in place for the safe and sound 
        management of FCS investment portfolios.

Corporate Activities
    While the number of FCS institutions has declined over the years as 
a result of mergers, their complexity has increased, which has placed 
greater demands on both examination staff resources and expertise. 
Generally, these mergers have resulted in larger, more cost-efficient, 
and better-capitalized institutions with a broad, diversified asset 
base, both by geography and commodity. Thus far in FY 2011, two mergers 
of associations have become effective. In addition, two banks, U.S. 
AgBank, FCB, and CoBank, ACB, have submitted a plan of merger for FCA 
Board consideration. As of January 1, 2011, the System had 84 direct-
lender associations, five banks, five service corporations, and two 
special-purpose entities.

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 extraordinary 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.
    From Farmer Mac's creation, Congress included strong statutory 
underwriting, security appraisal, and repayment standards for qualified 
loans, with Farmer Mac's activities regulated and supervised by FCA. In 
addition to its statutory minimum requirements, Farmer Mac was required 
to develop sound underwriting standards for loans to qualify for its 
programs. To date, these standards and regulations have prevented any 
investor credit losses in Farmer Mac securities. However, Farmer Mac 
was impacted by the spillover of the economic stress and recession 
stemming from the 2008 financial crisis. Losses on certain investments 
required Farmer Mac to raise additional capital during the fall of 
2008, and management changes were made by its board of directors. 
Farmer Mac continues to restructure its balance sheet and further 
strengthen its operations and risk-bearing capacity to focus on 
fulfilling its mission.
    Notably, in January 2010, Farmer Mac raised $250 million in capital 
from a private offering of shares of noncumulative perpetual preferred 
stock of Farmer Mac II LLC, an operating subsidiary in which Farmer Mac 
owns all of the common equity. The new preferred stock has a lower net 
effective cost than the retired capital and has increased its capacity 
to purchase and guarantee qualified loans and to provide liquidity to 
rural markets. As of December 31, 2010, Farmer Mac's core capital 
totaled $460.6 million, which exceeded its statutory requirement of 
$301.0. As a result, capital surplus grew to $159.6 million, up from 
$120.2 million as of December 31, 2009. The total portfolio of loans, 
guarantees, and commitments grew 14 percent to $12.2 billion.
    Farmer Mac's program-business portfolio shows continued stress in 
certain subsectors but remains manageable. Stress in the ethanol 
industry, as well as certain crop and permanent planting segments, 
contributed to an increase in the nonperforming loan rate to 1.90 
percent at December 31, 2010, compared with 1.41 percent at December 
31, 2009. Loans more than 90 days delinquent increased from 1.13 
percent at December 31, 2009, to 1.63 percent at December 31, 2010.
    Farmer Mac continues to enjoy reliable access to the debt capital 
markets to support its mission of providing financing and liquidity to 
agriculture and rural markets. Over the past 2 years, Farmer Mac has 
taken significant measures to increase the quality and liquidity of its 
$1.76 billion investment portfolio in order to improve its financial 
flexibility in the event of a financial or market disruption.

Working With Young, Beginning, and Small Borrowers
    System institutions are required to develop programs and make 
special efforts to serve young, beginning, and small (YBS) farmers and 
ranchers. In 2010, lending by the System to YBS producers continued to 
show gains in loan dollars outstanding. Nevertheless, YBS results as a 
percentage of total loans have either dipped or remained relatively 
flat over the past several years. However, the System's YBS dollar 
results are noteworthy because institutions have managed to expand loan 
volume in spite of generally downward demographic trends for these 
groups of farmers.
    FCS institutions may use a variety of tools to fulfill their 
commitment to YBS lending, including lower rates or fees for YBS 
borrowers, differential underwriting standards, USDA guarantees, and 
special training programs and other financial services. Many 
associations have revised their YBS policies and procedures in the past 
3 years. The changes are in response to guidance issued in our 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. The changes are an indication 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 of 
1971, as amended (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 Act and implementing regulations provide qualifying borrowers 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. These rights are unique when compared with other financial 
institutions that operate under Federal law.
    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. In 2009 and 2011, FCA issued Frequently 
Asked Questions (FAQs) to clarify its borrower rights regulations. 
These FAQs help guide System institutions and their borrowers through 
many of the situations encountered.

Conclusion
    We at FCA remain vigilant in our efforts to ensure that the Farm 
Credit System and Farmer Mac remain financially sound and focused on 
serving agriculture and rural America. While we are proud of our record 
and accomplishments, I assure you that the Agency will continue its 
commitment to excellence, effectiveness, and cost efficiency and will 
remain focused on our mission of ensuring a safe, sound, and dependable 
source of credit for agriculture and rural America. This concludes my 
statement. On behalf of my colleagues on the FCA Board and at the 
Agency, I thank you for the opportunity to share this information.

    The Chairman. Thank you, Mr. Strom. Dr. Henderson?

          STATEMENT OF JASON R. HENDERSON, Ph.D., VICE
         PRESIDENT AND OMAHA BRANCH EXECUTIVE, FEDERAL
             RESERVE BANK OF KANSAS CITY, OMAHA, NE

    Dr. Henderson. Thank you, Mr. Chairman and Members of the 
Subcommittee. My name is Jason Henderson. I am Vice President 
and economist with the Federal Reserve Bank of Kansas City. In 
this capacity, I lead several Federal Reserve initiatives that 
track economic conditions in the farm economy, including the 
Agricultural Finance Databook, which summarizes trends in 
national farm lending and the Agricultural Credit Survey for 
our seven states in the 10th Federal Reserve District. I 
appreciate the opportunity to discuss some of our findings 
regarding national agricultural credit conditions and farmland 
values.
    In 2009, the recession and fragile financial markets cut 
farm incomes and raised concerns about credit availability for 
agricultural borrowers. Since then, a stronger global economy 
has spurred booming farm incomes. Surging crop prices are 
boosting profits for crop producers, and many livestock 
operations are still able to maintain some level of 
profitability even in the face of high feed costs. With a 
resurgent farm economy, agricultural loan demand is shifting.
    The most dramatic shift has emerged from the decline in 
farm operating loans. With strong cash flows at the end of last 
year, farmers paid off operating loans and many prepaid a large 
portion of their input costs. Commercial bankers across the 
nation reported higher loan repayment rates with operating loan 
volumes falling sharply in the first quarter of 2011.
    In contrast, commercial banks increased lending to 
livestock producers. With higher costs straining livestock 
profits, loan demand from livestock enterprises increased. And 
even in the face of tighter credit standards and rising 
delinquency rates, commercial banks expanded loan volumes for 
livestock last year.
    In addition, loan volumes for farm machinery and equipment 
have risen sharply. Larger profits prompted many producers to 
expand their capital investments and business contacts reported 
brisk farm machinery sales. In the first quarter of 2011, farm 
loans for machinery and equipment surged 72 percent above year-
ago levels at commercial banks.
    Finally, farm real estate loan volumes rose solidly with 
booming cropland values. According to Federal Reserve and 
university surveys, cropland values in many midwestern states 
have soared more than 20 percent over the past year. The 
Northern and Southern Plains also enjoyed stronger farmland 
value gains as robust energy markets lifted land lease revenues 
for oil exploration. By the end of 2010, farm real estate loan 
volumes at commercial banks and Farm Credit associations rose 
solidly, and our industry contacts noted that life insurance 
companies, vendor creditors, and non-farm investors remained 
active in agricultural markets.
    Going forward, lenders appear to be in position to meet the 
credit needs of farmers. Agricultural bankers report having 
ample funds for farm loans and continue to lend at historically 
low interest rates. Bankers are beginning to ease collateral 
requirements on farm loans after stronger repayment rates 
trimmed delinquencies on farm loans. And with healthier loan 
portfolios, agricultural banks are enjoying stronger earnings 
than their peers, which should underpin lending activity.
    Still, questions surrounding the availability of credit and 
collateral requirements persist. The most pressing concerns and 
stringent requirements have likely emerged for livestock 
producers struggling with profitability, and for smaller farm 
operations owned by young and beginning farmers with less 
equity. Our research at the Federal Reserve Bank of Kansas City 
indicates that these operations are more likely to struggle 
with debt repayment and be denied credit.
    As a result, the sustainability of farm profits and land 
values pose the greatest risk to agricultural credit 
conditions. Agriculture is a boom-and-bust industry. While 
another year of hearty profits are expected, these profits 
could be fleeting. For example, USDA projects average annual 
corn prices to fall below $4.25 per bushel by 2013 and remain 
below these levels through 2020, cutting net returns above 
variable costs by 30 percent. In addition, profit margins for 
other major field crops are projected to decline. Shrinking 
returns could threaten booming cropland values, and if 
capitalization rates rise to their historical averages, land 
values could fall by as much as \1/3\, eroding the financial 
health of the farm sector.
    In the face of volatile markets and uncertain profits, low 
leverage ratios and larger levels of working capital are often 
the best risk management strategies for farmers. Most measures 
of financial leverage remain at historical lows, but it is 
still an open question whether farmers have learned these 
lessons from past farm crises and will resist the temptation of 
excessive borrowing at low interest rates.
    In sum, near-term prospects for U.S. agriculture remain 
bright. Delinquency rates have eased and, while tight, credit 
standards for agricultural loans are beginning to loosen. With 
lofty incomes, many farmers invested in machinery, equipment, 
and farm real estate, while others paid down debts to weather 
any unexpected storms building on the horizon. While volatile 
commodity markets and rising production costs are threats to 
future farm profits, credit is still available.
    Mr. Chairman and Members of the Subcommittee, thank you for 
inviting me here today, and I will be happy to respond to any 
questions at the appropriate time or in the future. Thank you.
    [The prepared statement of Dr. Henderson follows:]

  Prepared Statement of Jason R. Henderson, Ph.D., Vice President and 
 Omaha Branch Executive, Federal Reserve Bank of Kansas City, Omaha, NE

    Thank you, Mr. Chairman and Members of the Subcommittee. My name is 
Jason Henderson. I am Vice President and Economist with the Federal 
Reserve Bank of Kansas City. In this capacity, I lead several Federal 
Reserve initiatives that track economic conditions in the farm economy, 
including the Agricultural Finance Databook, which summarizes trends in 
national farm lending and the Survey of Agricultural Credit Conditions 
for our seven states in the Tenth Federal Reserve District. I 
appreciate the opportunity to discuss some of our findings regarding 
national agricultural credit conditions and farmland values.

Agricultural Credit Conditions
    In 2009, the recession and fragile financial markets cut farm 
incomes and raised concerns about credit availability for agricultural 
borrowers. Since then, a stronger global economy has spurred booming 
farm incomes. Surging crop prices are boosting profits for crop 
producers and many livestock operations are still able to maintain some 
level of profitability even in the face of high feed costs. With a 
resurgent farm economy, agricultural loan demand is shifting.
    The most dramatic shift has emerged from the decline in farm 
operating loans. With strong cash flows at the end of 2010, farmers, 
especially crop producers, paid off operating loans. In addition, many 
pre-paid a large portion of their input costs at the end of last year, 
curtailing loan demand. Based on Federal Reserve surveys, commercial 
bankers across the nation reported higher loan repayment rates and 
fewer extensions and renewals for operating loans, with loan volumes 
falling more than 22 percent below year ago levels in the first quarter 
of 2011.
    In contrast, commercial banks expanded lending to livestock 
producers. With higher costs for feed and feeder cattle straining 
livestock profits, loan demand from livestock enterprises increased. 
Even in the face of tighter credit standards and rising delinquency 
rates, commercial banks expanded loan volumes for livestock 
approximately 15 percent last year. In the first quarter of 2011, 
commercial bank lending for livestock held near last year's elevated 
levels.
    In addition, loan volumes for farm machinery and equipment have 
risen sharply. Larger profits prompted many crop producers to expand 
their capital investments and business contacts reported brisk sales of 
tractors, combines, trucks, pivot-irrigation systems, grain bins, and 
other farm equipment. For example, according to the Association of 
Equipment Manufacturers, four-wheel drive tractor sales jumped roughly 
30 percent in 2010. In the first quarter of 2011, commercial bankers 
reported that loan volumes for farm machinery and equipment surged 72 
percent above year ago levels.
    Finally, farm real estate loan volumes rose solidly with booming 
cropland values. According to Federal Reserve and university surveys, 
cropland values in many Midwestern states have soared more than 20 
percent over the past year. The northern and southern Plains also 
enjoyed stronger farmland value gains as robust energy markets lifted 
land lease revenues for oil exploration. By the end of 2010, farm real 
estate loan volumes at commercial banks and Farm Credit associations 
rose solidly, and industry contacts noted that life insurance 
companies, vendor creditors, and non-farm investors remained active in 
agricultural markets.

The Outlook for Agricultural Lending
    Going forward, agricultural lenders appear to be in position to 
meet the credit needs of farmers. Agricultural bankers report having 
ample funds for farm loans and continue to lend to farmers at 
historically low interest rates. Bankers are beginning to ease 
collateral requirements on farm loans after stronger repayment rates 
trimmed delinquencies on farm loans. With healthier loan portfolios, 
agricultural banks are enjoying stronger earnings than their banking 
peers, which should further underpin future lending activity.
    Still, questions surrounding the availability of credit and 
collateral requirements persist. The most pressing concerns and 
stringent requirements have likely emerged for livestock producers 
struggling with profitability and for smaller farm operations owned by 
young and beginning farmers with less equity. Our research at the 
Federal Reserve Bank of Kansas City indicates that these operations are 
more likely to struggle with debt repayment and be denied credit.
    As a result, the sustainability of farm profits and agricultural 
land values pose the greatest risk to agricultural credit conditions. 
Agriculture is a boom and bust industry. While many crop producers 
expect another year of hearty profits, these profits could be fleeting. 
For example, according to the U.S. Department of Agriculture's long-
term projections, average annual corn prices could fall to $4.10 per 
bushel by 2013 and remain less than $4.25 per bushel through 2020, 
cutting net returns above variable costs by 30 percent. Profit margins 
for other major field crops are also projected to decline. Shrinking 
returns could threaten booming cropland values, and if capitalization 
rates return to their historical averages, cropland values could fall 
by as much as a third, eroding the financial health of the farm sector.
    In the face of volatile markets and uncertain profits, low leverage 
ratios and larger levels of working capital are often the best risk 
management strategies for farmers. Most measures of financial leverage 
remain at historical lows, but it is still an open question whether 
farmers have learned these lessons from past farm crises and will 
resist the temptation of borrowing at low interest rates.
    In sum, near-term prospects for U.S. agriculture remain bright. 
Delinquency rates have eased and, while tight, credit standards for 
agricultural loans are beginning to loosen. With lofty incomes, many 
farmers invested in machinery, equipment and farm real estate, while 
others paid down debts to weather any unexpected storms building on the 
horizon. While volatile commodity markets and rising production costs 
are threats to future farm profits, credit is still available.
    Mr. Chairman, thank you for inviting me today, and I will be happy 
to respond to any questions at the appropriate time.


                               Attachment

                     Agricultural Finance Databook

       Cropland Values Climb and Agricultural Finances Strengthen

                   By Jason Henderson and Maria Akers

April 2011

    Agricultural finance conditions strengthened amid soaring farmland 
values, booming farm incomes and rising commodity prices. Strong farm 
incomes, especially in grain producing regions, drove cropland values 
as much as 20 percent above year-ago levels. Robust farm and non-farm 
investor demand and skyrocketing land prices enticed some landowners to 
list farms for sale. Robust energy markets also placed upward pressure 
on farmland values in the northern Plains where land lease revenues for 
oil exploration surged. Farmland value gains, however, were more modest 
in the southern Plains as drought conditions intensified. Rising 
farmland values and brisk sales raised farm real estate loan volumes at 
commercial banks moderately at year-end.
    With stronger loan portfolios, agricultural banks ended the year 
with their best performance since the start of the financial crisis. 
Farm loan delinquencies fell as more farmers paid off loans at the end 
of 2010. Bankers also reported fewer loan renewals or extensions, 
potentially foreshadowing future declines in noncurrent loan volumes. 
The return on assets and equity at agricultural banks marched higher 
during the year, while the returns at other small banks held steady. 
Moreover, in a year when over 150 commercial banks failed, fewer than 
ten were agricultural banks.
    Strong farm incomes transformed non-real estate loan portfolios at 
commercial banks. Rising incomes curbed demand for short-term 
production loans but fueled capital investment that lifted 
intermediate-term loan volumes for machinery and equipment. The volume 
of loans for operating expenses waned at the first of the year as both 
crop and livestock producers used current incomes to pay for operating 
expenses. In contrast, farm machinery and equipment loan volumes rose 
sharply with a rebound in capital spending. With softer non-real estate 
loan demand, more bankers reported a rise in funds available for farm 
loans. Collateral requirements generally held steady and interest rates 
continued to trend down.

Section A
    Resurgent capital spending on farm machinery and equipment shifted 
lending activity toward intermediate-term loans. With rising incomes, 
farmers sharply increased their capital spending levels, in turn 
boosting intermediate-term loan volumes on farm machinery and equipment 
(Chart 1). In fact, farm machinery and equipment loan volumes jumped 73 
percent above year ago levels in the first quarter of 2011. These loans 
were extended for slightly shorter terms compared to last year but at 
much lower effective interest rates that averaged 4.4 percent (Chart 
2).
    In contrast, rising farm incomes trimmed operating loan demand as 
farmers used cash to pay for operating expenses. The volume of 
operating loans plunged 22 percent below year ago levels in the first 
quarter. Bankers reported weak loan demand and strong pre-payment of 
operating expenses. Strong winter storms during the February survey 
period and the atypical timing of the survey may have exacerbated the 
declines in loan originations in first quarter 2011. Operating loan 
maturities were about 2 months longer than average at 11 months, and 
the average effective interest rate edged up to 5.3 from a fourth 
quarter low.
    After rising substantially the last half of 2010, the volume of 
feeder and other livestock loans at commercial banks posted modest 
declines. In the first quarter, the volume of feeder livestock loans 
fell nine percent below year-ago levels, even though rising feeder 
cattle prices pushed average loan amounts higher. The average maturity 
for feeder livestock loans fell to just under 8 months, and the average 
effective interest rate held around five percent.
    Small and mid-size commercial banks were more affected by shrinking 
non-real estate loan volumes than large commercial banks. The size of 
farm loan portfolios at banks with $25 million or less in farm loans 
contracted 12 percent year-over-year, while the size of farm loan 
portfolios at banks with more than $25 million in farm loans held 
steady. At the same time, the composition of farm loan portfolios 
shifted away from smaller loans towards larger loans over $100,000.

Section B
    Agricultural banks closed 2010 with their strongest financial 
performance in 2 years. The average rate of return on equity at 
agricultural banks jumped to 8.4 percent in the fourth quarter, 
compared to 1.1 percent at other small banks (Chart 3). Moreover, the 
rate of return on assets at agricultural banks strengthened in the 
fourth quarter to 0.9 percent, in contrast to 0.1 percent at other 
small banks. In addition, the percentage of agricultural banks with 
negative income as a share of average equity fell by more than a third. 
After rising during most of 2010, average capital ratios at both 
agricultural banks and other small banks edged down in the fourth 
quarter but remained near year-ago levels.
    Non-real estate loan performance strengthened in the fourth 
quarter. The volume of outstanding non-real estate farm loans at all 
commercial banks ended the year slightly below 2009 levels. Delinquent 
non-real estate loans have trended down since early 2010, comprising 
just 2.0 percent of outstanding farm production loans in the fourth 
quarter (Chart 4). Also, the volume of non-real estate loans 30 to 90 
days past due dropped to its lowest level since 2008. With declining 
delinquency rates, fourth quarter net charge-offs fell more than 25 
percent below year-ago levels.
    Loan performance measures for real estate loans improved at year-
end. Farm real estate loan volumes at all commercial banks settled 2.0 
percent above year-ago levels. After rising steadily during the past 3 
years, the share of nonperforming farm real estate loans eased slightly 
in the fourth quarter to 2.7 percent. In addition, the volume of real 
estate loans 30 to 90 days past due leveled off, which could signal 
further declines in delinquency rates. Net charge-off amounts grew in 
the fourth quarter but they accounted for about the same percentage of 
outstanding farm real estate loans as last year.

Section C
    Rising farm incomes propelled farmland values higher at the end of 
2010. Large year-over-year farmland value gains were seen across the 
Corn Belt and into the northern Plains where energy production is 
booming. In fact, North Dakota enjoyed the strongest annual increase in 
farmland values largely due to land lease revenues from expanded oil 
production (Map 1). Crop producing states such as Indiana, Illinois, 
Iowa, Nebraska, and Kansas reported another round of robust farmland 
price increases in the fourth quarter. Cropland values, however, 
increased more modestly in the southern Plains as drought conditions 
threatened crop yields and limited cattle grazing. Even with slightly 
more farms for sale at the end of the year, strong demand from farmers 
and nonfarm investors kept bidding brisk and values elevated. Bankers 
in the Chicago District expected growth in farm real estate loan 
volumes relative to last year. Many Federal Reserve survey respondents 
anticipated that farm incomes and farmland values would rise further in 
the coming months.
    Overall demand for farm loans stalled in the fourth quarter with 
less borrowing for production expenses and an upswing in loans for 
capital purchases. Several districts noted a decline in operating loan 
demand as many farmers used income to pre-pay for crop inputs. In 
addition, bankers in the Chicago, Dallas, and Richmond Districts 
reported fewer feeder cattle and dairy loans in the fourth quarter. 
Still, a majority of bankers expected operating loan volumes would 
rebound prior to spring planting. Federal Reserve surveys also noted a 
rush of machinery and equipment loans at the close of 2010 as farmers 
upgraded equipment and took advantage of new tax depreciation rules.
    Farm credit conditions strengthened further as farmers paid off 
loans in earnest at year-end. According to Federal Reserve surveys, 
loan repayment rates at agricultural banks continued to climb and were 
markedly higher in the Chicago, Minneapolis, and Kansas City Districts. 
Moreover, loan renewals and extensions fell in all districts but 
Richmond. Most bankers, but particularly those in the Chicago and 
Kansas City Districts, noted ample funds were available for loans, and 
very few loans were referred to non-bank credit agencies. Collateral 
requirements generally held steady or eased slightly. Interest rates 
trended down for both real estate and non-real estate loans.

Chart 1: Loan Volume by Purpose of Loan



Chart 2: Average Effective Interest Rates on Farm Loans



Chart 3: Rate of Return on Assets 



Chart 4: Nonperforming Loan Volumes



Map 1: Good-Quality (Non-irrigated) Cropland Values
(Percent change Fourth Quarter 2009 to Fourth Quarter 2010)




    The Chairman. Thank you, Dr. Henderson and gentlemen, for 
your testimony. I will begin questioning. Each Member will have 
approximately 5 minutes.
    Mr. Dolcini, you had stated that loans have increased in 
2010 over 2009 and are expecting a further increase this year. 
We have heard testimony today that the farm sector is in 
generally good condition and credit is readily available. So 
can you explain these increases, as well as the fact are they 
limited to certain credit sectors that are under stress now?
    Mr. Dolcini. Thanks for the question, Mr. Chairman. I think 
that what we have seen at FSA, and I consider our farm loan 
programs to be as an important part of the safety net as our 
Farm Programs, sort of the other side of the house, but there 
are still haves and have-nots in American agriculture. And 
while there are certainly some sectors of the overall ag 
economy that are doing quite well, and I think they have been 
cited in the testimony you have heard this morning. There are 
others that are not: poultry, hogs, dairy certainly. I come 
from California where the dairy industry has been hit really 
hard over the last couple of years.
    What we also have really tried to do in light of direction 
from the 2008 Farm Bill, and this Secretary and President Obama 
for that matter, is to bring more beginning farmers into our 
overall portfolio. And we have seen dramatic increases in the 
numbers of those folks in the last couple of years, too. So 
that accounts for a part of the growth that we have seen. And 
they have, in our experience, a tough time getting loans 
commercially. I think you will hear from a beginning farmer 
later this morning. But that has been an important part of 
where we have seen our portfolio grow.
    The Chairman. So what percent of the growth is due to these 
livestock sectors that are under certain stress as well as 
beginning farmers?
    Mr. Dolcini. Chris, can you address that?
    Mr. Beyerhelm. Yes, I wouldn't be able to give you an exact 
percentage, but I know that currently in 2011 and in 2010, 40 
percent of our loans made during those years were for new 
customers we hadn't done business with before. When you analyze 
those, at least half of those are from cattle producers. So 
just intuitively, what our takeaway from that is is that people 
are needing credit from the livestock industry and then also, 
as Mr. Dolcini said, beginning farmers that have not had access 
to credit previously.
    The Chairman. Thank you.
    Mr. Dolcini. We would be happy to provide you a breakdown 
of that.
    The Chairman. I think that would be helpful. Thank you very 
much.
    One further question. There have been a few requests to 
Members of this Committee to either suspend or extend term 
limits on guaranteed loans. Can you give us some insight from 
the Agency's perspective on why producers are not graduating 
from the program at 15 years?
    Mr. Beyerhelm. Thank you for that question. What our 
analysis is is that most of the farmers we work with--and 
ranchers--are in business for 40 to 50 years. And during that 
40 or 50 year period, the odds that some sort of weather 
condition or financial condition or personal condition that 
changes their ability to obtain credit from the commercial 
lending sector is most likely to happen. And you would think 
that 15 years would be enough, but if you live in certain parts 
of the country, farmers and ranchers have experienced numerous 
disasters, numerous setbacks, made some financial progress and 
then they are set back. So in some cases, 15 years is not 
enough in order to prepare them to get commercial credit 
without the assistance of a guaranteed loan.
    The Chairman. But the point of the program is to move 
people off of it after 15 years?
    Mr. Beyerhelm. Yes, and that is correct. I think the data 
is good as far as the number of people that are moving off of 
the System.
    The Chairman. That would actually be a helpful statistic as 
well if you could provide that. Thank you very much.
    I will turn to Mr. Strom now. In your written testimony, 
Mr. Strom, you discussed that the System is financing 
infrastructure projects through innovative bond financing, I 
assume that is part of the rural community investment pilot 
program. You have actually proposed expanding this Pilot 
Program in 2008. Can you comment on the status of this 
potential new rule?
    Mr. Strom. Thank you for the question, Mr. Chairman.
    The status of that rule is is that this Pilot Program began 
in 2005. In spring of 2008 we put out a proposed rule on this. 
We received numerous comment letters on that rule. We continue 
to look at and investigate the status of this program. 
Obviously, we are looking at how it can benefit areas of rural 
America with these targeted types of investments. It is 
currently on our regulatory agenda to go to a final rule, with 
yet an undetermined date. But we, again, continue to look at 
this very closely, again, trying to determine exactly the 
benefit that this can serve for rural America.
    The Chairman. Do you have just your perspective on why this 
particular mission change of the organization is under 
consideration?
    Mr. Strom. Well, the Farm Credit Act of 1971 gives this 
type of investment authority to the System. I think, initially, 
it was viewed that this would be good for farmers and ranchers 
and the communities that they live in. Investments held under 
these Pilot Program authorities are segregated in five 
categories. There is rural housing mortgage securities, rural 
development, debt securities--which include community 
facilities, rural business, rural lenders. There is credit link 
to agricultural notes, agribusiness investments and equity 
investments.
    I think in the overall look at this, again, with looking at 
how the authority of this can apply to these types of 
investments and, again, we received over 10,000 comment letters 
on this so there was a lot of comment regarding these. We just 
want to ensure that if this goes forward that it is done in a 
way that is targeted toward helping rural communities through 
infrastructure process, through either investments in the 
community facilities like critical care units or assisted 
living facilities. But again, the 1971 Act does give authority 
for these investment types. And I would be happy to provide you 
further information on that authority.
    The Chairman. That would be helpful. Thank you, Mr. Strom.
    Mr. Strom. Thank you.
    The Chairman. I will turn now to our Ranking Member, Ms. 
Fudge.
    Ms. Fudge. I thank you, Mr. Chairman.
    As you know, there are many conflicting events and meetings 
going on at this time, so I would like to yield to my colleague 
Mr. McGovern to ask his questions first.
    Mr. McGovern. I appreciate that and apologize that I have 
to leave early.
    But Mr. Dolcini, I am from New England and farmers in New 
England are typically smaller family-owned farms and tend to 
produce specialty crops or dairy. And I guess can you discuss 
some of the credit issues specific to smaller farmers and the 
ways that your Agency reaches out to them and can provide 
assistance? And what are you doing to continue to extend farm 
credit to dairy farmers that held on during the 2009 crisis?
    Mr. Dolcini. Sure. I will take that one first.
    The Dairy Industry Advisory Commission, which the Secretary 
convened last year, recently came up with its report. I think 
it listed 17 different recommendations. We are looking at that 
at USDA to determine how we can best fit those recommendations 
into the loan programs that we provide currently, or may want 
to provide in the future to the dairy industry. I think that we 
are working with Congress on that issue.
    The beginning farmer statistics, Mr. McGovern, are 
particularly impressive when you look back to 1995 when we only 
had about 3,500 folks who we consider beginning farmers in our 
portfolio. That number is now about 27,000. And that has come 
as a result of a lot of aggressive outreach in all of the 50 
states, including New England, to identify small farmers in 
particular, SDA borrowers, African Americans, women, Hispanic, 
Asian farmers, and really focus on new and different types of 
agriculture.
    As I mentioned earlier, I come from a state that grows 400 
different crops and has a very diverse farmer base. And we have 
worked with Hmong farmers, for example, in the Central Valley 
who might farm on an acre or less and still grow 20 or 30 
crops. And there are plenty of examples like that scattered 
around New England and the rest of the country, too. So, what 
we are doing in the states and what we are doing here in D.C. 
to push initiatives like that out are really making a big 
difference and a positive one.
    Mr. McGovern. I appreciate that. One final question.
    In your written testimony you begin by saying that farm 
economy strengthened in 2010. However, farm income, especially 
net farm income is very unevenly distributed. Can you expand on 
that a little bit and who are the winners and who are the 
losers?
    Mr. Dolcini. Well, as I mentioned in my remarks and I will 
defer to Mr. Beyerhelm for a deeper drill-down on the stats, 
but you know, there are haves and have-nots. And what we have 
seen in the dairy industry, as you mentioned----
    Mr. McGovern. Right.
    Mr. Dolcini.--poultry, hogs, some beginning farmers who 
have had trouble accessing commercial credit and are now coming 
into our programs are folks who are on the have-not side of the 
ledger. Large commodity program crops, the grain crops of the 
Midwest, are the folks who are enjoying historically higher 
prices. Rice is included in that as well. So it is kind of a 
regional breakdown depending on where you are. People who have 
accessed USDA programs historically and successfully are those 
that I think are enjoying the benefits of these high prices 
nowadays.
    Mr. McGovern. Thank you. Do you have anything to add?
    Mr. Beyerhelm. I think Mr. Dolcini covered it.
    Mr. McGovern. Okay. I appreciate it very much. Thank you.
    The Chairman. Do you want to use the balance of your time?
    Ms. Fudge. No, actually, after you I will go.
    Mr. Crawford [presiding.] Okay. I am pinch-hitting for the 
Chairman. I am Congressman Crawford from Arkansas and I have 
just a couple of quick questions for you, Mr. Dolcini.
    My district in Arkansas is home to large-scale rice 
production. Some of my constituents have come to me with 
complaints about the FSA Facility Loan Program. Beginning rice 
farmers and those having to replace their equipment have been 
asked to put up more collateral in order to secure loans for 
grain bins. The FSA is asking these farmers to leverage their 
land instead of their equipment when loans exceed a specific 
amount. Has credit become tighter for these types of loans as a 
result of insufficient resources and overall market conditions? 
Or has there been an increased amount of risk associated with 
lending to grain farmers?
    Mr. Dolcini. That is a good question, Mr. Crawford, and I 
appreciate the opportunity to get back with you with something 
I might leave out. But I would say that the Facility Storage 
Loan Program is a relatively new one. We are still trying to 
figure out, in some cases, the best ways to make it accessible 
to rice farmers like your constituents or others around the 
country. Cold storage is another area of application for that 
loan program. Obviously, we want good collateral for the loans 
that we make and whether it is land or machinery, or other 
things, I would like the opportunity to work with your staff to 
drill down a little further on that.
    Your Congressional district has about 26 USDA service 
centers, so I know we play an important part of the local 
economies in your CD and would like to come and visit with you 
and your staff to talk about these things in greater detail.
    Mr. Crawford. That sounds great. I would welcome that. Let 
me move on to something else.
    Are all the loans set aside for beginning and socially 
disadvantaged producers being used? Is the demand for these 
funds consistent with those set aside or are we preventing 
funds from getting to producers who could use the funds?
    Mr. Dolcini. They are not all being used. You know, we have 
expanded that portfolio--as I mentioned to Mr. McGovern--quite 
dramatically, but there are still funds for socially 
disadvantaged and beginning farmers that go unused.
    Chris, can you add to that?
    Mr. Beyerhelm. We maximize the use of those targets, but at 
certain times in the year, the targets do come off. So by the 
end of the year we are able to then move money to perhaps areas 
where loans are unfunded so at the end of the year we are able 
to make sure that we have utilized all of the funds that have 
been allotted.
    Mr. Dolcini. Our authorities are somewhat flexible in that 
regard so it is helpful to us.
    Mr. Crawford. Okay. Finally, after going through the CR 
that we will be voting on later today, I learned the FSA Ag 
Credit Insurance Fund will be cut by $433 million and the Farm 
Assistance Fund by $44 million. Is the FSA capitalized enough 
to absorb this kind of funding reduction and would it cause the 
FSA to change lending standards or create a backlog for 
potential borrowers?
    Mr. Dolcini. Well, sir, we have had a backlog for some 
months now as we have gone from one CR to another, as you 
probably know. We have been pretty aggressive in trying to 
focus funds that do come up in the CRs towards the operating 
loans. It is obviously spring-planting season and we want to be 
able to get those monies out into the countryside. We are still 
evaluating the continuing resolution that you will be 
considering later today, and we will have a more concrete 
answer early next week when we see those numbers. I think that 
we will be able to sustain our current activities around the 
nation.
    Mr. Crawford. Thank you. I want to thank the members of the 
panel. And unfortunately, due to a scheduling conflict, we are 
going to have to stand in recess briefly. And as soon as we can 
resume, we will get back with you. So we will stand in recess. 
Thank you.
    [Recess].
    Mr. Johnson [presiding.] I will now recall the Committee to 
order. This meeting of the Subcommittee will reconvene. I am 
Congressman Johnson and I am here in Mr. Fortenberry's required 
absence. And again, I welcome the first panel and I would call 
on Congresswoman Fudge for questions for this panel.
    Ms. Fudge. Thank you very much, Mr. Chairman.
    Let me begin with Mr. Strom. You mentioned in your 
testimony that the biggest loan growth in 2010 was to 
cooperatives and real estate mortgage loans. Is it possible to 
find out if this growth was in concentrated geographic areas? 
For example, did most of this growth happen in the West or the 
South or North? Could you respond, please?
    Mr. Strom. Ranking Member Fudge, the System's loan growth 
in 2010 would have equated to about $10 billion in loan growth. 
And, as you look at and analyze that, there are a couple of 
strong contributing factors: one, the rising values of land in 
the upper Midwest, especially where grain prices and the 
concentration of grain production or corn, soybeans, wheat, and 
because there has been strong income returns for farmers and 
ranchers in those areas last year and with higher prices now, 
that is obviously a contributing factor. So you saw increased 
loan growth somewhat in real estate mortgages there.
    I would say another strong contributing factor, though, to 
loan growth or that $10 billion in the System was probably 
driven by the rise in commodity prices because, again, the Farm 
Credit System in financing those cooperatives, many of those 
cooperatives are local grain elevators that are located across, 
again, the Midwest predominantly who enter into contractual 
arrangements with farmers and producers to contract grain 
prices. They lay off their risk by the use of hedging tools, 
which the Commodity Futures Trading Commission regulates. But 
as those farmers establish those positions and those prices 
move up, there is many times margin call requirements that have 
to be fulfilled. And as I mentioned in my opening statement, we 
saw just in the 7 days after the last Planting Intentions 
report and stocks report, demand for almost $2 billion. So if 
you look at last year when you had rising prices in the last 
half of last year, I am sure a good portion of that went to 
those types of margining requirements also.
    Ms. Fudge. Thank you very much.
    Dr. Henderson, you mentioned that bankers are beginning to 
ease collateral requirements. Is that only for lending 
institutions ``best customers,'' or are you seeing it for 
smaller producers as well where commodity prices are going up 
or going down?
    Dr. Henderson. Well, what we are hearing in terms of 
collateral requirements starting to ease is across the board as 
long as the borrower has a projected out income stream on 
returns and will be able to repay the loans. So we are seeing 
across the board for small, medium, and large, but it really 
depends upon what is their repayment capacity and their ability 
to repay that loan.
    Ms. Fudge. And when you say repayment capacity, tell me 
exactly what you are talking about.
    Dr. Henderson. In terms of incomes and expectations, your 
business plan, what is your projected profitability for your 
institution?
    Ms. Fudge. Is there a standard you have or do you just look 
at every instance separately?
    Dr. Henderson. Every borrower is on an individual basis 
because a lot of it depends upon an income, the projections in 
there, but it also depends upon the management capabilities of 
the borrower in themselves and how they run their business. A 
lot of times if you look at community banks, they do some 
relationship-based lending. And so a lot of times that might 
not be done on strict hard core numbers, but at the same point 
in time, they understand that there is a relationship there, 
they are building a business for future growth as well and so 
they do make some loans on that basis.
    Ms. Fudge. Okay. Thank you. And this is to any member of 
the panel. Any of you, if you could just respond if you are 
aware of any individual banks in the System that may be doing 
things to facilitate direct marketing of foods, like 
encouraging producers to establish infrastructure like farmers' 
markets. Obviously, that is a big thing where I come from. So 
any member of the panel is welcome or more than one.
    Mr. Strom. Let me just first respond. The Farm Credit 
System and its Young Beginning Small Farmer Program emphasizes 
it. It is a mission of the System to serve all eligible 
borrowers, creditworthy farmers and ranchers, even those that 
are producing on small plots for local food systems. We are 
currently under a project looking closely at that issue to make 
sure that those emerging markets and local food systems are 
being adequately served.
    Mr. Dolcini. I will take a crack at that, too, 
Congresswoman. You know, you didn't ask it directly but we do 
make loans in urban areas actually if there is a tie to 
agriculture. So for example, some of the loans that the 
California operation has made while I was out there involved 
small apiaries, for example, or rooftop gardens or things. If 
there is a nexus between agriculture, we are not confined, 
unlike some other USDA agencies, to simply rural areas. We can 
make those loans. And in many cases it starts out with youth 
loans and then they graduate into our Direct or Guaranteed 
Program. There was a couple of sisters in Fresno County that 
were raising pigs and they started out with a $5,000 youth loan 
and today they are borrowers at a much higher level. So we have 
really tried to develop those relationships.
    On the farmers' market side, you mentioned, ``Know Your 
Farmer, Know Your Food.'' We are really seeing around the 
country a much greater emphasis on locally grown, and customers 
and consumers who want to have relationships with their farmers 
and ranchers, who want to know where their food was produced.
    In my state again--I keep going back to my regional bias--
we have 300 active farmers' markets there. USDA has provided 
support to a number of them through various grant programs. And 
we have provided support to a number of participants through 
our loan program. So we are active on that front.
    Ms. Fudge. Thank you very much.
    Mr. Johnson. Well, if there are no other questions and 
there is just Congresswoman Fudge and I at this point, we will 
dismiss the first panel and we appreciate your testimony and 
appreciate your time.
    And if I could ask the second panel to come to the table. 
Briefly introduce yourselves and we will be more than happy to 
hear fairly brief comments. Thank you again.
    As the gentlemen are assembling, let me take the liberty, 
then, of introducing each of them. We have Mr. Michael Gerber, 
President and Chief Executive Officer, Federal Agricultural 
Mortgage Corporation here in D.C.; and Doug Stark, President 
and Chief Executive Office, Farm Credit Services of America on 
behalf of the Farm Credit System; Matthew Williams, Chairman 
and President, Gothenburg State Bank on behalf of the ABA in 
Gothenburg, Nebraska; and Matt Starline, Starline Organics, 
Athens, Ohio.
    So if you want to proceed in the order I introduced you, we 
would be more than happy to hear from you. Thanks.

 STATEMENT OF MICHAEL A. GERBER, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, FEDERAL AGRICULTURAL MORTGAGE CORPORATION (FARMER 
                     MAC), WASHINGTON, D.C.

    Mr. Gerber. Good morning, Mr. Chairman, Ranking Member 
Fudge, and Members of the Subcommittee. My name is Michael 
Gerber and I am the President and CEO of the Federal 
Agricultural Mortgage Corporation, also known as Farmer Mac. I 
greatly appreciate the opportunity to testify here today before 
you. Let me tell you a little bit about Farmer Mac and then 
give you a snapshot of credit conditions as we see them today 
in rural America.
    Farmer Mac provides a secondary market for agricultural 
real estate loans, rural utilities loans, and certain loans 
guaranteed by the U.S. Department of Agriculture. We support 
primary lenders represented by those seated next to me, as well 
as others by purchasing or guaranteeing the farm loans they 
originate. In doing so, we help ensure lending capacity and 
liquidity for those rural lenders and provide a source of 
funding for long-term credit at stable interest rates to rural 
America's communities, including farmers, ranchers, and other 
rural electric cooperatives.
    Since 1996, Farmer Mac has provided over $26 billion in 
credit to rural America. Currently, our portfolio stands at 
$12.2 billion of loans, guarantees, and commitments with loans 
in all 50 states. You may be interested to know that 65 percent 
of our portfolio of loans comes from family farms and 61 
percent of the loans by number meet the USDA definition of 
small farms.
    In 2008, Congress expanded our charter to purchase and 
guarantee loans made by cooperative lenders to the nation's 
rural utility cooperatives. We took that authorization very 
seriously and are proud to say that we have provided over $5 
billion of funding to that industry.
    Since our creation in 1988, we have maintained rigorous 
underwriting standards. Our commitment to these standards has 
enabled us to maintain a low delinquency rate and minimal 
charge-offs. In addition, as you know, we are regulated for 
safety and soundness by the Farm Credit Administration and also 
subject to regulation by the Securities and Exchange 
Commission. We cannot consider as qualified for our program a 
loan with a loan-to-value ratio in excess of 80 percent, and 
today our actual weighted average loan-to-value ratio for our 
farm mortgage portfolio is 55 percent.
    The financial crisis of 2008 was a challenging time for 
financial institutions and Farmer Mac was not immune. Yet we 
continued to provide lending programs to rural lenders even 
during those challenging times. Farmer Mac's losses during that 
period were not in our lending portfolio but rather our 
liquidity investments, which are required under regulation. 
When the difficulties arose, it was our partners, the Farm 
Credit System, the National Rural Utilities Cooperative Finance 
Corporation, and the commercial banks which provided the 
necessary capital to allow us time to resolve our issues. We 
took no taxpayer dollars or government support during that time 
and--with an additional capital raise in January of 2010--paid 
our partners back in full, including interest. Since that time, 
we have grown our capital to well above the required minimum 
level and continue our efforts to grow that capital base.
    Today, the ag economy is stable. While commodity prices on 
products such as grains and cotton have resulted in strong cash 
flow for those producers, commodities tied to the general 
economy have experienced some challenges. All ag producers, 
however, today face substantial increases in prices for farm 
inputs. Manufactured input costs such as petroleum and 
fertilizer are forecast to increase by almost 11 percent in 
2011 while input costs such as feed are forecast to increase by 
about six percent. These increases will add risk to the cash 
flow for farm operations and may result in additional need for 
operating lines of credit.
    Farmland has also increased in price over recent years in 
many parts of the country. This is largely due to generally 
favorable fundamental economic factors such as increasing 
demand for ag products, strong commodity prices, and low 
interest rates. Demand for farm loans remains steady. Volatile 
commodity prices, high input costs, and a slowly recovering 
economy will continue to impact the borrowing needs of 
producers.
    As a result of these conditions, we have seen solid growth 
at Farmer Mac. As banks, Farm Credit institutions, and rural 
utility lenders all work together to meet the demands of their 
customers, our healthy financial position and mission focus 
allow us to support rural America today and in an even bigger 
way in the future. Thank you again for this opportunity and we 
look forward to working with you in the future. And I would be 
happy to answer any questions you may have.
    [The prepared statement of Mr. Gerber follows:]

Prepared Statement of Michael A. Gerber, President and Chief Executive 
   Officer, Federal Agricultural Mortgage Corporation (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 
and rural utilities loans and certain loans guaranteed by the U.S. 
Department of Agriculture. This secondary market increases the 
availability of long-term credit at stable interest rates to America's 
rural communities, including farmers, ranchers and other rural 
residents, and rural utilities, 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.
    Farmer Mac was created by Congress in the aftermath of the 
agricultural credit crisis of the 1980s, when land values fell as 
interest rates rose sharply, credit policies tightened and there was a 
wave of farm foreclosures. Farmer Mac interacts with all categories of 
rural lenders (including banks, Farm Credit System institutions, 
insurance companies, and cooperative rural utilities lenders) 
throughout the country helping to ensure liquidity and lending capacity 
for lenders to rural America, every day. We serve as a bridge between 
institutional investment pools of capital and Main Street rural 
America.

Farmer Mac Programs
    Farmer Mac accomplishes its Congressional mission of providing 
liquidity and lending capacity to rural lenders by:

   purchasing eligible loans directly from lenders;

   providing advances against eligible loans;

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

   providing credit enhancements that enable lenders to meet 
        their customers' growing credit needs, transfer risk and 
        improve their capital position.

    Farmer Mac conducts these activities through three programs--Farmer 
Mac I, Farmer Mac II and Rural Utilities, offering loan products 
designed to increase the liquidity of agricultural real estate mortgage 
and other eligible loans and the lending capacity of financial 
institutions that originate them. As of December 31, 2010, the total 
outstanding volume in all of Farmer Mac's programs was $12.2 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 standards specified by Farmer Mac. 
Small farms account for 61% of Farmer Mac guarantees and commitments 
and the average outstanding loan balance for Farmer Mac I loans is 
$305,000.
    Under the Farmer Mac II program, Farmer Mac's wholly-owned 
subsidiary purchases the portions of loans guaranteed by the U.S. 
Department of Agriculture under the Consolidated Farm and Rural 
Development Act of 1972, as amended. Eligible USDA-guaranteed loans 
include Farm Service Agency Guaranteed Farm Ownership and Term 
Operating Loans and Rural Development Business and Industry and 
Community Facility Guaranteed Loans.
    In the Farm Bill of 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 borrowers who have 
received or are eligible to receive loans under the Rural 
Electrification Act of 1936. 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 
eligible rural utilities lenders to provide significant funding to 
date, with nearly $2.6 billion outstanding as of December 31, 2010. 
Farmer Mac has worked diligently to develop this line of business and 
the consumer owners of the nation's rural electric cooperatives have 
benefited from it.

Figure 1
Outstanding Loans and Guarantees



    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. As lenders seek Farmer Mac's products and services, favorable 
loan terms ultimately depend on Farmer Mac's access to the capital 
markets. Ultimately, this access to the capital market at favorable 
rates means that rural borrowers can borrow at better rates which 
reduces their costs and improves the chances of their success.

Strong Statute and Oversight
    When Congress created Farmer Mac in response to the needs arising 
from problems in the agricultural credit delivery system in the 1980s, 
the legislators added requirements for a strong and independent 
regulator. Unlike the other existing secondary market GSEs at the time, 
under the initial 1987 legislation (Title VIII of the Farm Credit Act 
of 1971 as amended), Farmer Mac was to be regulated by an independent 
regulator, the Farm Credit Administration, for safety and soundness. In 
1991, Congress required Farmer Mac to be regulated by a separate office 
(Office of Secondary Market Oversight) within the Farm Credit 
Administration. The statute creating Farmer Mac expressly required that 
qualified loans meet minimum credit and appraisal standards that are 
representative of sound loans to profitable farm businesses. Farmer 
Mac's statutory charter 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 more 
frequent reports when there are significant developments. These 
registration and reporting requirements 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 (as of December 31, 2010 the 
        weighted average original LTV for Farmer Mac I loans was 55%);

   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 debt 
obligations to the U.S. Treasury 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.

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 and 
the risk-based capital requirement. Over the past 2 years, Farmer Mac 
substantially improved its capital position to support the additional 
business demands in the agricultural production and rural utilities 
sectors. The chart below illustrates the growth in the level of excess 
capital, from $13.5 million at year end 2008 to $159.6 million at year 
end 2010.

Figure 2
Capital Levels



Current Credit Conditions
    The current economic environment is a generally stable one for the 
agricultural sector as a whole. The grains sector, for example, has 
seen commodity prices approach all-time highs, which has resulted in 
strong cash flows for these producers. Commodities such as timber and 
nursery/greenhouses have experienced some challenges tied to the 
general economy and most notably the dairy and meat complex have seen 
volatile prices for their commodities and cash flow challenges as a 
result of higher feed costs.
    All agricultural producers are facing substantial increases in the 
prices for farm inputs, as illustrated in the chart below. These 
increases will add risk to the cash flow for operations and may result 
in additional credit needs for operating lines. Manufactured inputs 
costs (such as petroleum and fertilizer) are forecast to increase by 
almost 11% in 2011, while farm origin input costs (such as feed) are 
forecast by about 6%. These cost increases for agricultural producers 
are significantly higher than overall inflation in the economy, as 
consensus forecasts for CPI inflation during 2011 are currently around 
2.7%.

Figure 3
Agricultural Input Costs




    Farmland has also experienced substantial increases in price over 
recent years. The chart below shows the average value per acre for U.S. 
cropland, which has been remarkably resilient despite the impacts of 
the recent recession. This is largely due to generally favorable 
fundamental economic factors such as increasing demand for agricultural 
products, strong prices for agricultural commodities, low leverage in 
the agricultural sector, and low interest rates.

Figure 4
U.S. Average Cropland Value




    The combination of the above mentioned factors combined with many 
financial institutions desiring to improve their balance sheets has 
resulted in an increase in demand for Farmer Mac products. Lenders 
continue to seek to offer their customers long-term interest rates at 
historically low levels, fund larger real estate loans, and manage 
borrower exposure levels. Farmer Mac has seen its outstanding loans and 
guarantees expand, and the numbers of new financial institutions, most 
of which are small rural lenders, applying to become approved Farmer 
Mac participants grew by 217 from 2008 to 2010. This has resulted in 
significant growth in our cash window products as new loan submissions 
have increased substantially over the past 2 years. Net volume of 
loans, guarantees and commitments grew in excess of 14% in 2010. The 
chart below shows producer-level loan submissions to Farmer Mac, and 
does not include portfolios securing Farmer Mac advances to lenders or 
portfolios credit enhancements to lenders.

Figure 5
Famer Mac Agricultural Production Loan Purchase Submissions



Commodity/Geographic Diversity
    It is Farmer Mac's policy to diversify its portfolio of loans held 
and loans underlying Farmer Mac I products, both geographically and by 
agricultural commodity/product. Farmer Mac directs its marketing 
efforts toward agricultural lenders throughout the nation to achieve 
commodity/product and geographic diversification in its exposure to 
credit risk. Farmer Mac evaluates its credit exposure in particular 
geographic regions and commodities/products, adjusted for the credit 
quality of the loans in those particular geographic regions or 
commodity/product groups relative to the total principal amount of all 
outstanding loans held and loans underlying Farmer Mac I products.

Figure 6
Agricultural Production Commodity Distribution



    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 do even more to fulfill our mission of bringing liquidity 
and the benefits of the secondary market to rural America.

    The Chairman [presiding.] Thank you, Mr. Gerber. First, let 
me apologize and thank you all for your patience, especially 
the Ranking Member. I do not have the supernatural gift of bi-
location and absolutely had to be at another hearing where my 
own bill was considered by the Committee, which got a little 
bit entangled, but good news, it did pass. So we will proceed 
on now with Mr. Doug Stark. Go ahead, Mr. Stark.

          STATEMENT OF DOUG STARK, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, FARM CREDIT SERVICES OF AMERICA, OMAHA, NE; 
                ON BEHALF OF FARM CREDIT SYSTEM

    Mr. Stark. Thank you, Mr. Chairman, Ranking Member Fudge. I 
appreciate the opportunity today to testify before the 
Committee on behalf of the Farm Credit System. I am Doug Stark, 
President and CEO of Farm Credit Services of America out of 
Omaha, Nebraska.
    As Mr. Strom reported earlier, the Farm Credit System 
remains financially strong. We ended the year 2010 with $175 
billion loan portfolio with a growth rate of about 6.4 percent 
overall for the System. As mentioned as well, the System's 
capital position has increased as well to almost 15 percent of 
total assets, or more than double the regulatory minimum.
    The institution I lead, Farm Credit Services of America is 
owned by more than 85,000 farmers that borrow from us in the 
States of Iowa, Nebraska, South Dakota, and Wyoming. Our 
customers appreciate being part of a cooperatively owned 
financial institution. Last year, we distributed $110 million 
in cash patronage to them and over the last several years, 
since 2004, have distributed $425 million of our earnings back 
to our customer-owners. Overall, the Farm Credit System 
distributed $733 million of cash patronage back to its 
customers last year.
    The cash grain industry represents almost half of our 
portfolio at 46 percent. While the industry is experiencing 
record commodity prices and strong profitability, we are seeing 
increasing risk in this segment. Volatility is at record 
levels. Commodity prices alone are double what they were 1 year 
ago.
    Farm inputs, as you heard already today, have increased 
considerably as well. Landlords are demanding more cash rent. 
The cost of seed, fertilizer, and fuel have all increased, and 
this drives the need for more capital to operate these farms.
    Complicating matters further, grain producers in and of 
themselves are finding the need to capitalize almost 3 years of 
production. First of all, they have to finance the carryover of 
their inventory from last year while they market it. They also 
are financing the ongoing investment in the crop being planted, 
and not too far down the road here, they will be asked to step 
up and make commitments and prepay such things as fertilizer, 
seed, and chemicals for the coming year. We estimate that the 
capital requirements for a typical Midwest corn producer are 
nearly four times what they were just a mere few years ago in 
2005.
    As these credit needs for farmers have increased, lenders 
have also had to continue to build capital so they can keep up 
with the increased loan demand and maintain capital levels 
necessary for a safe and sound financial institution. At Farm 
Credit Services of America, last year our loan volume increased 
13 percent, approximately $2 billion. This required us to build 
nearly $300 million in retained earnings to capitalize our 
institution so that we could safely meet the increasing needs 
of our farmers and ranchers in our local area.
    As you have heard, of great interest at local coffee shops 
and increasingly from the media as well are the recent price 
increases in agricultural real estate. The most notable 
increases have been in the upper Midwest, the major grain-
producing areas of the country. The System continues to finance 
land transaction in these volatile times by remaining focused 
on sound underwriting and by making credit decisions based on 
the repayment capacity of the individual borrower. Because we 
hold all our loans on our own balance sheet, we have a strong 
interest in seeing that our customers are successful.
    Given the volatility and risk present in agricultural real 
estate values, we have also implemented various adjustments to 
underwriting processes to reduce the risk on new real estate 
loans. These actions include such things as setting lower loan-
to-value limits, establishing maximum per-acre limits, stress-
testing a borrower's repayment capacity, shortening loan terms, 
or cross-collateralizing loans with property that has limited 
debt encumbrance. The most important thing we continue to do, 
though, is making our credit decisions based on the repayment 
capacity of the borrower, not just on collateral values.
    Another aspect that I wanted to make sure that we talked 
about was the programs we have in place for three special 
categories of borrowers: those that are young, those that are 
just beginning in farming, and those that are small farmers. 
Last year, the Farm Credit System made $7.3 billion in loans to 
young farmers and $10.3 billion to beginning farmers. Our loan 
officers work hard in understanding agricultural operation that 
these new farmers engage in, whether they are traditional farms 
or they are sustainable local food-related operations that 
involve value-added processing. We recognize that we must reach 
out to those who are innovators in farm enterprise as they move 
from being niche operators to tomorrow's Main Street 
businesses.
    In conclusion, the Farm Credit System is financially 
strong. It is economically vital and serving its mission for 
agriculture and rural America well. We make credit available to 
all segments of agriculture, including commercial producers, as 
well as young, beginning, and small farmers. We pay insurance 
premiums to protect our investors, pay the full cost of our 
regulator, and have no taxpayer backstop.
    Mr. Chairman, thanks for the opportunity to testify today 
on behalf of the System. I look forward to any questions that 
you or the Committee Members may have.
    [The prepared statement of Mr. Stark follows:]

    Prepared Statement of Doug Stark, President and Chief Executive 
Officer, Farm Credit Services of America, Omaha, NE; on Behalf of Farm 
                             Credit System

    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 Doug Stark, and I am President and CEO of Farm Credit Services 
of America. Farm Credit Services of America 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, discuss 
our response to increasing land values, and summarize what Farm Credit 
is doing 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 89 
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 the farmers, 
ranchers, agricultural cooperatives, rural utilities and others in 
rural America that borrow from them. Farm Credit institutions 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.
    Farm Credit Services of America is one of these 89 Farm Credit 
cooperatives. We are owned by more than 85,000 farmers that borrow from 
us in the states of Iowa, Nebraska, South Dakota, and Wyoming. As 
President and CEO, I report to a 16 member Board of Directors that 
consists of thirteen farmers elected by the members of the cooperative 
and three appointed directors. Two appointed directors are selected for 
their financial experience and the board has selected a third to ensure 
we had a young farmer represented on the board. In Farm Credit, 
employees are not allowed to serve as directors of our lending 
institutions.
    There are 84 independently operated Farm Credit associations like 
Farm Credit Services of America 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. The Board of Directors of each institution is responsible for 
establishing the 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 area that the institution serves.
    Each Farm Credit association obtains funds for their lending 
programs from one of the five wholesale Farm Credit banks. At Farm 
Credit Services of America, we get our funding from AgriBank Farm 
Credit Bank (headquartered in St. Paul, MN), which is cooperatively 
owned by 17 local associations. The five System banks own the Federal 
Farm Credit Banks Funding Corporation (located in Jersey City, NJ), 
which, as agent for the banks, markets to the investing public the 
System-wide 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 that are 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 
oversight by both House and Senate Agriculture Committees. 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.
    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 Farm Credit's safety and soundness regulator 
understands our unique mission and what it takes to be successful in 
accomplishing that mission. Changing our regulatory oversight 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
    All Farm Credit System institutions are focused on accomplishing 
the mission established for us by Congress: to serve agriculture and 
rural America. We take our Congressional charge seriously, and 
continuously review our performance to ensure that we are doing so 
efficiently and effectively. 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. Farm Credit's lending 
relationship with our member-borrowers is based on constructive credit 
over the long haul--we make loans, retain loans, and service loans. We 
do not enter and exit agricultural lending as farm profitability waxes 
and wanes. Our lending philosophy is to be conservative in good times 
so that we can be courageous in tough times.

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 Farm Credit Services of America 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.
    Since 2004, Farm Credit Services of America has distributed over 
$425 million dollars in earnings as patronage dividends to the member-
borrowers of our cooperative. This ``rural stimulus'' has allowed our 
customer-owners to re-invest in their own operations and to support 
their rural communities through local spending. We are proud to be able 
to directly and indirectly support all of these communities, regardless 
of size. In the past 5 years, the Farm Credit System in total has 
returned some $3.3 billion in cash and allocated an additional $1.2 
billion in equities to our customer-owners. That is money that stays in 
agriculture and rural America and helps Farm Credit's customers be 
successful.

Farm Credit's Financial Strength
    The Farm Credit System remains very strong financially. The 
System's combined net income was $3.5 billion for 2010, 23% higher than 
2009. Nationwide, Farm Credit ended 2010 with a loan portfolio of about 
$175 billion which was 6.4% larger than where we had ended 2009. Farm 
Credit's financial performance has allowed growth in combined capital 
to $33.3 billion as of year-end 2010. This represents the reserves 
available in the event of losses.
    The Farm Credit System's debt securities are insured by the Farm 
Credit System Insurance Corporation (FCSIC). Farm Credit institutions 
pay annual premiums of up to 20 basis points to assure that the FCSIC 
Insurance Fund is maintained at the secure base amount of 2% of 
outstanding System debt. The Insurance Fund held $3.031 billion as of 
year-end 2010. There is no Federal backstop for the Insurance Fund.

Current Conditions in Agriculture
    As you are well aware, starting in 2008 financial and credit 
markets were disrupted severely due to failures in the home mortgage 
sector. Despite this disruption, the Farm Credit System successfully 
continued to meet the credit demands of our customers. At Farm Credit 
Services of America, we continued to see increased demand for credit 
and I am pleased how we have been able to respond. With the strength of 
current commodity prices it is very important that we continue our 
prudent approach to making credit available. Our experience tells us 
that the extraordinary period of farm profitability we now enjoy will 
inevitably be replaced by a period of thinner margins.
    Let me give you some highlights regarding what we are seeing in 
Farm Credit Services of America's territory when it comes to the local 
farm economy, credit conditions, and how Farm Credit Services of 
America is responding to these unique circumstances.
    The cash grain industry represents 46 percent of our portfolio. 
While the industry is experiencing record commodity prices and strong 
profitability, we are seeing the risk increasing in this segment. 
Volatility is at record levels--commodity prices alone are double what 
they were 1 year ago. Not everyone benefits from these increases, 
particularly livestock producers.
    Farm input costs have continued to increase. Landlords are 
demanding more for cash rent, while seed, fertilizer and, of course, 
fuel also have increased notably. This has driven a considerable 
increase in the need for capital to operate these farms. In many 
situations, grain producers are finding that they need to capitalize 
and fund portions of 3 years of production: they must finance their 
investment in the carryover of last year's crop while it is being 
marketed; they have the ongoing investment in the present crop being 
planted and grown; and even before this year's crop has matured or been 
harvested, they are expected to make commitments and prepay such things 
as seed, fertilizer, and chemicals for the coming year. To effectively 
market their crops, many farmers also set up marketing loans to fund 
margin calls to cover their marketing program positions. We have 
estimated that the capital requirements for a typical Midwest corn 
producer to be nearly four times what it was in 2005.
    To be successful in these volatile times farmers need profitability 
so that they can increase their equity stake in their own operations. 
But as the credit needs of these farmers has continued to increase, 
lenders have had to continue to build capital so that they can keep up 
with increased loan demand while maintaining appropriate capital 
levels. At Farm Credit Services of America, our 2010 loan volume 
increased by 13 percent, or approximately $2 billion. This increase 
required us to build nearly $300 million in retained earnings to 
capitalize our institution so that we could safely meet the increased 
borrowing needs of farmers and ranchers. We have seen that some local 
financial institutions had neither the financial capacity nor the 
experienced personnel to deal with this rapidly changing and volatile 
environment. This becomes apparent when we see an increase in loan 
requests from producers whose need for credit has outgrown their local 
lender's financial capacity, or who are in need of an immediate loan 
because volatile prices lead to calls for immediate increased margins 
in their hedge accounts.
    Of great interest at local coffee shops, increasingly from the 
media, and from financial regulators are the recent price increases in 
agricultural real estate. The most notable increases have been in the 
upper Midwest--the major grain producing areas of the country. While 
there are many reasons for increased farmland values including low 
interest rates and higher commodity prices, the volatility in 
agricultural commodity prices and in land values has heightened the 
caution with which Farm Credit System institutions approach the 
marketplace. The System continues to finance land transactions in these 
volatile times by remaining focused on sound underwriting and making 
credit decisions based on the repayment capacity of the individual 
borrower. Because we hold virtually all of our loans on our own balance 
sheet, we have a strong interest in seeing that our customers are 
successful and prudent in their own risk-taking, including the purchase 
and financing of farm real estate.
    Given the volatility and risk in the present agricultural real 
estate values, most Farm Credit System institutions have implemented 
adjustments to their underwriting processes to reduce the risk on new 
real estate loans. Some of these actions have included setting lower 
loan to value limits, establishing maximum loan per acre limits, 
strengthening loan analysis by stress testing a borrower's repayment 
capacity, shortening loan terms, or cross-collateralizing loans with 
property that has limited debt encumbrance. Appraisals are also 
completed by certified and licensed appraisers who are totally 
independent of the credit decision process. These adjustments result in 
terms that are significantly more conservative than allowed by law and 
regulation, designed to maintain safety and soundness.
    Another way Farm Credit Services of America was able to extend to 
our customers our institutional sense of prudent risk-taking was 
through our Loan Conversion program. Most people don't expect their 
lender to contact them about reducing the rate of interest on their 
loan. This past year, more than 15,000 of our farm and ranch customers 
have benefited from the lowering of their long term fixed interest 
rate. These actions resulted in savings to customers of $44 million in 
the first year alone. The conversion of longer term, fixed rate loans 
to lower cost, fixed rates resulted not just in immediate savings to 
the borrower, but continued interest savings for the life of the 
converted loans. We know that our long-standing focus on what's best 
for our customers has improved the financial strength of both the 
borrowers and our Farm Credit cooperative.
    The balance of our portfolio is to various segments in the 
livestock industry, most notably cattle, followed by swine, and then 
dairy. These industries have, for the most part, been adversely 
impacted by an increase in feed prices since 2008. For a good share of 
2008 and 2009, we saw losses to producers in these segments, especially 
swine and dairy. Because of our focus on agriculture, we have in place 
a skilled lending staff that is backed by our strong capital position. 
This dual strength allowed us to restructure loan terms and repayment 
plans for a significant portion of the producers in these agricultural 
operations that feed grains.

A Commitment to Serving Young, Beginning and Small Farmers
    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. Our mission to serve the 
needs of young, beginning, and small farmers leads us to identify, 
understand, and finance the farm operations that these new 
agriculturalists engage in, including such operations as organic, 
sustainable, local food-related, direct-to-retail, or other emerging 
business models in addition to traditional agricultural operations. We 
recognize that we must reach out to those who are innovators in farm 
enterprises in order to follow today's niche operation as it becomes 
tomorrow's mainstream business.
    Farm Credit Services of America has an exceptional commitment to 
our Young, Beginning, and Small farmer program that starts in our board 
room. Several years ago, our board took the unusual step of creating an 
appointed board member position to be filled by an outstanding young 
farmer so that we would include the voice of the next generation in all 
of the board's deliberations.
    Farm Credit Services of America's Young, Beginning, and Small 
farmer program has many facets to serve the unique needs of borrowers 
in our area. Our program offers lower interest rates, while maintaining 
our credit standards. In fact, as of year-end, 2010, nearly 17% of our 
loan portfolio consists of loans to young and beginning borrowers in 
our territory. In addition, we are dedicated to training and education 
programs for young, beginning, and small farmers in our territory 
through our own classes, seminars, and institutes as well as supporting 
such programs provided by others. 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.
    Nationwide, the Farm Credit System's dedication to our mission is 
demonstrated by the aggregate amount of new loans made in the year 2010 
to Young, Beginning, and Small farmers by all Farm Credit associations. 
New loans in 2010 to young farmers totaled $7.3 billion, in the same 
period new loans to beginning farmers added up to $10.3 billion, and to 
small farmers was $13.1 billion. It is important to note that farmers 
may be included in multiple categories since they are included in each 
category for which they meet the defined characteristic; Young--35 or 
younger; Beginning--10 years or fewer of farming experience; Small--
less than $250,000 in annual gross farm sales.
    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 2010. They 
indicated that the 1,552 banks that met their definition of a ``farm 
bank'' had some $33.9 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 84 associations of the Farm Credit System had 
slightly more than $143.7 billion of similar sized loans outstanding at 
the end of 2010.

USDA Programs Help Farm Credit Serve Agriculture
    Additionally, at Farm Credit Services of America we often make use 
of USDA's Farm Service Agency (FSA) loan guarantees to support our 
lending, particularly to young and beginning farmers and ranchers. We 
are pleased that our experience and excellent credit management 
practices have allowed us to be recognized as an FSA preferred lender.
    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. These 
FSA guarantees, along with our Board's acute focus on serving young and 
beginning farmers and ranchers has allowed to create a special program 
we call AgStart, which assists young producers who cannot meet normal 
underwriting standards. In this special program we are now serving 
1,340 young producers that fit into this category.
    Another very important USDA program which benefits our farmer-
members is the Risk Management Agency's (RMA) crop insurance program. 
Producers need protection against weather related disasters and price 
volatility and today's crop insurance represents a terrific risk 
mitigation tool for them. As a lender we believe strongly that crop 
insurance is essential for producers but also is essential for lenders 
to help protect our investments in loans. At Farm Credit Services of 
America we are an active participant in the crop insurance program. 
Last year, we paid out over $124 million in claims. I can't emphasize 
enough how important crop insurance is as the primary risk management 
tool that allows our member-borrowers to make the huge investments 
required to plant and grow annual crops.

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 $15 billion at the end of 2010 from $14.6 billion at the 
end of 2009.
    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 billion 
at year end 2010.

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. We witnessed firsthand how disruptions in 
the nation's financial markets can directly impact not only our cost of 
funds but also the term of the funds that are available.
    During the recent crisis, commercial banks were extended a direct 
Federal guarantee on their debt issuance and access to Federal capital 
support. The housing GSEs gained enhanced support from the Treasury to 
facilitate their access to the debt markets. In the case of Farm 
Credit, we have no such guarantee, we were provided no access to 
capital support, we have no explicit borrowing line with the Treasury, 
and no Federal backstop for the Farm Credit System 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, 
the 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.

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. 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 that our farmer-owners hold 
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 high farm profitability and increasing 
farmland values. But it should not surprise you that I am reporting on 
our prudence in lending practices, credit management, and service to 
our 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. We are aware that 
all of agriculture will inevitably face challenging economic times that 
may test the resolve of many. We urge that you assure adequate 
guaranteed loan programs through USDA FSA and Rural Development, along 
with the funding resources and flexibility for a strong crop insurance 
program.
    Mr. Chairman, thank you again for the opportunity to testify today 
on behalf of Farm Credit Services of America Farm Credit and the Farm 
Credit System. I will be pleased to respond to your questions.

    The Chairman. Thank you, Mr. Stark, for your testimony. Mr. 
Williams?

   STATEMENT OF MATTHEW H. WILLIAMS, CHAIRMAN AND PRESIDENT, 
    GOTHENBURG STATE BANK; VICE CHAIRMAN, AMERICAN BANKERS 
                  ASSOCIATION, GOTHENBURG, NE

    Mr. Williams. Chairman Fortenberry, Ranking Member Fudge, 
and Members of the Subcommittee, I am Matt Williams, President 
of the Gothenburg State Bank in Gothenburg, Nebraska, a family-
owned bank, and I am a fourth-generation banker. I also serve 
as the Vice Chairman of the American Bankers Association.
    More farmers and ranchers borrow money from banks than any 
other source. Over 5,700 banks, nearly 75 percent of all the 
banks in the United States, reported ag loans on their books at 
the end of 2010 with a total outstanding portfolio of $127 
billion. Since the financial crisis, the banking industry has 
stepped up and increased farm and ranch lending from year end 
2007 to year end 2010 by over $13 billion.
    In the past 6 months, we have heard a great deal about the 
increase in farmland prices. Is this the next asset bubble? 
Recently, I was invited to speak on behalf of bankers at an 
FDIC symposium on this issue. In most of Nebraska, ag land 
prices have increased. Agriculture has done well with farmers 
responding to market conditions by increasing their land 
holdings. As a result, land that has gone on the market has 
generated significant interest and prices have risen 
accordingly. Demand for credit, though, to finance these 
purchases has been relatively flat. In fact, many of the sales 
are paid for with cash.
    For over 40 years, the banking industry and the USDA have 
worked together to provide access to credit to more than 55,000 
farmers and ranchers who borrow money from banks through the 
Guaranteed Farm Programs offered through the USDA's Farm 
Service Agency. As you have heard today, Congress inserted term 
limits into these programs that prohibit farmers and ranchers 
after a period of years. While the goal of term limits is 
understandable, term limits hurt those farmers and ranchers who 
can least afford a financial setback. For this reason, the 
American Bankers Association has endorsed H.R. 1422, introduced 
by Representative Leonard Boswell. We urge you to pass H.R. 
1422.
    Credit is certainly available to agriculture. In fact, the 
lending market is very competitive. I compete with many 
financial service providers for loans. Over the years, farm 
credit is one of our major competitors. I face this taxpayer-
backed tax-advantaged Federal Farm Credit System on a daily 
basis. Today, farm credit is a large and complex financial 
service business with $229 billion in assets. It earned $3.495 
billion in 2010 and it enjoyed a combined local, state, and 
Federal tax rate in 2010 of just 5.9 percent. Farm Credit is a 
GSE and it presents the same kind of potential liability to the 
American taxpayer as Fannie Mae and Freddie Mac. Congress will 
soon reform the housing GSEs. I urge this Committee to take a 
look at the Farm Credit System also when you are reviewing 
GSEs.
    I would also like to bring to your attention the Investment 
Bond Pilot Program, a program offered and created by the Farm 
Credit Administration, the regulator of the Farm Credit System. 
To finance a project under this program, an FCS lender helps a 
borrower issue a bond and Farm Credit purchases this bond as an 
investment. In this way, Farm Credit is able to characterize 
otherwise prohibited commercial lending activity as an 
investment instead of a loan. This pilot program has been 
running nationwide since 2005. A nationwide program that allows 
entities to access Farm Credit funding that are prohibited from 
borrowing is a regulatory overreach and should be stopped.
    In conclusion, let me emphasize two things. We know our 
farmers and banks have an adequate supply of credit available 
for these farmers. Based on how we finance ag land and how Farm 
Credit, by the way, finances ag land, a decrease in farmland 
values will not cause a significant decrease in loan quality.
    We would ask you to please not allow excess regulation such 
as Dodd-Frank, unfair competition, reduce our ability to 
continue serving the agriculture needs of our communities and 
our country. Thank you for this opportunity to address the 
Subcommittee.
    [The prepared statement of Mr. Williams follows:]

   Prepared Statement of Matthew H. Williams, Chairman and President,
  Gothenburg State Bank; Vice Chairman, American Bankers Association, 
                             Gothenburg, NE

    Chairman Fortenberry, Ranking Member Fudge, and Members of the 
Subcommittee, my name is Matt Williams, and I am the Chairman and 
President of Gothenburg State Bank in Gothenburg, Nebraska. My great 
grandfather founded the bank in 1902 and our family has operated it 
since then. My grandfather served as President of the bank and my 
father followed him in the job. Since it was founded, Gothenburg State 
Bank and my family have survived many economic catastrophes including 
the farm crisis of the 1920s, the Great Depression, the farm crisis of 
the 1980s, and the Great Recession of 2008/2009. We plan to continue to 
serve the citizens of central Nebraska for the next 100 years or more. 
Our bank's tag line is ``Still Pioneering'' and it is a core value of 
our company. Today, Gothenburg State Bank has two office locations, 
assets of $115 million, and employs 27 people. Our loans total nearly 
$80 million with about 75% of our portfolio connected to agriculture in 
a direct or indirect way.
    I also serve as the Vice Chairman of the American Bankers 
Association (ABA), and I appreciate the opportunity to present the 
views of the ABA on credit conditions in rural America. The ABA 
represents banks of all sizes and charters and is the voice of the 
nation's $13 trillion banking industry and its two million employees. 
ABA is uniquely qualified to comment on agricultural credit issues as 
banks have provided credit to agriculture since the founding of our 
country. Over 5,700 banks--nearly 75% of all banks--reported 
agricultural loans on their books at year end 2010 with a total 
outstanding portfolio of over $127 billion. More farmers and ranchers 
receive credit from the banking industry than from any other source. In 
addition to our commitment to farmers and ranchers, thousands of farm 
dependent businesses--food processors, retailers, transportation 
companies, storage facilities, manufacturers, etc.--receive financing 
from the banking industry as well.
    The topic of today's hearing is extremely important and timely. Our 
nation is 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 farms, businesses and individuals. Banks in every state in the 
country are actively looking for good farm and ranch loans. Since the 
financial crisis, the banking industry stepped up and increased their 
share of farm and ranch lending from year end 2007 to year end 2010 by 
over $13 billion. During the same period farmers and ranchers have 
reduced their total indebtedness by nearly $6 billion.

The Impact of Dodd-Frank on the Banking Industry
    Our communities and our country cannot reach their full potential 
without the presence of a local bank--a bank that understands the 
financial and credit needs of its citizens, farmers, businesses, and 
government. I am concerned that this model may be in jeopardy given the 
massive weight of new rules and regulations that will result from the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(Dodd-Frank). The vast majority of banks in our country had nothing to 
do with the events that led to the financial crisis and are as much 
victims of the devastation as the rest of the economy. While most banks 
are far removed from Wall Street and banks on Main Street are the ones 
that are paying the price for the mess that others created.
    Banks work every day to make credit and financial services 
available to their customers. Those efforts, however, are made more 
difficult by regulatory costs and second-guessing by bank examiners. 
Combined with hundreds of new regulations expected from the Dodd-Frank 
Act, these pressures are slowly but surely strangling our traditional 
community banks, handicapping our ability to meet the credit needs of 
our communities.
    Managing this mountain of regulation will be a significant 
challenge for a bank of any size. The median-sized bank has only 37 
employees--for them, and for banks like mine that have even fewer 
employees, this burden will be overwhelming. Historically, the cost of 
regulatory compliance as a share of operating expenses is 2\1/2\ times 
greater for small banks than for large banks. Moreover, it creates more 
pressure to hire additional compliance staff, not front line customer 
service staff. It means more money spent on outside lawyers to manage 
the risk of compliance errors and greater risk of litigation. It means 
more money to hire consulting firms to assist with the implementation 
of all of the changes, and more money hiring outside auditors to make 
sure there are no compliance errors. It means more risk of regulatory 
scrutiny, which can include penalties and fines. All of these 
expenditures take away precious resources that could be better used 
serving the bank's community.
    The consequences of these new burdens from the government are real. 
New regulatory pressures will have a negative impact on the number of 
banks that survive in our country. Costs are rising, access to 
additional capital is limited, and revenue sources have been severely 
cut. It means that fewer loans will get made. It means a weaker 
economy. It means slower job growth. With regulatory over-reaction, new 
laws, and uncertainty about government's role in the day-to-day 
business of banking, meeting the financial needs of our local community 
seems to have become secondary, and yet our success in Gothenburg 
demands that we focus on our customers and our community.

The Impact of Dodd-Frank on Agricultural Credit
    The increased regulatory burden brought about by the passage of 
Dodd-Frank that I have spoken about will impact agricultural credit. 
Dodd-Frank will require that we supply the regulators with additional 
data about our lending activities to farmers and ranchers. Dodd-Frank 
may require us to justify the ``suitability'' of the credit products we 
make available to our farm and ranch customers.
    Of particular concern is the additional regulatory and compliance 
burden expected once the Bureau of Consumer Financial Protection (CFPB) 
becomes fully operational. This new bureaucracy--expected to hire over 
1,200 new staff--will certainly impose new obligations on community 
banks--banks that had nothing to do with the financial crisis and 
already have a long history of serving farmers, ranchers and all 
consumers fairly in a competitive environment.
    Small banks like mine are not exempt from the CFPB. All banks--
large and small--will be required to comply with rules and regulations 
set by the CFPB, including rules that identify what the CFPB considers 
to be ``unfair, deceptive, or abusive.'' Moreover, the CFPB can require 
community banks to submit whatever information it decides it ``needs.'' 
There are also many other new regulatory burdens flowing from the Dodd-
Frank Act empowerment of the CFPB which will add considerable 
compliance costs to every bank's bottom line. Increased compliance 
costs increase the cost of borrowing money for our customers; this will 
not help us revive our local and national economy.
    In response to what we know lies ahead, ABA and our members have 
been telling farmers and ranchers that they have to improve their 
business practices including their marketing plans, their capital 
expenditure planning, and their risk management practices to name a 
few. Overall, many producers have responded positively to these 
messages, and they have stepped up their game to meet the challenges of 
this period. Proven cash flow, and being able to demonstrate the 
ability to repay a loan, continues to be a bedrock principle of 
agricultural lending by banks. If a producer cannot show adequate 
repayment ability, it will be hard to obtain credit. Again, the 
regulators have made it very clear to the bankers that they expect 
bankers to stick to the basics and that demand is being followed by the 
bankers I know.

Agricultural Real Estate Values Have Increased Due to Farm Prosperity, 
        Not Leveraged Speculation
    In the past 6 months we have all heard and read a great deal about 
the increase in farmland prices. The question most asked by the press, 
and increasingly the banking regulators is, ``Are we looking at another 
bubble?'' A little more than a month ago the FDIC held a symposium on 
this issue. In early December the FDIC issued guidance ( the Office of 
the Comptroller of the Currency issued similar guidance to all western 
banks) to all FDIC insured banks warning them about the dangers of 
asset bubbles and also warning agricultural banks--those banks with a 
concentration in agricultural lending--like mine, to consider the 
dangers of credit concentration. We appreciate the guidance of the 
regulatory community.
    I was the only banker invited to share my views at the FDIC 
Symposium. While it is clear in some areas of the country--including 
most of Nebraska--farmland prices have escalated, there is no evidence 
that this is being fueled by credit. Farmers are responding to market 
signals, and those signals are extremely positive. Farmers and ranchers 
have accumulated cash thanks to a healthy agricultural economy, and 
they have a positive outlook. As a result of these factors, what land 
that has gone on the market (in my area, very few parcels have come up 
for sale) has generated intense interest, and as a result, prices have 
risen. At the same time, demand for credit to finance these new land 
acquisitions has been relatively flat. A recent survey of bankers in 
three Federal Reserve Districts supports this point. In all three 
districts, the overwhelming majority of bankers reported that farm and 
ranch loan demand in the third quarter of 2010 was essentially the same 
as it was in the third quarter of 2009. In the districts that reported 
an increase in demand, the increase was very modest. This data 
strengthens my belief that the increase in farmland sales values that 
we have seen over the past few years has largely been the result of 
farmer prosperity, not excessive lending.
    I made it clear to the participants at the FDIC Symposium last 
month that managing agricultural loan risk is what we do at Gothenburg 
State Bank, and what bankers at banks all over the country do. To give 
you a sense of our posture towards farm real estate lending, please 
consider some of the standards at our bank:

   We have very conservative underwriting standards for real 
        estate lending and these have not changed for a decade or more.

   Repayment-ability is the primary driver of our 
        underwriting--if the request does not cash flow, we do not do 
        it--regardless of the collateral position of the customer.

   We only lend a maximum of 60% of the appraised value of the 
        land (loan-to-value).

   In our current farmland loan portfolio, our average loan-to-
        value is about 40%

   Even though land values have increased to $5,000 per acre in 
        our service area, we use $3,500 per acre for credit analysis 
        purposes when calculating net worth position, debt to assets, 
        and other key ratios.

   Technology is available that allows us to stress test our 
        farm loan portfolio to see what would happen if real estate 
        values dropped by as much as 40%.

   I cannot overstate the value of the technology that my bank 
        and that most banks have invested in that allows us to do 
        credit analysis and run ``what if'' scenarios almost 
        instantaneously. In our bank exercise, a 40% drop in real 
        estate values did reduce the balance sheet net worth of our 
        customers, but it had very little or no effect on the quality 
        of our loan portfolio. Our bank's risk to the FDIC insurance 
        fund would not change.

    I believe the concerns about what is happening in farmland values 
are overstated at this time. Our farm and ranch customers, and the farm 
and ranch customers of many other banks, have enormous skin in the game 
in their operations. Many are paying cash for real estate. Leverage 
levels are at or near a historic low--a recent paper published by the 
Kansas City Federal Reserve indicates that only 30% of all farmers and 
ranchers had any debt in 2008 (the most recent data available). 
Prosperity is driving the demand for farmland and retained earnings are 
providing the cash to purchase it.

Recommendation to Congress to Help Farmers and Ranchers Access Credit 
        from Banks and Other Private Sector Lenders
    I have spoken at length about the prosperity that many farmers and 
ranchers have enjoyed over the past 10 years. However, for many 
reasons, that prosperity has not benefited all sectors of the 
agricultural economy. For over forty years the banking industry and the 
USDA have worked cooperatively to provide access to credit to those 
farmers and ranchers who have some deficiency in their operation that 
makes them ineligible for bank credit. Many of these farmers and 
ranchers who borrow are young and are still acquiring the asset base 
they need to be able to qualify for bank loans. Most of these farmers 
operate small farms because the average loan is $187,000 which is not a 
large farm loan given the capital that modern agriculture demands. 
Despite the challenges these young and small farmers and ranchers face, 
they are conscientious customers who handle their credit obligations 
very well.
    I am referring to the farmers and ranchers who borrow money from 
banks through the guaranteed farm loan programs offered by the USDA's 
Farm Service Agency (FSA). Since it is a credit guaranty, banks like 
mine underwrite and fund the loan and the USDA provides the bank with a 
guaranty against loss on the loan. At the end of FY10, over 55,000 
farmers and ranchers accessed credit through this program. Banks are 
not the only participants as Farm Credit System lenders, credit unions, 
state agricultural credit programs, and others have worked with USDA to 
provide credit to these farmers and ranchers.
    The program has been a resounding success. Each year a limited 
appropriation is leveraged into a significant program that, in many 
cases, is the only way these farmers and ranchers can access credit. At 
the end of FY10, the portfolio of guaranteed farm and ranch loans 
exceeded $10 billion, or about 4% of the total agricultural credit 
market. Even though these customers have some financial statement or 
operating deficiency, they are very conscientious borrowers. FY10 year-
end loan delinquencies were 1.69% and losses in the program in FY10 
were .581% of outstanding loans. From a delinquency and loan loss 
perspective, this is a very sound portfolio of loans.
    In the early 1990s, Congress inserted ``term limits'' into the 
program that only allowed farmers and ranchers a limited period of 
eligibility for the program. While the goal of term limits was 
understandable, it has created uncertainty for many farmers and 
ranchers. I should also note that I do not know of any comparable 
eligibility limitation in other Federal loan guaranty programs. Given 
the volatile nature of the agricultural economy, the practical 
application of FSA term limits has caused hardship to those farmers and 
ranchers who can least weather a financial setback.
    For this reason, the American Bankers Association (and many farm 
organizations) has endorsed H.R. 1422 introduced by Representative 
Leonard Boswell, and cosponsored by Representative Bruce Braley, 
Representative G.K. Butterfield, Representative Tom Latham, and 
Representative David Loebsack. Congressman Boswell's bill would extend 
the deadline on FSA guaranteed loan term limits to December 2013. We 
urge this Committee to support and pass H.R. 1422.

The Banking Industry is Concerned About the Risk a Government Sponsored 
        Enterprise Creates in the Rural Economy
    I mentioned earlier in my testimony that the market for 
agricultural credit is very competitive. I compete with several other 
banks in my service area, finance companies from all of the major farm 
equipment manufacturers, several international banks, credit unions, 
life insurance companies, and finance companies owned by seed and other 
supply companies to name a few. However, the most troublesome 
competitor I face is the taxpayer-backed and tax-advantaged Federal 
Farm Credit System (FCS). The FCS was chartered by Congress in 1916 as 
a borrower-owned cooperative farm lender at a time when banks did not 
have the legal authority to make farm real estate loans. Over the 
ensuing 95 years the FCS has received numerous charter enhancements, 
and it continues to pursue increased authorities from Congress and from 
its regulator.
    Today the FCS is a large and complex financial services business 
with $229 billion in assets. It is profitable--it earned $3.495 billion 
in net income in 2010. It is tax-advantaged and enjoyed a combined 
local, state, and Federal tax rate in 2010 of 5.9%. In spite of their 
size, profitability, and tax advantages the Farm Credit System presents 
the same kind of potential liability to the American taxpayer as Fannie 
Mae and Freddie Mac. As a Government Sponsored Enterprise (GSE) like 
Fannie Mae and Freddie Mac, the American taxpayer is the ultimate back 
stop should the Farm Credit System develop financial problems. The 
potential liability that GSEs pose to taxpayers became very real in 
2008 when the Federal Government seized Fannie Mae and Freddie Mac. An 
earlier near collapse of the Federal Farm Credit System in the late 
1980s as a result of their irresponsible farm lending foreshadowed what 
taxpayers would confront more than twenty years later with the housing 
GSEs. Congress will take up the question about what to do with the 
housing GSEs in an effort to restructure home mortgage finance in the 
United States. I urge this Committee to include the Federal Farm Credit 
System in those discussions as there is no difference between the risk 
the housing GSEs pose to our economy and the risk the Farm Credit 
System poses to our rural economy.
    As an example of the risk the Farm Credit System poses to the rural 
economy, I would like to bring to your attention the investment bond 
pilot program, a program created by the Farm Credit Administration 
(FCA), the regulator of the Farm Credit System. Under the ``pilot'' 
program FCS institutions are authorized to finance almost any kind of 
commercial and municipal activity in rural America. Often called 
``mission-related investments'', ``Rural Investment Bonds'', or 
``Agriculture and Rural Community (ARC) bonds'', this program allows 
FCS to finance ``independent or assisted living facilities, waste water 
or water treatment facilities, rural business facilities, rural 
drainage district projects, fire station facilities or major equipment 
purchases, municipal, township or county facilities, health care 
facilities such as outpatient surgery centers, physician and dental 
facilities, multi-family housing, community buildings, processing or 
manufacturing facilities, hotel/convention facilities, industrial 
development parks, agribusiness facilities or major equipment 
purchases'' (Source: Badgerland Financial website March, 2011. 
Badgerland Financial is an FCS lender based in Wisconsin).
    To finance a project under this program, an FCS lender helps the 
borrower issue a ``bond'' which is then purchased by FCS as an 
``investment''. In this way, FCS is able to characterize otherwise 
prohibited commercial lending activity as an investment instead of a 
loan. The pilot program has been running since 2005. The Farm Credit 
Administration has been considering a proposed rule to expand and 
permanently authorize the program for several years. Thousands of 
bankers and others wrote comment letters opposing the program, and yet 
the FCA continues to allow the pilot project to operate, and to 
continue to acquire assets.
    The pilot program and proposed rule allows unrestricted commercial 
financing that redirects the FCS away from its mission to serve family 
farmers and ranchers. Hotels, dental clinics, and other financing 
projects already undertaken have moved the FCS directly into commercial 
finance. The FCS was specifically chartered by Congress to leverage its 
special GSE privileges in support of farmers, ranchers, and farmer-
owned cooperatives, not commercial businesses. The diversion of the 
capital owned by farmers and ranchers into commercial projects that 
have no direct connection to the farmer-owners of the FCS puts farmer-
owned capital in jeopardy. Interestingly, since these are 
``investments'' the bond issuers (the borrowers) are not eligible to 
participate in the benefits of cooperative ownership so they do not 
receive patronage dividends. Congress should be additionally concerned 
that the FCS is quickly devolving into a two tiered system of 
``owners'' who share the benefits of cooperative ownership, and those 
who do not receive any benefits.
    If Congress intended the FCS to finance hotels, dental clinics, and 
general manufacturing, it would have provided that authority to the 
FCS. The FCA's attempt to broadly reinterpret the investment portion of 
the statute as a way to expand lending oversteps its authority and 
undermines the express intent of Congress. It is a gross example of 
regulatory over-reach. A pilot project by definition is conducted in a 
limited area for a limited time. FCA has allowed the ``Investments in 
Rural America'' pilot program to operate since 2005. A nationwide 
program operating indefinitely is clearly not a pilot program and 
should be terminated.
    We urge this Committee to stop the Farm Credit System's investment 
bond pilot project.

The Banking Industry is Well Positioned to Meet Their Customer's Needs
    For the past decade, U.S. agriculture has enjoyed one of the 
longest periods of financial prosperity in history. Financially, 
American agriculture has never been stronger. In 2010, many American 
farmers and ranchers enjoyed their most profitable year ever, and USDA 
projects that 2011 will exceed 2010. The balance sheet for U.S. 
agriculture at the end of 2010 (according to USDA) is the strongest it 
has ever been with a debt to asset ratio of less than ten percent. USDA 
projected that at year end 2010 farm and ranch net worth was in excess 
of $2 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 additional equipment and 
additional land. As a result, farmers and ranchers today 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.
    When the agricultural economy collapsed in the middle 1980s, the 
banking industry worked with farmers and ranchers to restructure their 
businesses and to rebuild the agricultural economy. Since that time 
banks have provided the majority of agricultural credit to farmers and 
ranchers. While other lenders shrank their portfolios of agricultural 
loans or exited the business altogether, banks expanded agricultural 
lending, just as they did following the economic crisis of 2008/2009. 
Bankers saw opportunity where others did not.
    In 1902 my great grandfather saw great possibilities in Gothenburg, 
Nebraska. We are still pioneering in Gothenburg. Do not allow the 
opportunities for banks like mine working with our farm, ranch and 
rural customers to become overshadowed by excessive regulation and 
unfair competition from government backed entities.
    Thank you for the opportunity to express the views of the American 
Bankers Association. I would be happy to answer any questions that you 
may have.

    The Chairman. Thank you, Mr. Williams. We appreciate your 
testimony. Mr. Starline?

 STATEMENT OF MATTHEW STARLINE, OWNER, STARLINE ORGANICS, LLC; 
 MEMBER, OHIO ECOLOGICAL FOOD AND FARM ASSOCIATION, ATHENS, OH

    Mr. Starline. First, I would like to thank the Subcommittee 
for giving me the opportunity to testify this morning. My name 
is Matthew Starline, and I am a beginning farmer from Athens, 
Ohio. My farm is a 50 acre diversified farm located in the 
foothills of Appalachia. We grow a variety of vegetables, 
fruits, mushrooms, herbs, and grains, also employing the full 
circle of farming with lamb, pork, and beef. I am a member of 
the Ohio Ecological Food and Farming Association. I am a 100 
percent full-time farmer, roughly half the age of the average 
farmer.
    All of our products are consumed 20 miles from our farm. 
The local residents of the community are enthusiastic about 
eating our fresh, local, and organic produce. Our products are 
available at many locally-minded restaurants and food stores, 
as well as the Athens Farmers' Market and onsite sales. We make 
every attempt that we can to provide food for anyone, 
regardless of economic status. We participate in the Farmers' 
Market Electronic Benefits Transfer assistance program, and we 
also accept WIC and Senior Farmers' Market Nutritional Program.
    I think my story is a model for the opportunities in 
today's agriculture. Farming as a career choice is one of the 
most difficult occupations to enter. Limited access to land and 
markets, high input costs, and a lack of sufficient support 
networks are major barriers for entry into agriculture. Despite 
these hurdles, people want to farm and see great opportunities 
in agriculture. The local movement and the growth in organics 
are a few of the trends that have more and more individuals and 
families interested in farming.
    Access to credit is crucial in all types of new and 
beginning farmers, including small-scale and more locally-
oriented farms like mine. Finding credit is difficult for 
beginning farmers as a whole, and particularly difficult for 
farmers like me because most lenders are learning on a curve on 
both sides. For the farmer, we must learn how to present a 
business plan that makes sense to the lender, and the lender to 
quickly merge with the local food sector.
    I am currently about $300,000 in debt, primarily from 
buying land, even though land and equipment--even though land 
is relatively cheap in my area, my expenses are relatively low 
when compared to someone who starts out with more of the 
average size as a conventional farm. Mortgage payments have 
opened my eyes for the need of year-round sales. My energy is 
now focused through season extension programs through NRCS, as 
well as my own needs.
    We have plans to add a certified kitchen, as well as cold 
storage unit for our products. I am pleased to say that all my 
bills are being paid on time. The greatest hill to climb for a 
new beginning farmer is the initial start-up cost. It is hard 
for someone with very few assets to secure a loan for 
agricultural land. It is crucial to retain the Farm Service 
Agency Direct Loan Programs as a lender for those who cannot 
find credit elsewhere.
    FSA lending creates new farming opportunities and helps 
regenerate American agriculture. I believe Congress was correct 
in the last four farm bills directing a majority of direct real 
estate loans to beginning farmers as well as a substantial 
amount of direct operating loans. These loans help slow down 
the aging of American agriculture. I hope Congress will 
continue to ensure a strong target for beginner farmers and the 
robust funding overall for direct and guaranteed loans. The 
future of the next generation of farmers depends on it.
    I had to move fast on my loan. Land on the market does not 
wait for a loan to become available. Many beginning farmers 
have lost out on farmland because FSA was temporarily out of 
funds and delays in the Congressional appropriations process. 
Currently, I am working with FSA on the cold storage unit for 
storing my vegetable products. My local FSA agent was very 
concerned about funding issues on whether or not it would be 
budgeted and I would be able to obtain my loan.
    I plea for this Committee to remember that beginning 
farmers do not have the luxury of waiting for the budget 
process to close on a deal to buy land. Either loans are 
available or they are not. If we are serious about growing a 
new generation of farmers and reversing the aging of American 
agriculture, we need to be serious about ensuring a healthy FSA 
loan budget. Thank you for the time and I would be happy to 
answer any questions.
    [The prepared statement of Mr. Starline follows:]

Prepared Statement of Matthew Starline, Owner, Starline Organics, LLC; 
     Member, Ohio Ecological Food and Farm Association, Athens, OH

    Thank you for the opportunity to testify this morning. I am Matt 
Starline, a beginning farmer from the Athens, Ohio area. Starline 
Organics is a 50 acre diversified farm located in the Appalachian 
foothills of southeast Ohio. We grow a variety of vegetables, 
mushrooms, herbs, and grains, plus lamb, pork and beef.
    I am also here today as a member of the Ohio Ecological Food and 
Farming Association (OEFFA). Formed in 1979, OEFFA is a grassroots 
coalition of nearly 3,000 farmers, backyard gardeners, consumers, 
retailers, educators, researchers, and others who share a desire to 
build a healthy food system that brings prosperity to family farmers, 
helps preserve farmland, offers food security for all Ohioans, and 
creates economic opportunities for our rural communities. OEFFA 
developed and began operating an organic certification program in 1981, 
and is currently one of the largest USDA-accredited certifying agents, 
last year certifying over 600 organic farms and processors. OEFFA 
provides education, advocacy, and grassroots organizing to promote 
local and organic food systems, helping farmers and consumers reconnect 
and together build a sustainable food system, one meal at a time.
    I farm the foothills of Appalachia. That means that you are lucky 
if you have flat land. My plateau is rich in history reminding me of 
how we are merely stewards of the land. My land was host to many 
generations of farmers including American Indians. When I first started 
my small business, vegetables were my main focus. Now with more diverse 
land base, I have ventured into livestock as well as grains.
    Our farming practices are centered on sustainability. We utilize a 
natural gas well to heat our greenhouses as well as our home. Spring 
water provides the largest input for our water system. We look at our 
soil as our largest investment as well as our most important living 
ecosystem. We are always looking at innovative ways of how to turn our 
waste into a usable positive product, such as plant excess being fed to 
pigs rather than turning it into compost. Our animals are rotationally 
grazed. We are moving towards a multi-species grazing method to 
decrease the use of chemical dewormers for sheep. Currently we have 
three separate Environmental Quality Incentive Program contracts: 
construction of a high tunnel, an irrigation system connecting springs 
and wells to supply the garden, and the Organic Initiative with an 
emphasis on Integrated Pest Management (IPM) for organic systems. We 
are also applying for an agriculture easement as a long term insurance 
policy for moneys we receive. This is a state program placing permanent 
agricultural easement on the land.
    I am a child of Appalachia. I grow food to feed the Athens, Ohio 
community 20 minutes from my farm. My farm is certified organic in an 
impoverished region of Ohio. I find the local residents in my community 
are enthusiastic about eating our fresh, local, and organic produce. 
Our products are available at many locally-minded restaurants and food 
stores, as well as at the Athens Farmers' Market and on-site.
    We attempt to make our farm products available to everyone 
regardless of economic status. Our business took in \1/60\ of the Ohio 
statewide Farmers' Market Electronic Benefits Transfer (EBT) assistance 
program, in conjunction with the Athens Farmers' Market taking in 
$34,000 for the year. We also accept Woman, Infants and Children (WIC) 
and Senior Farmers' Market Nutritional Program (SFMNP) coupons. A local 
nonprofit, Community Food Initiatives (CFI), has a ``Donation Station'' 
where farmers can donate excess product to be distributed to over 40 
different places of need. Being a beginning small business, I 
understand that donating has no instant monetary gain. However in the 
long run I feel I am trading for promotional advertising.
    I am the son of a farmer who signed all of his farmland into the 
Conservation Reserve Program (CRP). My earliest memories are riding 
with my dad in his old Gleaner combine, hypnotized by the crops until I 
would fall asleep only to be awoken by the jolt of hitting a hole. I am 
a 100% full-time farmer, which means I am part-time mechanic, educator, 
scientist, researcher, advocate, plumber, carpenter, gas well operator, 
landowner, delivery driver, record keeper, veterinarian, sales 
representative, and community member. I am roughly half the age of the 
average farmer. I moved from a conventional background to growing 
organic. My wife came from a non-farming background and is now an 
operating owner. Most of my equipment is significantly older than I am, 
but it works as hard as I do.
    I think my story is indicative of the opportunities in today's 
agriculture. Farming as a career choice is one of the most difficult 
occupations to enter. Limited access to land and markets, high input 
costs, and a lack of sufficient support networks are major barriers to 
entry into agriculture. Yet, despite these hurdles people want to farm 
or ranch and see great opportunities in agriculture. The burgeoning 
local food movement and the growth in organics are just a couple of the 
trends that have more and more individuals and families interested in 
farming.
    If more institutions sourced locally there would be a large spike 
in the demand for fruits and vegetables. For instance, Ohio University 
takes up much of Athens. The demand is there, and from a public health 
perspective the need is there, but we desperately need more farmers to 
supply local foods and meet rising demand. I understand that every town 
does not have an institution like OU, but there are elementary schools 
and high schools where volume can be created. In Ohio, farm to school 
programs are breaking ground. We have an excellent model in Granville 
High School in Granville, Ohio that is now being applied elsewhere.
    Access to credit is obviously critical for all types of new and 
beginning farmers, including smaller-scale and more locally-oriented 
farms like mine. Finding credit is difficult for beginning farmers as a 
whole, and particularly difficult for farmers like me because most 
lenders are not as familiar with what we do, how we market, and what 
our price structures are. There is a learning curve on both sides--for 
the farmer to learn how to present a business plan that makes sense to 
the lender, and for the lender to learn what this quickly emerging 
local food sector is all about. I am pleased to say that my local FSA 
agent views vegetable farming as the best opportunity for beginning 
farmers in my area and has been willing to work with me. From what I 
hear at farmer meetings, others have not been so lucky.
    I am $300,000 in debt, primarily from buying land, even though land 
is relatively cheap in my area and my expenses are relatively low when 
compared with someone who would start out the average size more 
conventional farm. Mortgage payments opened my eyes to the need for 
year round sales. Now my energy is focused on season extension 
structures for produce. We have plans to add a certified kitchen for 
value added products, storage bins for grains, and a grain processing 
facility. I am pleased to say that all our bills are being paid on 
time.
    The greatest hill to climb for a new beginning farmer is the 
initial start-up cost. It is hard for someone with few assets to secure 
a loan for agricultural land. It is critical therefore to retain the 
Farm Service Agency direct loan programs. As the lender for those who 
cannot find credit elsewhere other than resorting to credit cards, FSA 
creates new farming opportunities and helps regenerate American 
agriculture. I believe Congress was correct in the last four farm bills 
to target a majority of FSA direct real estate loans to beginning 
farmers as well as a substantial amount of direct operating loans. 
These loans in a very real sense help slow down the aging of American 
agriculture, and it is my hope that Congress will continue to ensure 
strong targeting to beginners and robust funding overall for both 
direct and guaranteed loans. The future for the next generation of 
farmers, like the ones before it, depends on it.
    My father-in-law was the first to show me a print out for the FSA 
loans for beginning farmers. I qualified for the FSA beginning farmer 
loans, however, like many others, I had to move fast to secure my farm. 
Land on the market does not sit around waiting for loan funds to become 
available. Many beginning farmers have lost out on farmland because FSA 
was temporarily out of funds due in part to delays in the Congressional 
appropriations process. It would be great if Congress and the 
Administration could find a way to allow FSA to make loans in these 
situations. The loan programs need to reflect the reality of the land 
market if new and beginning farmers are going to have a realistic 
chance of competing.
    Currently, I am working with FSA on a loan for construction of a 
cold storage unit for our products. We are also looking to build a 
certified kitchen above the cold storage unit, although that is not a 
part of the loan. This will enable me to prolong the storage life of 
our vegetables and herbs after harvest and further improve our 
profitability. This will also allow for more time to harvest and will 
allow us to harvest more overall. The kitchen will also pave the way to 
selling more value-added products, meeting strong consumer demand while 
again improving our profitability. These are the kind of activities 
that I hope FSA, Farm Credit, and commercial lenders will look at more 
seriously in the future. The market for local food is real and 
expanding, and the new farmers who are serving this market need to know 
that credit will be available to help us respond to the demand for farm 
fresh food.
    We need a national strategy and commitment to support beginning 
farmer and ranchers entering agriculture. With an aging farm 
population, the time is now to nurture new agriculture start-ups. A new 
farms policy, especially in the local food sector, is a jobs creator, a 
sound investment that can provide long-term societal benefits and 
contribute to the revitalization of our rural as well as urban 
communities.
    In that light, I was disappointed to hear that the continuing 
resolution for the rest of Fiscal Year 2011 contains a very substantial 
27 percent cut in direct farm ownership loan funding. This is like 
throwing away the seed corn for the future of our farming system. 
Thankfully the reduction in direct operating loans was a more modest 
five percent. I would urge this Subcommittee to work diligently with 
your colleagues on the Agriculture Appropriations Subcommittee to 
secure adequate loan program levels for Fiscal Year 2012.
    The 2008 Farm Bill targets 75 percent of direct ownership loans and 
50 percent of direct operating loans to beginning farmers. In FY 2009, 
the FSA made or guaranteed about $4.5 billion in loans to 34,210 
farmers, including over 20,000 farmers receiving direct operating 
loans. From this total, about 14,500 beginning farmers received loans 
totaling $1.5 billion. Nearly half of all direct operating loans and 
over 70 percent of direct ownership loans went to beginning farmers, 
just shy of the farm bill targets of 50 and 75 percent, respectively.
    Reflecting credit difficulties during the recession, FSA lending in 
FY 2010 increased to $5.3 billion servicing 36,440 borrowers. Perhaps 
as a result of the additional influx of more established farmers 
requiring FSA assistance during the downturn, the agency's performance 
on beginning farmer lending declined a bit. Total loans to beginners 
dipped under 14,000 though loan volume remained constant at about $1.5 
billion. The percentage of beginning farmer loans to total loans 
dropped, however, to 60 percent for direct ownership and 45 percent for 
direct operating.
    For the first half of Fiscal Year 2011, FSA has needed to 
concentrate on funding the direct operating loan program to help get 
farmers into the field for this growing season. As a result, direct 
farm ownership lending has suffered. Total direct farm ownership loan 
volume is down considerably, and the beginning farmer participation 
rate remains stuck at 60 percent of the total, the same as for Fiscal 
Year 2010. Both of these situations will hopefully turn around in the 
last half of the fiscal year as the full year's funding is made 
available, though obviously the 27 percent cut in funding will have a 
very real and negative impact.
    Despite the pain it causes beginning farmers who were not able to 
secure farmland in the absence of loan availability, FSA is to be 
commended for concentrating on operating loans in the past months given 
how close we are to planting time. These are the very unfortunate but 
necessary trade-offs that have to be made when Congress is so late in 
appropriating funds. Compounding the problem is the Administration's 
decision that during repeated short-term Continuing Resolutions FSA can 
only spend a pro rata share of total loan funds under the pretense that 
lending remains constant week to week over the course of a year. Of 
course, as we all know, operating credit in particular is front loaded 
into the first half of the fiscal year to correspond with the planting 
season. I would encourage this Subcommittee to help relieve this 
nonsensical situation by working for a policy that keeps lending rates 
consistent with normal lending volumes for a given portion of the year 
during these unfortunate long delays in appropriations.
    While performance on meeting the beginning farmer targets for 
direct loans has been admirable, the picture on guaranteed loans is 
less positive. Congress has targeted 40 percent of guaranteed ownership 
and operating loans to beginning farmers, but the actual rates in 
recent years have been less than 20 percent. The relative lack of 
responsiveness of the commercial sector to concentrating more resources 
on beginning farmers through the guaranteed program would be a 
worthwhile subject for this oversight panel to pursue.
    The Down Payment Loan program for first-time land acquisition by 
beginning and minority farmers took a big upturn since passage of the 
2008 Farm Bill. The farm bill lowered the interest rate and the 
beginning farmer down payment amount and also increased the value of 
land which could be financed, all of which combined to get the program 
more fully utilized. This creates a win-win-win situation, with the 
agency able to stretch its limited resources further, the commercial 
lender starting off with a beginning farmer customer earlier in the 
process, and the beginning farmer having greater equity in the 
operation.
    The 2008 Farm Bill improvements paid off immediately. The Down 
Payment program financed 1,100 beginning farmers with a total of $147 
million in real estate loans in 2008 and 2009, compared to the nearly 
3,000 beginning farmers assisted with $131 million in loans in the 
previous 14 years of the program's existence combined. An additional 
1,225 down payment loans were made in Fiscal Year 2010 on a loan volume 
of $170 million, bringing the total for the first 3 years under the new 
farm bill to 2,325 farms and a loan volume of over $300 million. I am 
glad to say that Ohio is in the top ten states using the program. 
Congress did the right thing in improving the program in 2008 and 
should continue on the same path in the new farm bill.
    I will close my remarks with a note of alarm about the existing 
levels of backlog for FSA loans. According to FSA, as of last Friday 
there was a backlog of 503 approved applications from non-beginning 
farmers worth $91.5 million and 590 approved applications from 
beginning farmers worth $115 million waiting for direct farm ownership 
funding. Applications waiting for direct farm ownership funding from 
socially disadvantaged or minority farmers totaled 195 worth $34 
million. The backlog for direct operating loans was also substantial. 
Nearly 850 beginning farmers were waiting on loans approved for $56 
million and an additional 486 farmers were waiting on loans approved 
for $34 million. Hopefully many of these loans will move forward 
quickly after the final Fiscal Year 2011 appropriations bill is signed 
into law.
    I leave you with a plea to remember that beginning farmers do not 
have the luxury of waiting on the vagaries of the budget process to 
close a deal to buy land. Either loan funds are available when the land 
is available or not. If we are serious about growing a new generation 
of farmers and reversing the aging of American agriculture, we need to 
be serious about ensuring a healthy FSA loan budget.
    With respect to the farm bill, I applaud the many positive advances 
made in the 2008 bill for beginning farmers, including the Down Payment 
program, the Beginning Farmer and Rancher Development Program, and the 
targeting of conservation funds, among others. I encourage this 
Subcommittee to explore the positive outcomes generated by these farm 
bill gains and to redouble your efforts on beginning farmer issues in 
the 2012 bill.
    Thank you again for the opportunity to testify. I will be happy to 
try to answer any questions you might have.

    The Chairman. Thank you, Mr. Starline. Let me just start 
right there with you. I am curious if you could expound upon 
your background a little bit? What motivated you to enter 
agriculture in a time in which the average age of the farmer in 
Nebraska, and throughout most of the country, is approaching 58 
years old, you are clearly not there? And I am curious as to 
how you came to enter into this entrepreneurial desire? Is this 
a part of your own family background? Did you study 
agriculture? If you could just briefly expound upon that?
    Mr. Starline. Yes. Through different generations, my family 
has been farming land in Ohio. Growing up with it was the best 
aspect for me, when I was 17 I had an opportunity with OSU 
extension growing green bell peppers in order to wean farmers 
off tobacco basis. As I went to school, I was able to work on 
an organic vegetable farm and I saw how strong my community was 
in support of the local food system, and I felt that as a 
viable business for my area.
    The Chairman. Well, congratulations on your decision and 
what you do is important for the country and we appreciate your 
willingness to take this risk and come before the Committee 
today to explain your perspectives.
    Let me turn quickly to Mr. Gerber. I think it would be 
helpful for everyone for you to explain the substantive 
differences between Farmer Mac as a government-sponsored 
enterprise and other government-sponsored enterprises such as 
Fannie Mae and Freddie Mac, which have experienced deep 
structural difficulty and caused severe exposure to the 
taxpayer?
    Mr. Gerber. Sure. Thank you for the question. A number of 
differences exist between the model at Farmer Mac and the model 
of the other GSEs you named. First of all, Farmer Mac reports 
to this Committee, the Agriculture Committee, which is focused 
on rural America, focused on the issues and needs there, and 
understanding the uniqueness of that marketplace.
    Second, we have a strong regulator in the Farm Credit 
Administration, an independent regulator that reports to you 
and that is active in assuring that we are doing things on a 
safe-and-sound basis. I think in addition our model is a 
different one because these loans that we do real estate 
mortgage agricultural loans and rural utility loans are 
business loans rather than strictly consumer loans. As well, 
our underwriting standards are critical to the success. Our 
focus, because they are business loans, is not to focus as much 
on, or only on, the collateral and its value if there were 
default, but also the borrower's capacity to repay the loans 
and the understanding of the business behind those loans. That 
makes a significant difference as we think about the 
differences and the problems that the other GSEs experienced.
    Farmer Mac did not experience similar problems even with 
the challenges of 2008--our portfolio remained strong. We have 
not seen significant losses through the cycles and the 
challenges of agriculture over the last 20 years.
    The Chairman. Thank you. Quickly, let me turn to Mr. Stark. 
You had indicated in your testimony that the System continues 
to finance land transactions by remaining focused on sound 
underwriting and making credit decisions based upon the 
repayment capacity--and I think that is an important work--of 
the individual borrower. Is this true throughout the System?
    Mr. Stark. Yes, it is true throughout the System. We have 
had several meetings over the course of the last few months 
focusing specifically on the actions that institutions in the 
Farm Credit System are taking with respect to financing real 
estate; and unanimously they have all made sure that they are 
focused clearly on sound underwriting practices and even using 
more longer-term averages for prices of corn, not the current 
price. We all know that that is going to fluctuate and will 
likely be lower, as we have heard in testimony this morning. So 
we are using conservative prices, conservative yields, and 
long-term projections to make those assumptions.
    The Chairman. Does this Committee need to help ensure that 
this is the case?
    Mr. Stark. I think that the System is adequately overseen 
by the Farm Credit Administration. They are in our association 
right now looking at loan underwriting and they give the 
reports back to the Agency on a timely basis.
    The Chairman. Thank you. We may have to come back to 
another round. But right quick, Mr. Williams, thank you for 
your testimony. You stated that you support ending the term 
limits for FSA Lending Programs, the guaranteed operating loans 
that limit borrowers to assistance for 15 years. Congress has 
suspended this on several occasions, but that means that 
borrowers could potentially go up to 20 years on a guaranteed 
operating loan. So how does that encourage a borrower to 
graduate and move to commercial credit?
    Mr. Williams. I think it is important that we recognize 
that graduation can happen, but as you have heard earlier 
today, there are certainly cycles. We had a board meeting at 
our bank yesterday and I brought this up with some of our ag 
lenders, and we have several customers coming through the late 
1970s and the early 1980s that struggled and showed some 
weakness. We began using the Guaranteed Loan Program on them in 
the late 1980s and early 1990s and they were in that program 
for, in one case, 10 years, in another case, about 12 years 
during that period of time and then they graduated and have 
been out of the program. But if there was a weakness shown and 
it was needed to come back into the program with those two 
borrowers, the time clock has already ticked a major portion of 
their term limit. So it would be difficult to potentially bring 
them back in. I think that is the flaw in the program this way, 
that it sounds good to graduate but the reality is as cycles 
change over periods of time, we can't see the future. So that 
is why we would propose, again, suspending that.
    The Chairman. Thank you very much. We will turn now to our 
Ranking Member for her questions.
    Ms. Fudge. Thank you, Mr. Chairman. Let me start with Mr. 
Stark and Mr. Williams, same question. Specifically, what are 
your institutions doing to facilitate the entry into ag 
production of diversified and direct marketing producers like 
Mr. Starline?
    Mr. Stark. Well, I will start with that because I had the 
opportunity to visit with Mr. Starline before the session began 
and as a matter of fact, he obtains part of his financing from 
the Farm Credit System, Farm Credit Services of Mid-America. So 
we are very actively involved in ensuring that young people can 
get their start in farming.
    Our institution of Farm Credit Services of America has also 
appointed a member of the board. They went out of their way, as 
opposed to just having an elected stockholder, to make sure we 
put a young person on our board who is 29 years old to assure 
the voices of these young people are heard. And so they are 
very interested in having that voice heard and made that 
appointment.
    Additionally, we also have a very active young farmer 
program. We do a number of things in that area, as well as 
being very focused on serving the needs of small farmers. Small 
farmers in our portfolio is the largest portion of our 
portfolio at this time.
    Ms. Fudge. Thank you. Mr. Williams?
    Mr. William. Ranking Member Fudge, thank you for that 
question. In our bank we are very excited to work with young 
people. That is the lifeblood of our community. That is where 
we are going. There has been a lot of talk about farmers' 
markets and those kinds of things. The farmers' market in 
Gothenburg is held on the sidewalk in front of the bank every 
Thursday night during the summer. Several of the producers that 
are there are small producers that we finance.
    We also have started a program in Gothenburg of working 
with our local FFA chapter. We have two bank officers that do a 
significant portion of their training, and we help them in 
their preparation for state and national competitions. We have 
also devised a program to help them become farmers on a limited 
basis because they need that experience.
    All said, as you heard this morning, farming is not an 
easy-entry occupation. But, with the added ingredients and the 
environment that we as banks and Farm Credit create, we do the 
best job we can to see that this happens. Thank you.
    Ms. Fudge. Thank you. And I would certainly hope, Mr. 
Starline, if you have these gentlemen sitting here with you 
that you would make sure that they do not get out of the room 
until you talk to them. Thank you.
    Now, to all of you, as we prepare to write the next farm 
bill, what changes would you like to see in the area of Farm 
Credit? I would like each of you to give me just one thing, 
okay? What would you like to see change in the area of Farm 
Credit? We can start with Mr. Gerber.
    Mr. Gerber. For agriculture and for rural America, one of 
the things that is interesting is that rural America is the 
only marketplace in this country that does not have a secondary 
market available to it other than what we do specifically in 
the agricultural real estate mortgage area, and in the area of 
the rural utilities business. As you have seen by our numbers 
and by the growth, there is a need and an opportunity for that 
secondary market and the opportunities that moving investment 
from Wall Street into rural America would bring; and we believe 
that is some thing that would help make a difference in rural 
America is the ability for those markets to have an opportunity 
to use the secondary market products.
    Ms. Fudge. Thank you. Mr. Stark?
    Mr. Stark. I would mention the one thing that I believe 
supports the farmers and Farm Credit System, as well as the 
credit extension that we have, particularly in the Midwest is 
the Crop Insurance Program. And as you face challenges with 
budget issues, that is a very strong underpinning to credit 
extension throughout the country. I can recall the days of ad 
hoc disaster assistance, which were very challenging to know 
when and how that might occur. Farmers have in the Crop 
Insurance Program a very good risk-management tool. And I would 
just encourage your consideration of that in the credit sense.
    Ms. Fudge. Thank you.
    Mr. Williams. Ranking Member Fudge, you mentioned what 
would we do in the farm bill for Farm Credit but I would assume 
you are also asking about credit to farmers, not just Farm 
Credit.
    Ms. Fudge. Absolutely correct.
    Mr. Williams. I think it is terribly important that we 
remember the challenge that we have as a country behind the 
whole farm bill to maintain an abundant and safe supply of food 
for our country and the world. In our world we have conflict 
over energy and we can certainly get to a point that we have 
conflict over food. I think the American people demand and 
expect an abundant and safe supply of food.
    Specifically, from the American bankers we would like to 
see the term limit on FSA guarantees, a suspension of that, and 
a continuation of a strong FSA Guaranteed Loan Program. That 
program works. It serves over 55,000 farmers in our country and 
it is necessary that that continues.
    And we would also like to see an examination to be sure 
that the Farm Credit System itself continues to follow the 
original mission that it was proposed to do in 1916. Thank you.
    Ms. Fudge. Thank you very much. And Mr. Starline, I know 
that my time is over but the chair has been gracious enough to 
allow me to get the last answer. Mr. Starline?
    Mr. Starline. In my eyes, after I graduated college I had 
next to nothing as far as equity was concerned. With the new 
beginning farmer aspect of FSA with the loans, lowering the 
interest rate and lowering the down payment would really help 
out beginning farmers and it is a step up in becoming a farmer.
    Ms. Fudge. Thank you so much. Mr. Chairman, I yield back.
    The Chairman. Thank you, Ms. Fudge. Let me return to some 
additional questions.
    Mr. Stark, you had indicated--and I am curious as to why--
and if you could unpack further your testimony that the capital 
requirements of a typical corn farmer are now four times higher 
than they were just in 2005. Could you explain that further, 
please?
    Mr. Stark. Yes, I think there were several things and in 
various presentations, one I gave most recently at the National 
Feed and Grain Association, I outlined some of those specifics. 
It really involved first of all, not only are the cost of 
inputs higher, which we are seeing, now, the cost of risk 
management programs are being passed on to farmers. Co-ops and 
grain merchandisers are no longer extending marketing programs 
out beyond 1 year, and in some cases it is even difficult to 
get that. So many cases we are setting up marketing loan 
programs that didn't exist 3 to 5 years ago because there were 
other options available in the market. And the overall cost of 
production we are estimating about $700 an acre for farmland. 
And then when you get to multiple years production on that that 
I mentioned earlier in my testimony, it quickly multiplies.
    The Chairman. Can this also be explained by consolidation 
of land into fewer and fewer hands and therefore the need for 
larger loans?
    Mr. Stark. Not necessarily. I would say our estimation is 
what would be on a per-acre basis. So, when you really look on 
it, regardless of size, the cost of----
    The Chairman. It is per acre and not the individual 
borrower?
    Mr. Stark. Yes.
    The Chairman. I see. Okay. Thank you. You also stated that 
you loaned about $7.3 billion to beginning farmers. I would 
assume that would include value-added opportunities as well as 
organic and local food businesses. What percent of your 
portfolio is that?
    Mr. Stark. We have at Farm Credit Services of America, 17 
percent of our portfolio is to young and beginning farmers. So 
out of 85,000 customers, a significant portion of our portfolio 
will result in loans to farmers less than 35 years of age and 
less than 10 years in farming.
    The Chairman. Since we are assuming, like Mr. Starline, 
that most young and beginning farmers are actually entering 
into new models of agriculture that are actually traditional 
models of agriculture versus what we understand as production 
ag, which is essential for you to be focused on as well; what 
percent of the young farmers that you are underwriting are 
involved in new enterprises such as his?
    Mr. Stark. I don't have those numbers readily available, 
but I can tell you that a number of them are involved in 
various types of enterprises.
    The Chairman. Well, the reason I ask is, we all know that 
this is a growing opportunity in agriculture in general and it 
actually augments our strong production ag system to create 
more entrepreneurial opportunity for local food systems, 
strengthening local economies, returning to the connection 
between the urban and rural and the farm to the family, and I 
think there are multiple benefits in doing that. So that is why 
I am trying to get a better sense as to whether or not this 
percent of your underwriting that goes to young farmers is 
actually targeted to these new emerging trends, small as they 
are, but nonetheless emerging trends in agriculture.
    Mr. Stark. It would certainly be included in those numbers 
but it is not specifically broken out.
    The Chairman. All right. I think that would be helpful to 
know if you could provide that.
    Mr. Stark. We will provide that.
    The Chairman. Mr. Williams, in your testimony you stated a 
concern that the Farm Credit System as a government-sponsored 
enterprise is a risk to the taxpayer, but does your institution 
also use advances from the Federal Home Loan Bank System and do 
you consider the Federal Home Loan Bank System a risk to the 
taxpayer as well?
    Mr. Williams. Yes, we do use advances from Federal Home 
Loan Bank System on a limited basis to supply funding that is 
necessary for us to be able to meet the credit needs of our 
community. I think the health of the Federal Home Loan Banking 
System is vitally important, and the regulators and everyone 
overseeing that needs to recognize that and be certain that 
they stay as healthy as possible also, just like Farm Credit.
    The Chairman. Let us touch briefly upon the issue of 
escalating land values and, of course, this posed perhaps the 
most--the drop in land values was part of the reason of the 
severe difficulties in the 1980s that we experienced. Will you 
explain why the situation may be different as we are seeing 
escalating land values today?
    Mr. Williams. Yes, I think there are two specific questions 
that we need to ask when we are looking at that. One is, is 
this an asset bubble and what is the potential risk of land 
prices dropping significantly? That is the first question and 
that one can be debated on both sides and we will be able to 
look in the rearview mirror down the road and know whether that 
happens.
    I think the second question is the more important question 
as to whether this is an asset bubble and if land values do 
decrease, what is the result of that decrease? And I think that 
is the important difference. And the way I would describe that 
is it is not your grandfather's farm anymore as it was in the 
1980s when this happened before. And also granddad isn't 
running the bank. We do things significantly different both on 
the farm and in the bank that have tended to mitigate that 
potential risk.
    We are in the risk-monitoring business in banking, weighing 
risk and analyzing those. The technology that we use today is 
substantially different. If you go back to the 1980s, we were 
primarily collateral-based lenders. So we were relying almost 
solely on the underlying value of that collateral to support 
our loans. So in our particular area in central Nebraska when 
land values dropped by 35 to 40 percent in the 1980s and we 
were relying on that, it was devastating to us. We are now cash 
flow lenders.
    The other thing is we have not invented unusual and exotic 
types of instruments to finance agriculture. In our shop we use 
a 60 percent loan-to-value ratio, looking at the front end of 
an ag real estate loan. And we analyzed our whole portfolio and 
our outstanding portfolio of ag loans right now has a loan-to-
value of about 40 to 45 percent. With that in mind, I would put 
it this way. If ag land were to drop, if it were a bubble and 
it were to drop that 40 percent or some number like that, we 
would see an instant decrease in the net worth of many of our 
borrowers but we----
    The Chairman. Can I interrupt you for a moment? What was 
the loan-to-value in the 1980s?
    Mr. Williams. Loan-to-value in the 1980s, we were using a 
much higher level because we were based on the collateral at 
that point. I would have to look back but I am thinking we were 
in the 85, sometimes 90 percent range that we were loaning. And 
we, again, at that time had a period of time where we had 
significant increases in land value very quickly. And we were 
aggressively pursuing that at that time.
    The Chairman. Thank you. Ms. Fudge, do you have any further 
questions? I just thought of--Mr. Stark, you may want to 
comment on this as well because of the preliminary research I 
have done into the question suggests there is another factor in 
addition to the changing structural requirements that are in 
place in banks and the awareness of the industry not to repeat 
the past. The issue of not over-leveraging is also manifested 
in the fact that a lot of money is moving simply out of cash 
into land purchases. This is not taxing, if you will, the 
credit system further. Is that a fair assumption?
    Mr. Stark. Yes, that is exactly right. You know, one of the 
biggest things we see today in land purchases is the amount of 
cash going into these transactions as well.
    The other thing, Mr. Chairman, that I would mention that at 
the Farm Credit System we are doing to really help protect 
customers around not only falling land values but also to 
locking in the cost relative to land. We have the ability to go 
out and fix interest rates up to 15 and 20 years. And that is 
really protecting customers in the event that we have higher 
interest rates, which will impact land values as well. And so 
even this last year, we converted over 15,000 loans or loans to 
15,000 customers to lower rates of interest and locked in their 
rates of interest to protect them against those kind of 
changes. So we are doing everything we can to protect them both 
with land values declines as well as interest rate increases.
    The Chairman. Thank you very much. With that said, let me 
make some concluding remarks and then we will adjourn 
momentarily.
    This has been a very important hearing to look overall at 
the credit system in America. We have a mixed financing system 
for agricultural credit in our society and we have done it this 
way for a very long time. I think, though, if we can take a 
step back and look at the reality that agriculture is one of 
the few bright spots in the American economy, and agriculture 
is significantly evolving from not only its primary mission to 
feed and provide a safe food supply not only for our own people 
but for people throughout the world; it has evolved also on the 
forefront of both energy, environmental, and national security 
policy.
    So I want to thank you all for what you do in helping 
secure that so we have a sound financing system for American 
agriculture. You, Mr. Starline, being a new entrepreneur, we 
appreciate your entry into the field as well. Ms. Fudge, do you 
have any further commentary?
    Ms. Fudge. I would just like to thank you, Mr. Chairman, 
and to thank all of our witnesses for today for your excellent 
testimony. As a new Member, it is really important for me to 
get some background, some foundation as to the significance and 
the changes that are going on in credit in agriculture. So I 
just want to thank all of you for being here and hope to learn 
more about the whole credit issue and how it affects our 
farmers today. So I thank you all. Thank you, Mr. Chairman.
    The Chairman. Thank you. 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 
requests from the witness to any question posed by a Member. 
This hearing of the Subcommittee on Department Operations, 
Oversight, and Credit is adjourned.
    [Whereupon, at 11:45 a.m., the Subcommittee was adjourned.]


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