[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
            A REVIEW OF CREDIT AVAILABILITY IN RURAL AMERICA

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




                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                LIVESTOCK, RURAL DEVELOPMENT, AND CREDIT

                                 OF THE

                        COMMITTEE ON AGRICULTURE

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 25, 2014

                               __________

                           Serial No. 113-15


          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
STEVE KING, Iowa                     MIKE McINTYRE, North Carolina
RANDY NEUGEBAUER, Texas              DAVID SCOTT, Georgia
MIKE ROGERS, Alabama                 JIM COSTA, California
K. MICHAEL CONAWAY, Texas            TIMOTHY J. WALZ, Minnesota
GLENN THOMPSON, Pennsylvania         KURT SCHRADER, Oregon
BOB GIBBS, Ohio                      MARCIA L. FUDGE, Ohio
AUSTIN SCOTT, Georgia                JAMES P. McGOVERN, Massachusetts
SCOTT R. TIPTON, Colorado            SUZAN K. DelBENE, Washington
ERIC A. ``RICK'' CRAWFORD, Arkansas  GLORIA NEGRETE McLEOD, California
SCOTT DesJARLAIS, Tennessee          FILEMON VELA, Texas
CHRISTOPHER P. GIBSON, New York      MICHELLE LUJAN GRISHAM, New Mexico
VICKY HARTZLER, Missouri             ANN M. KUSTER, New Hampshire
REID J. RIBBLE, Wisconsin            RICHARD M. NOLAN, Minnesota
KRISTI L. NOEM, South Dakota         PETE P. GALLEGO, Texas
DAN BENISHEK, Michigan               WILLIAM L. ENYART, Illinois
JEFF DENHAM, California              JUAN VARGAS, California
STEPHEN LEE FINCHER, Tennessee       CHERI BUSTOS, Illinois
DOUG LaMALFA, California             SEAN PATRICK MALONEY, New York
RICHARD HUDSON, North Carolina       JOE COURTNEY, Connecticut
RODNEY DAVIS, Illinois               JOHN GARAMENDI, California
CHRIS COLLINS, New York
TED S. YOHO, Florida
VANCE M. McALLISTER, Louisiana

                                 ______

                      Nicole Scott, Staff Director

                     Kevin J. Kramp, Chief Counsel

                 Tamara Hinton, Communications Director

                Robert L. Larew, Minority Staff Director

                                 ______

        Subcommittee on Livestock, Rural Development, and Credit

             ERIC A. ``RICK'' CRAWFORD, Arkansas, Chairman

BOB GOODLATTE, Virginia              JIM COSTA, California,  Ranking 
STEVE KING, Iowa                     Minority Member
RANDY NEUGEBAUER, Texas              MIKE McINTYRE, North Carolina
MIKE ROGERS, Alabama                 DAVID SCOTT, Georgia
K. MICHAEL CONAWAY, Texas            FILEMON VELA, Texas
GLENN THOMPSON, Pennsylvania         MICHELLE LUJAN GRISHAM, New Mexico
SCOTT DesJARLAIS, Tennessee          PETE P. GALLEGO, Texas
CHRISTOPHER P. GIBSON, New York      WILLIAM L. ENYART, Illinois
REID J. RIBBLE, Wisconsin            CHERI BUSTOS, Illinois
JEFF DENHAM, California              KURT SCHRADER, Oregon
RICHARD HUDSON, North Carolina       RICHARD M. NOLAN, Minnesota
TED S. YOHO, Florida                 JOE COURTNEY, Connecticut

                                  (ii)



                             C O N T E N T S

                              ----------                              
                                                                   Page
Costa, Hon. Jim, a Representative in Congress from California, 
  opening statement..............................................     3
Crawford, Hon. Eric A. ``Rick'', a Representative in Congress 
  from Arkansas, opening statement...............................     1
    Prepared statement...........................................     2

                               Witnesses

Long Thompson, Ph.D., Hon. Jill, Board Chair and Chief Executive 
  Officer, Farm Credit Administration, McLean, VA................     4
    Prepared statement...........................................     6
    Submitted material...........................................    91
    Submitted questions..........................................   105
Beyerhelm, Chris, Deputy Administrator for Farm Loan Programs, 
  Farm Service Agency, U.S. Department of Agriculture, 
  Washington, D.C................................................    13
    Prepared statement...........................................    15
    Submitted question...........................................   108
Kauffman, Nathan S., Assistant Vice President, Federal Reserve 
  Bank of Kansas City, Omaha Branch, Omaha, NE...................    20
    Prepared statement...........................................    21
Frazee, Bob, President and Chief Executive Officer, MidAtlantic 
  Farm Credit, ACA, Westminster, MD; on behalf of Farm Credit 
  System.........................................................    45
    Prepared statement...........................................    47
Buzby, Timothy L., President and Chief Executive Officer, Federal 
  Agricultural Mortgage Corporation (Farmer Mac), Washington, 
  D.C............................................................    52
    Prepared statement...........................................    53
Wolfe, Leonard, President and Chief Executive Officer, United 
  Bank & Trust, Marysville, KS; on behalf of American Bankers 
  Association....................................................    60
    Prepared statement...........................................    61
Williams, Sean H., President and Chief Executive Officer, The 
  First National Bank of Wynne, Wynne, AR; on behalf of 
  Independent Community Bankers of America.......................    66
    Prepared statement...........................................    68
Melone, Brett, Loan Officer, California FarmLink, Santa Cruz, CA; 
  on behalf of National Sustainable Agriculture Coalition........    75
    Prepared statement...........................................    77

                           Submitted Material

Auer, Kenneth E., President and Chief Executive Officer, The Farm 
  Credit Council, submitted letter...............................    95
Emerson, Jo Ann, Chief Executive Officer, National Rural Electric 
  Cooperative Association, submitted letter......................   100
Petersen, Sheldon C., Chief Executive Officer, National Rural 
  Utilities Cooperative Finance Corporation (CFC), submitted 
  letter.........................................................   101
Thaler, Brad, Vice President of Legislative Affairs, National 
  Association of Federal Credit Unions, submitted letter.........   102
National Association of REALTORS', submitted statement   103


            A REVIEW OF CREDIT AVAILABILITY IN RURAL AMERICA

                              ----------                              


                        WEDNESDAY, JUNE 25, 2014

                  House of Representatives,
  Subcommittee on Livestock, Rural Development, and Credit,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:01 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. Eric A. 
``Rick'' Crawford [Chairman of the Subcommittee] presiding.
    Members present: Representatives Crawford, Goodlatte, King, 
Rogers, Conaway, DesJarlais, Yoho, Costa, Scott, Vela, Lujan 
Grisham, Bustos, Schrader, and Nolan.
    Staff present: Caleb Crosswhite, Debbie Smith, Josh 
Maxwell, Kevin Kramp, Mary Nowak, Pete Thomson, Skylar Sowder, 
Anne Simmons, Lisa Shelton, Liz Friedlander, and Riley Pagett.

    OPENING STATEMENT OF HON. ERIC A. ``RICK'' CRAWFORD, A 
            REPRESENTATIVE IN CONGRESS FROM ARKANSAS

    The Chairman. This hearing of the Subcommittee on 
Livestock, Rural Development, and Credit to review credit 
availability in rural America, will come to order. Good morning 
and thank you all for attending today's hearing to review 
credit availability in rural America.
    Before I go any further, I do want to take a point of 
privilege, if you would allow, and that is to recognize Debbie 
Smith who is clerking her last hearing in the Agriculture 
Committee after 35 years of service. She began her career here 
on the Hill at 19 years of age, and she served seven chairmen 
during the span of eight farm bills. I probably said too much 
on the math. But let me just say, she has always made the 
trains run on time here in the Committee. She is a treasure 
that we will certainly miss dearly, especially when it comes to 
getting our way in conference in the Senate. So, Debbie, thank 
you so much. And we appreciate you.
    All right. I know she would want me to go on with the show. 
Providing credit to America's farmers and ranchers is a 
necessary and serious challenge for many lenders in the United 
States. The Farm Credit System, commercial banks and USDA's 
Farm Service Agency have continued to do an outstanding job 
working to meet the credit needs of rural America. I believe it 
is important to hold hearings like the one we are holding today 
to make sure the credit needs of producers are being met and 
will continue to be met in the future.
    As we know, the ag economy is highly cyclical. History 
teaches us that interest rates will eventually go up, and 
record high prices will eventually come down. In fact, after a 
recent period of historic highs, crop prices have declined due 
to record plantings and strong production, and farmland values 
are slightly decreasing. While livestock producers are 
rebounding on the balance sheet with lower feed costs, our 
western producers are still struggling with consecutive years 
of drought.
    Thankfully, due to recent years of high farm incomes and 
responsible underwriting, the state of our ag lending 
institutions and the farm economy remain strong. Even though 
the current ag economy and higher farm prices have resulted in 
overall good credit conditions, we must be cautious moving 
forward. While farmers should see a small drop in production 
costs, USDA is forecasting a 27 percent decline in farm income 
from last year. In order to sustain an abundant supply of food 
and fiber well into the future, we must ensure that responsible 
farm and ag credit policies are in place now.
    The Agricultural Act of 2014 was instrumental in doing just 
that. The bill included several provisions to provide 
opportunities for young and beginning farmers, including making 
permanent a microloan program to meet their needs for smaller 
projects and creating a cooperative lending pilot program. 
Additionally, the elimination of term limits on guaranteed 
operating loans will give borrowers and lenders the certainty 
they need to work together to graduate participants to 
commercial credit.
    Today, I am pleased to welcome a distinguished group of 
witnesses and I look forward to learning more from them about 
their perspectives of current credit conditions and their 
forecast for the future economy of rural America.
    [The prepared statement of Mr. Crawford follows:]

Prepared Statement of Hon. Eric A. ``Rick'' Crawford, a Representative 
                       in Congress from Arkansas
    Good morning. Thank you all for attending today's hearing to review 
credit availability in rural America.
    Providing credit to America's farmers and ranchers is a necessary 
and serious challenge for many lenders in the United States. The Farm 
Credit System, commercial banks, and USDA's Farm Service Agency have 
continued to do an outstanding job working to meet the credit needs of 
rural America.
    I believe it is important to hold hearings like the one today to 
make sure the credit needs of producers are being met and will continue 
to be met in the future. 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.
    In fact, after a recent period of historic highs, crop prices have 
declined due to record plantings and strong production, and farmland 
values are slightly decreasing. While livestock producers are 
rebounding on the balance sheet with lower feed costs, our western 
producers are struggling with consecutive years of drought. Thankfully, 
due to recent years of high farm incomes and responsible underwriting, 
the state of our agricultural lending institutions and the farm economy 
remains strong.
    Even though the current agricultural economy and higher farm prices 
have resulted in overall good credit conditions, we must be cautious 
moving forward. While farmers should see a small drop in production 
costs, USDA is forecasting a 27% decline in farm income from last year.
    In order to sustain an abundant supply of food and fiber well into 
the future, we must ensure that responsible farm and agricultural 
credit policies are in place now. The Agriculture Act of 2014 was 
instrumental in doing just that. The bill included several provisions 
to provide opportunities for young and beginning farmers, including 
making permanent a microloan program to meet their needs for smaller 
projects and creating a cooperative lending pilot program. 
Additionally, the elimination of term limits on guaranteed operating 
loans will give borrowers and lenders the certainty they need to work 
together to graduate participants to commercial credit.
    Today I am pleased to welcome a distinguished group of witnesses 
and I look forward to learning more from them about their perspectives 
of current credit conditions and their forecast for the future economy 
of rural America.

    The Chairman. I would like to recognize our distinguished 
Ranking Member, my friend from California, Mr. Costa.

   OPENING STATEMENT OF HON. JIM COSTA, A REPRESENTATIVE IN 
                    CONGRESS FROM CALIFORNIA

    Mr. Costa. Thank you very much, Chairman Crawford, ladies 
and gentlemen, and our good witnesses on the two panels that we 
will be hearing from shortly. We appreciate you being here and 
having the opportunity to hear from the witnesses on what we 
can do to ensure that farmers, ranchers and dairy producers 
across this great nation of ours have the necessary financial 
resources to continue to produce what I believe--what this 
entire Subcommittee believes--is the most nutritious, the 
finest food products grown anywhere in the world at cost levels 
to American consumers that cannot be matched anywhere in the 
world. And, certainly, it is the agricultural producers of this 
nation that make it happen every day.
    But we are here because the certainty provided by 
availability of credit for our producers is a critical link for 
their continued prosperity and of our ability to make this 
happen. Despite the strength of the farm economy, we all know 
that there is significant volatility that occurs on a cyclical 
nature throughout every region of America. America's farmers, 
ranchers and dairy producers face so many different variables 
as they grow the food that we put on our dinner table each day 
that sadly, in my view, it is too often taken for granted by 
the consumers who get that wonderful food at their table. They 
don't understand, in many instances, the hard work and the 
risk-taking that is involved. Every day these variables take 
different shapes and forms. We are all aware of the natural 
disasters like droughts and floods. And despite those 
challenges, our producers are resilient. But they also deal 
with other levels of volatility in the marketplace. And, 
obviously, we are proud of their efforts to preserve and 
sustain themselves through these difficult challenges.
    In my home State of California, as across much of the 
western United States, farmers, ranchers and dairy producers, 
as the Chairman noted a moment ago, are dealing with a 
devastating drought after 3 consecutive below average rainfall 
years. And couple that with water systems that today cannot 
meet the demands we face. In California, for example, we are 
looking at a 6 million acres of very highly productive 
agricultural land in which possibly over 600,000 acres of that 
6 million acres could become fallow this year. What are the 
totals of those impacts and costs?
    Therefore, we have to ensure that credit is available to 
our producers, both large and small and in between. And to 
ensure that credit is available, we must have the mechanisms in 
place, the tools, to provide producers that financial 
assistance. For example, the dairy producers in California and 
across the country saw a sharp decline in prices back in 2009 
and 2010 when we were looking at $9 per hundredweight in milk 
prices. We had significant bankruptcies as a result of that. 
Farm Credit's loan portfolio was impacted as were other private 
institutions that were financing dairies.
    But with the passage of the new farm bill, and bipartisan 
credit is due to this Subcommittee and to the full Committee 
with both Chairman Lucas and Ranking Member Peterson, we were 
able to produce a 2014 Farm Bill that I think reflects a lot of 
the current needs that American agriculture is facing. Dairy 
producers, as an example, and lenders alike, will have 
confidence to apply for and provide loans respectively because 
of the new dairy title and the safety net that exists with the 
insurance program.
    There were also other reforms that were made in the 
Agricultural Act of 2014 that we believe collectively bolster 
rural America. The microloans that were mentioned, the efforts 
to provide assistance to young farmers, the EQIP Program and 
Market Access Program, as examples, we take for granted. But 
American agricultural exports are at an all-time high, proving 
that not only can we produce the food on the American 
consumer's dinner table better than anywhere, but we can 
compete in foreign markets if we have a level playing field.
    So, Mr. Chairman, I look forward to hearing what our 
witnesses have to say about their confidence in our agriculture 
economy and the attempt to ensure that we have a stable source 
of lending activity that is available for agriculture in every 
region of America, as we implement the reforms in the 2014 Farm 
Bill.
    So thank you, and I yield back the balance of my time.
    The Chairman. I thank the Ranking Member and would request 
that any Members that want to submit an opening statement would 
do so in writing for the record, so witnesses may begin their 
testimony and ensure that there is ample time for questions.
    I would like to welcome our first panel of witnesses. Our 
first three witnesses, the Honorable Jill Long Thompson, Board 
Chair and CEO, Farm Credit Administration; Mr. Chris Beyerhelm, 
Deputy Administrator for Farm Loan Programs, Farm Service 
Agency, USDA; and Mr. Nathan S. Kauffman, Assistant Vice 
President, Federal Reserve Bank of Kansas City, Omaha Branch, 
Omaha, Nebraska. We appreciate the witnesses being here today.
    We will recognize each of you in turn for 5 minutes. I 
would direct your attention to the timer and the box that you 
see in front of you. If the light is green, it means you are 
good to go. If it turns yellow, it is just like when you are in 
your car, you might want to step on the gas because it is 
fixing to turn red. So we appreciate that.
    And with that, I would like to introduce our first witness, 
the Honorable Jill Long Thompson. You are recognized for 5 
minutes.

 STATEMENT OF HON. JILL LONG THOMPSON, Ph.D., BOARD CHAIR AND 
              CHIEF EXECUTIVE OFFICER, FARM CREDIT
                   ADMINISTRATION, McLEAN, VA

    Dr. Long Thompson. Thank you, Mr. Chairman, Members of the 
Subcommittee. I am Jill Long Thompson, Board Chair----
    The Chairman. Can you turn on the microphone. Thank you, 
ma'am.
    Dr. Long Thompson. Thank you. That is better. Mr. Chairman 
and Members of the Subcommittee, I am Jill Long Thompson, Board 
Chair and Chief Executive Officer of the Farm Credit 
Administration. On behalf of my colleagues on the FCA Board, 
Kenneth Spearman and Leland Strom, and the dedicated women and 
men at FCA, I am pleased to participate in this hearing today.
    As required by the Farm Credit Act of 1971, as amended, FCA 
serves as the independent arm's-length agency responsible for 
examining and regulating the banks, associations and related 
entities of the Farm Credit System. We take our 
responsibilities very seriously, and we strive to interpret the 
Farm Credit Act faithfully.
    Congress established the Farm Credit System in 1916 to 
provide American agriculture with a dependable source of 
credit. The System consists of a nationwide network of 
cooperatively organized banks and associations that are owned 
and controlled by their borrowers. It serves all 50 states and 
the Commonwealth of Puerto Rico. At year-end 2012, the System 
held more than 46 percent of the nation's farm real estate 
debt. And I am pleased to report that the System's overall 
condition and performance remains sound, and it continues to 
fulfill its Congressionally mandated mission.
    The System's net income was $4.64 billion in 2013, up 12.7 
percent from 2012. Since 2010 when the financial crisis and 
recession were in full swing, credit quality has continued to 
improve. As of December 31, 2013, non-performing loans amounted 
to $2 billion, or 1.01 percent of gross loans, down from $2.6 
billion or 1.36 percent at year-end 2012.
    Because the System raises the money it lends to borrowers 
by selling securities in the debt markets, having reliable 
access to debt capital is critical for the System. And I am 
happy to report that it continues to experience reliable 
access. And investor demand for all System debt security 
products is strong.
    In addition to monitoring the Farm Credit System, my agency 
closely monitors the farm economy for emerging risks that would 
affect farmers and their lenders. Currently, U.S. agriculture, 
as a whole, remains strong. In the Farm Credit Act, Congress 
requires System institutions to provide programs specifically 
to serve young, beginning and small, or as we call them YBS 
farmers and ranchers. In our examinations of System 
institutions, we review their YBS programs to ensure that they 
are meeting the needs of these borrowers. And we also require 
annual reports from institutions on their YBS lending 
activities.
    In the wake of the global financial crisis, we have 
undertaken two major rulemaking actions to strengthen the 
safety and soundness of System institutions. Last June, we 
issued a revised liquidity regulation requiring each bank to 
maintain higher quality liquidity, as well as a supplemental 
liquidity buffer. The rule helps ensure that System banks keep 
liquidity to continue operating if their access to the capital 
markets is temporarily interrupted.
    In addition, the FCA staff worked throughout 2013 and into 
2014 on extensive revisions to the agency's capital 
regulations. The proposed rule, which the Board adopted last 
month, would modernize our capital requirements while ensuring 
that System institutions continue to hold regulatory capital to 
fulfill their mission.
    Another part of our mission is to regulate and oversee the 
Federal Agricultural Mortgage Corporation, or as it is known 
Farmer Mac. Congress established Farmer Mac in 1988 to provide 
a secondary market for agricultural mortgage and rural home 
loans to improve the availability of cost effective, long-term 
credit and liquidity to America's farmers, ranchers and rural 
communities. Farmer Mac is in good financial condition and 
continues to grow its operations and risk bearing capacity to 
advance its statutory mission.
    In the past couple of years, as our nation has considered 
the ways corporate misconduct may have contributed to the 
recent financial crisis, my agency has increased its emphasis 
on ethics and standards of conduct, both among our own 
employees and in the institutions we regulate. American 
agriculture is critical to meeting the food demands of this 
nation and the world, and the Farm Credit System is a critical 
source of financing for America's farmers and ranchers. As the 
regulator of the System, FCA is committed to helping maintain 
the source for generations to come.
    And, Mr. Chairman, this concludes my statement. But, of 
course, I will be happy to answer any questions you may have.
    [The prepared statement of Dr. Long Thompson follows:]

 Prepared Statement of Hon. Jill Long Thompson, Ph.D., Board Chair and 
    Chief Executive Officer, Farm Credit Administration, McLean, VA
Introduction
    Chairman Crawford, Ranking Member Costa, Members of the 
Subcommittee, I am Jill Long Thompson, Board Chair and Chief Executive 
Officer of the Farm Credit Administration (FCA or Agency). On behalf of 
my colleagues on the FCA Board, Kenneth A. Spearman of Florida, Leland 
A. Strom of Illinois, and all the dedicated men and women of the 
Agency, I am pleased to participate in this 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 banks and associations of the 
FCS form 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. We accomplish this mission in two important ways.
    First, we protect the safety and soundness of the FCS by examining 
and supervising all FCS institutions, including Farmer Mac, and we 
ensure that they 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, we develop policies and regulations that govern how System 
institutions conduct their business and interact with customers. Our 
policies and regulations protect System safety and soundness; implement 
the Farm Credit Act; provide minimum requirements for lending, related 
services, investments, capital, and mission; and ensure adequate 
financial disclosure and governance. We approve the corporate charter 
changes of System institutions, 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.
    Since then, the Farm Credit System has restored its financial 
health and the public trust. Using our authority as an arm's-length 
regulator, we have contributed to the System's success by ensuring 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. We 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, we recognize 
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. The System's banks and associations form 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 services 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 1.1 million 
loans and approximately 500,000 stockholders in 2013. 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 41 percent, which slightly 
exceeds the 40 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 6 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. 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
    The FCS remains fundamentally safe and sound and is well positioned 
to withstand the challenges facing agriculture. Although the near-term 
outlook for agriculture is generally favorable, uncertainty surrounding 
both the general and farm economies will present continuing challenges 
for the System.
    The U.S. Department of Agriculture is projecting that net cash 
income will drop sharply in 2014. Crop prices declined significantly in 
2013 in response to strong global crop production. Near-record U.S. 
corn and soybean plantings and a return to normal yields in 2014 could 
lead to further declines in grain and oilseed prices.
    As a consequence of lower prices, margins for crop producers will 
be sharply lower, but the dairy and livestock sectors should see a 
significant improvement in profitability. Lower grain prices are also 
having a cooling effect on the farmland market, especially in the 
Midwest. Severe drought conditions in the West, especially in 
California, may also negatively affect System borrowers. While the 
current credit stress level in the System's loan portfolio is well 
within its risk-bearing capacity, the above-mentioned factors may 
adversely affect asset quality in 2014.
    The System continues to grow at a moderate pace. As of March 31, 
2014, gross loans totaled $204.6 billion, up $12.8 billion or 6.7 
percent from March 31, 2013. Real estate mortgage lending was up $5.5 
billion or 6.2 percent as demand for cropland continued in 2013, 
especially in the Midwest. Overall, real estate mortgage loans 
represent 46.1 percent of the System's loan portfolio. Agribusiness and 
production lending increased by $3.3 billion from the year before, and 
intermediate-term lending increased by $2.4 billion.
    The System also continues to enhance its capital base. As of March 
31, 2014, System capital equaled $43.7 billion, up from $39.6 billion 
the year before. The System's total capital-to-assets ratio was 16.6 
percent as compared with 16.0 percent a year earlier. Moreover, more 
than 81 percent of total capital is in the form of earned surplus.
    The increase in total capital is due in large part to the System's 
strong earnings performance. For the first quarter of 2014, the System 
reported net income of $1.1 billion. For the 2013 calendar year, the 
System reported net income of $4.6 billion. With the decline of 18 
basis points in the interest rate on earning assets, net interest 
margin declined in the first quarter to 2.63 percent compared with 2.83 
percent the year before. Higher average earning asset balances, up 
$15.1 billion year over year, helped offset the decline in net interest 
margin. While the System has been able to take advantage of the low 
interest rate environment, its ability to continue to lower its cost of 
debt relative to asset pricing is limited. Some compression of net 
interest spread is expected as interest rates change and assets prepay 
or reprice.
    Credit quality in the System's loan portfolio continues to be 
strong. As of March 31, 2014, non-performing loans totaled $2.1 
billion, or 1.01 percent of gross loans, as compared with $2.7 billion, 
or 1.41 percent, for the same quarter a year ago. In comparison to 
total capital, non-performing loans represented 4.7 percent at quarter-
end. High feed costs, which challenged livestock, poultry, and dairy 
producers through much of 2013, have moderated as a result of the 
substantial drop in crop prices. Combined with strong product pricing, 
profit margins for these sectors are substantially higher. Other 
sectors such as the forestry and nursery industries have also seen a 
drop in nonaccrual rates as the U.S. housing market continues to 
strengthen.
    The System continues to have reliable access to the debt capital 
markets. Investor demand for all System debt products has been 
positive, allowing the System to continue to issue debt on a wide 
maturity spectrum at very competitive rates. Even as the Federal 
Reserve started to slowly taper its quantitative easing policy at the 
end of 2013, risk spreads and pricing on System debt securities 
remained favorable relative to corresponding U.S. Treasuries. Further 
strengthening the System's financial condition is the Insurance Fund, 
which holds more than $3.6 billion. Administered by the Farm Credit 
System Insurance Corporation, this fund protects investors in System-
wide consolidated debt obligations.
    System banks also maintain liquidity reserves to ensure they can 
withstand market disruptions. As of March 31, 2014, the System's 
liquidity position equaled 183 days, significantly above the 90 day 
regulatory minimum.
A Changing Risk Profile in Agriculture
    The high grain prices of the past few years led to strong earnings 
for grain and soybean farmers. High grain prices had the inverse effect 
on the earnings of livestock and dairy producers, constricting their 
profit margins by driving up their feed costs.
    The tables have now turned, however. The large U.S. corn and 
soybean crops in 2013 and the potentially large crops in 2014 have 
caused prices for these crops to decline considerably. As a result, the 
profit margins for livestock and dairy producers have expanded as the 
profit margins of grain and soybean farmers have constricted. Crop 
insurance played an important role in supporting grain and soybean 
farmers' income in 2013, but the level of support it will provide in 
the future is unclear.
    The reduced profit margins in the crop sector are not expected to 
lead to significant credit problems in the near future because many 
grain farmers have experienced several years of good earnings and 
should have the resources necessary to get them through some lean 
times. Nevertheless, grain farmers who rent most of the land they farm 
may face greater financial stress than those who have no land rental 
costs.
    Farmland values in the Midwest rose rapidly during the past several 
years because of high grain prices and historically low interest rates. 
Most observers agreed that these elevated farmland values were not 
sustainable because grain prices and interest rates would likely revert 
to more sustainable levels, leading to an adjustment in farmland 
prices. Surveys conducted by several Federal Reserve Banks and Iowa 
State University indicate that farmland values are adjusting.
    Fortunately, farm real estate mortgage underwriting has been 
conservative among Farm Credit System institutions as well as 
commercial banks, according to colleagues from other financial 
regulators with whom we discuss common issues regularly. Consequently, 
we believe that most FCS institutions will not face significant losses 
because of adjustments in farmland prices.
    FCA staff monitors developments in the farmland market closely, and 
our examiners have implemented a program for examining the collateral 
risk management at each Farm Credit institution. In addition, we 
monitor System real estate mortgage loan-to-value ratios on a quarterly 
basis. The FCA Board receives semiannual staff reports on the farmland 
market and loan-to-value ratios at Farm Credit institutions.
Examination Programs for FCS Banks and Associations
    FCA is responsible for regulating and supervising the banks, 
associations, and related entities that compose the Farm Credit System. 
Our examination and oversight programs provide strategic, proactive 
risk supervision of the System. In conducting our institution-specific, 
risk-based oversight and examination activities, we assign highest 
priority to institutions that present the greatest risk.
    We also perform nationally focused examinations that target 
specific issues and operational areas to monitor the condition and 
operations of the System as a whole. We actively monitor risks that may 
affect groups of System institutions or the entire System, including 
risks from the agricultural, financial, and economic environment.
    Through our oversight, we require System institutions to have the 
programs, policies, procedures, and controls to effectively identify 
and manage risks. Our oversight program also requires compliance with 
laws and regulations. When institutions are either unable or unwilling 
to address unsafe and unsound practices or to comply with laws and 
regulations, we take appropriate supervisory or enforcement action. We 
use a comprehensive regulatory and supervisory framework to ensure the 
System's safety and soundness. FCS institutions, on their own and in 
response to our efforts, continue to improve their risk management 
systems.
    FCA uses the Financial Institution Rating System (FIRS) to assess 
the safety and soundness threats to each System institution. Similar to 
the systems used by other Federal financial regulators, the FIRS is a 
CAMELS-based system, with component ratings for capital, assets, 
management, earnings, liquidity, and sensitivity, all factoring into an 
overall composite rating. System institutions are assigned component 
and composite ratings based on FCA's evaluation of quantitative and 
qualitative factors. FIRS ratings range from 1 for a sound institution 
to 5 for an institution that is likely to fail.
    Although the System's financial condition remains sound, a small 
number of individual institutions display some weaknesses. These 
weaknesses stem from several factors that have adversely affected some 
System borrowers:

   The slow pace of economic recovery

   Volatile commodity prices

   Drought in the western United States

   Damaging diseases in the citrus and pork sectors

    As the System's regulator, we have increased supervisory oversight 
and dedicated additional resources to institutions experiencing stress. 
As of December 31, 2013, eight System institutions had a composite FIRS 
rating of 3. While these institutions represent about two percent of 
System assets and do not meaningfully affect the System's consolidated 
performance, they require significantly more resources to oversee.
    The chart below includes the System banks and their affiliated 
associations. The figures in the bars reflect the number of 
institutions by FIRS rating.
Farm Credit System FIRS Composite Ratings


          Source: FCA's FIRS Ratings Database.
Regulatory Activities
    Congress has given the FCA Board statutory authority to establish 
policy, prescribe regulations, and issue other guidance to ensure that 
System institutions comply with the law and operate in a safe and sound 
manner. We are committed to developing balanced, flexible, and legally 
sound regulations.
    Over the past couple of years, we have revised our regulations to 
accomplish the following objectives:

   To require each System institution's business plan to 
        include strategies and actions to serve all creditworthy and 
        eligible persons in the institution's territory. In addition, 
        the regulation encourages institutions to serve 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 also seeks to achieve 
        diversity and inclusion in the workforce of System 
        institutions.

   To enhance System disclosures of senior officer compensation 
        and supplemental benefit programs.

   To ensure that System institutions maintain effective 
        policies to measure and manage exposure to single 
        counterparties, industries, and market segments, and to large 
        complex loans.

   To ensure that System funding and liquidity requirements are 
        appropriate and to ensure that the discounts applied to 
        investments reflect their marketability.

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

   To ensure that prudent practices are in place for the safe 
        and sound management of System investment portfolios.

   To remove all requirements related to nonbinding, advisory 
        votes at System institutions on senior officer compensation.

   To establish a regulatory framework for the reporting of 
        System accounts and exposures to FCA. The revisions reaffirm 
        our authority to collect data on System institution accounts 
        and exposures, including data on shared assets.

   To establish standards for Farmer Mac's capital planning 
        process. The revised process emphasizes the quality and level 
        of capital and annual stress testing.

   To increase the level and quality of assets held in Farmer 
        Mac's liquidity reserve.

    Currently, we are working on regulatory projects to accomplish 
these additional objectives:

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

   To implement the requirements of the Dodd-Frank Wall Street 
        Reform and Consumer Protection Act by imposing margin 
        requirements on noncleared derivatives transactions and 
        removing references to credit ratings.

   To clarify and strengthen the standards-of-conduct 
        requirements for System directors, employees, and agents.

   To seek public input on FCA regulations that may duplicate 
        other requirements, are not effective in achieving the stated 
        objectives, are not based on law, or impose burdens that are 
        greater than the benefits received.

   To clarify and enhance stockholder voting procedures.

   To revise regulatory requirements for mergers or 
        consolidations of banks or associations.

   To strengthen the safety and soundness of the investment 
        activities of System banks by more accurately reflecting the 
        risk in particular investments, and to comply with a provision 
        of the Dodd-Frank Act by replacing credit rating requirements 
        with other standards of creditworthiness.

   To ensure appropriate and effective risk governance and 
        board oversight at Farmer Mac, and to clarify standards-of-
        conduct and conflict-of-interest requirements.

   To remove reliance on credit ratings from investment 
        eligibility regulations pertaining to Farmer Mac and to 
        maintain the quality and availability of Farmer Mac's liquid 
        investments.
Corporate Activities
    The number of FCS institutions has declined over the years as a 
result of bank and association mergers. Generally, System institution 
mergers result in larger, more cost-efficient and better-capitalized 
institutions with broad, diversified asset bases, both by geography and 
commodity.
    However, these mergers also increase the complexity of the 
continuing institutions. The increased complexity places greater 
demands on both FCA staff resources, as well as the level of expertise 
required of staff, particularly in areas of regulation, policy, 
examination, and legal interpretation. As of January 1, 2014, the 
System consisted of the following:

   Seventy-eight direct-lender associations

   Three Farm Credit Banks and one Agricultural Credit Bank

   Five service corporations that provide support, technology, 
        leasing, human capital, and other services

   A funding entity that markets the securities--chiefly bonds 
        and discount notes--that the banks sell in the capital markets 
        to raise loan funds

   A GSE with the mission of providing a secondary market for 
        agricultural real estate and rural housing mortgage loans
Federal Agricultural Mortgage Corporation
    Congress established Farmer Mac in 1988 to provide a secondary 
market for agricultural mortgage and rural home loans to improve the 
availability of cost-effective long-term credit and liquidity to 
America's farmers, ranchers, and rural communities. 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. Loan originators that participate in Farmer Mac's 
secondary market programs include community banks, Farm Credit System 
institutions, mortgage companies, commercial banks, insurance companies 
and credit unions. 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 (the Office of 
Secondary Market Oversight), FCA examines, regulates, and oversees 
Farmer Mac's operations and its safety and soundness. As the secondary 
market GSE devoted to agriculture and rural America, Farmer Mac has the 
statutory authority to, in extraordinary circumstances, issue 
obligations to the U.S. Treasury Department, not to exceed $1.5 
billion, to fulfill the guarantee obligations of its guaranteed 
securities. The Insurance Fund does not back Farmer Mac's securities, 
and the System is not liable for any Farmer Mac obligations.
    After sustaining losses on liquidity investments during the 2008 
financial crisis, Farmer Mac continues to replenish capital and 
strengthen its operations and risk-bearing capacity to advance its 
statutory mission. Over the past several quarters, Farmer Mac's capital 
position has steadily improved, with healthy core earnings growth and 
recent issuances of high-quality preferred stock. As of March 31, 2014, 
Farmer Mac's core capital totaled $664.0 million, which exceeded its 
statutory requirement of $462.5 million. As a result, capital surplus 
grew to $261.0 million, up from $155.6 million as of March 31, 2013.
    New business volume growth is steady. The total portfolio of loans, 
guarantees, and commitments grew by five percent from March 31, 2013, 
to $14.1 billion on March 31, 2014. Farmer Mac recently reported that 
small farm loans contributed 44 percent of the volume related to its 
new Farm & Ranch program. Despite the decreasing number of small farms, 
Farmer Mac has seen an overall increase in the dollar volume and number 
of small farm loans in its programs.
    Credit quality indicators reflect the strength in the agricultural 
and rural utility sectors and Farmer Mac's commitment to strong 
underwriting standards. As of March 31, 2014, Farmer Mac's 90 day 
delinquencies were $29.4 million, or 0.56 percent of Farm & Ranch 
volume, compared with $39.7 million, or 0.83 percent, as of March 31, 
2013. Real estate owned as of March 31, 2014, was $2.5 million, down 
from $4.4 million a year earlier. Farmer Mac reported no delinquencies 
in its pools of rural utility cooperative loans. On March 31, 2014, 
Farmer Mac's allowance for losses totaled $14.0 million, compared with 
$14.3 million on March 31, 2013.
    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. To improve its financial flexibility in 
the event of a financial or market disruption, Farmer Mac has taken 
significant measures to increase the quality and liquidity of its $2.5 
billion investment portfolio.
Serving Young, Beginning, and Small Farmers and Ranchers
    System institutions are required to develop programs and make 
special efforts to serve young, beginning, and small (YBS) farmers and 
ranchers. In 2013, the System continued to show gains in loan dollars 
outstanding and loan numbers outstanding to YBS producers. In addition, 
from 2012 to 2013, the number of new loans made to young farmers went 
up by 2.3 percent, and the number of new loans made to beginning 
farmers went up by 5.0 percent.
    Despite these gains, YBS results as a percentage of the System's 
total farm loans have either declined or remained flat over the past 
few years. These results likely reflect the shrinking pool of YBS 
farmers in the United States. Because of the high costs of starting a 
farm, fewer people are entering agriculture. Over the years, farms have 
gotten bigger, and the average age of farmers has gone up.
    FCA issued a bookletter in August 2007 to encourage institutions to 
seek ways to better serve YBS borrowers. The bookletter provides 
institutions with more flexibility to lend to YBS borrowers and 
encourages them to use credit enhancements to allow more YBS borrowers 
to qualify for credit. Credit enhancements for YBS borrowers may 
include:

   lower rates or fees for YBS borrowers,

   differential underwriting standards, and

   USDA loan guarantees.

    In response to this guidance, more institutions are committing 
capital to assist in their YBS lending, and more are using advisory 
committees to update YBS policies and procedures. Many institutions 
have stepped up their YBS outreach efforts and their coordination with 
outside parties or organizations to serve YBS producers.
    In addition to providing credit to YBS borrowers, FCS institutions 
may offer other financial services to YBS borrowers, and many 
institutions provide special training and educational programs for 
them.
    Our efforts to encourage System institutions to emphasize diversity 
and inclusion and to serve producers of local and regional foods also 
benefit YBS producers. In 2012, to ensure the System fulfills its 
Congressional mission to serve all eligible, creditworthy borrowers, we 
issued a regulation requiring institutions to develop human capital and 
marketing plans that promote diversity and inclusion. Because many 
small and beginning farmers belong to underrepresented groups, this 
regulation helps strengthen service to YBS borrowers. Likewise, a 
bookletter we issued in 2012 to provide guidance regarding service to 
local and regional foods producers also benefits YBS borrowers because 
many of these producers would be classified as young, beginning, or 
small.
Working with Financially Stressed Borrowers
    Risk is an inherent part of agriculture, and the causes of risk are 
many:

   Adverse weather

   Changes in government programs

   International trade issues

   Fluctuations in commodity prices

   Crop and livestock diseases

    These risks can sometimes make it difficult for borrowers to repay 
loans. The Farm Credit Act provides System borrowers certain rights 
when they apply for loans and when they have trouble repaying loans. 
For example, the act requires FCS institutions to notify borrowers of 
the right to seek restructuring of loans before the institutions begin 
foreclosure. It also provides borrowers an opportunity to seek review 
of certain credit and restructuring decisions. When a System 
institution acquires agricultural property through liquidation, the 
Farm Credit Act also provides borrowers the opportunity to buy or lease 
back their former properties.
    FCA enforces the borrower rights provisions of the Farm Credit Act 
and examines institutions to make sure that they are complying with 
these provisions. We also receive and review complaints from borrowers 
who believe their rights have been denied. Through these efforts, we 
ensure compliance with the law and help FCS institutions continue to 
provide sound and constructive credit and related services to eligible 
farmers and ranchers.
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, we remain committed to excellence, effectiveness, 
and cost efficiency, and we 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. I appreciate that. And we will 
move on to our next witness, Mr. Chris Beyerhelm, Deputy 
Administrator for Farm Loan Programs, FSA.

              STATEMENT OF CHRIS BEYERHELM, DEPUTY
           ADMINISTRATOR FOR FARM LOAN PROGRAMS, FARM
  SERVICE AGENCY, U.S. DEPARTMENT OF AGRICULTURE, WASHINGTON, 
                              D.C.

    Mr. Beyerhelm. Mr. Chairman, Members of the Subcommittee, 
thank you for this opportunity to appear before you to provide 
an update on credit conditions in rural America and a status 
update on how FSA loan programs are working with our commercial 
lending partners to provide credit to our farmers and ranchers.
    The farm economy has been strong in recent years with high 
farm income and farmland values at or near record levels. 
However, these highs are not expected to continue, and not all 
agriculture sectors have benefited from these conditions. An 
increase in feedgrain production is expected to drive farm 
income down, and a slowdown in real estate values has already 
been observed. Our livestock producers and dairy operations are 
still recovering from extended periods of high feed costs and 
drought. And input costs for all are expected to remain at near 
or record high levels of recent years.
    Finally, considering all of these events, combined with 
interest rates creeping up, lenders and their regulators are 
closely scrutinizing agriculture credit standards, making some 
producers unable to get credit. For those family farmers who 
could not qualify for commercial credit due to lender 
standards, but otherwise creditworthy, they can turn to the FSA 
administered guaranteed loan programs. These loan programs are 
discretionary and are funded through annual appropriations. 
Federal budget resources have been increasingly leveraged over 
the last 4 years through loan programs. For example, in 2010, 
$148 million of budget authority was needed to provide $5 
billion of lending authority. While in 2014, a significantly 
reduced budget authority of $98 million provided for $5.5 
billion of lending authority. This is an excellent example of 
how government programs that are prudently managed the taxpayer 
with a greater return.
    Since early 2009, FSA has experienced record demand levels 
of loan requests. In each of the last 4 years, FSA has had a 
significant backlog of approved, but unfunded, loans. To manage 
this increase, the President's 2015 budget has requested 
lending authority to go to $6.4 billion. And should these funds 
be provided, FSA expects for the first time in many, many years 
to be able to meet all of the demand in our loan programs. This 
will allow our customers to be better prepared and execute 
their business plans, and meet on an even playing field for 
land and preseason discounts.
    As of May 2014, the FSA portfolio was $20 billion, 71,000 
direct customers, 34,000 guaranteed customers. Performance of 
the portfolio has been stellar, with loss rates for the direct 
and guaranteed programs at 1.6 and .3 percent respectively. 
Delinquencies for direct and guaranteed are 5.4 percent and 1 
percent respectively.
    The portfolio continues to be fluid with customers moving 
in and out of the portfolio as it was designed. In fact, of all 
of the customers in our portfolio in the year 2000, for the 
operating program, only 14 percent of those remained in 2013. 
These statistics indicate the program is providing new and 
beginning farmers an opportunity. But once their financial 
condition improves, they are able to seek and obtain commercial 
credit.
    The FSA continues to put an emphasis on beginning farmers. 
The continued increase in average age of farmers and rural 
population decline says that there is a pressing need that we 
get new farmers into the industry. We try to take existing loan 
programs and tweak and revise those to provide benefits to 
beginning farmers. Most notably, the microloan program you have 
mentioned earlier has been a tremendous asset to beginning 
farmers. Since its inception in January of 2013, over 7,200 of 
these loans have been made. And I am pleased to tell you that 
over 70 percent of those have been to beginning farmers.
    Congress also recognized the importance of beginning 
farmers in the last farm bill. And soon after enactment, FSA 
implemented all of the discretionary--or the non-discretionary 
provisions of the farm bill. And many of those had immediate 
impact on beginning farmers, though many of the farm bill 
provisions will be implemented in October of 2014, with the 
rest in early 2015.
    In conclusion, Mr. Chairman, FSA, working together with our 
commercial lending partners, is delivering a successful lending 
program with high levels of participation and fiscal 
responsibility. Our boots on the ground delivery system puts us 
in a unique position to deliver a quality loan product to the 
next generations of America's farmers and ranchers. However, we 
continue to face challenges: government resources are 
declining, and agriculture is changing.
    We look forward to working with this Committee and others 
to continue to refine and adjust our programs and processes to 
maximize the opportunities for our small, beginning and 
socially disadvantaged farmers, and find the appropriate level 
of resources in order for us to meet this--or accomplish this 
mission.
    Thank you for allowing me to share the FSA farm loan 
perspectives as you seek to address this important issue. I 
look forward to any questions now or in the future. Thank you.
    [The prepared statement of Mr. Beyerhelm follows:]

 Prepared Statement of Chris Beyerhelm, Deputy Administrator for Farm 
  Loan Programs, 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 provide an update on the credit 
conditions rural America now faces, and the current status and 
operations of the farm loan programs at the Farm Service Agency (FSA).
Credit Conditions
    The farm economy has been strong the last couple of years with net 
farm income at an all-time high in 2013, and farmland values currently 
at, or near, record levels. However, record farm income is not 
sustainable. A bumper feed grain crop is being forecast for 2014 that 
could lead to a 27 percent decline in farm income from last year, but 
farm income is still forecast to be the seventh highest to date. A 
slowdown in farmland value growth already has been observed. 
Furthermore, the high commodity prices in prior years did not benefit 
all producers equally as higher feed costs squeezed livestock and dairy 
producer margins leaving them with weak balance sheets in need of 
rebuilding. Compared to 2012, gross crop receipts are forecast to 
decrease by more than 15.2 percent in 2014, with a $20.2 billion 
decline in corn receipts and a $6.2 billion decline in soybean receipts 
expected.
    On a historical basis, production expenses are anticipated to fall 
from 2013 levels, but will remain near their all-time highs, having 
grown to a forecasted $348.2 billion for 2014, which is a 21.1 percent 
increase over 2010. Therefore, large amounts of capital will continue 
to be required to finance agricultural production, increasing the 
demand for operating credit, financial leverage, and liquidity.
    Finally with interest rates bottoming out and farmland values high, 
credit standards established by lenders and their regulators have been 
high since 2010 and will likely continue to be high for some time. 
Recent Federal Reserve Surveys indicate commercial lenders in most 
regions are maintaining stringent credit standards. This continued high 
level of loan scrutiny by lenders means some farmers still cannot 
qualify for commercial credit.
    FSA Farm Loan Programs. Family farmers who do not qualify for 
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. In fact, of those borrowers having 
outstanding operating loans in 2000, only 14 percent remain in the FSA 
portfolio in 2014.
    Guaranteed loans are made, funded and serviced by a commercial 
lender. FSA typically 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 1990 (as amended), appropriations for FSA farm loans are 
based on the projected total cost of loans when they are made. Federal 
budget resources are able to be significantly leveraged through the 
loan programs. In Fiscal Year (FY) 2014, $97.7 million in 
appropriations supported $5.53 billion in direct and guaranteed FSA 
loans which, when provided to American farmers and ranchers, resulted 
in a significant investment in the rural parts of our country. Prudent 
management and program administration, as evidenced by low levels of 
delinquencies and losses, has allowed FSA to increase leverage of 
limited budgetary resources over the past several years. For example, 
in FY 2010, $148.5 million in budget authority was required to support 
a total program level of $5.08 billion, while in FY 2014, a slightly 
larger program level requires 34 percent less budget authority.
    Loan Demand. Activity in FSA's farm loan programs indicates that a 
significant number of farmers and ranchers 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 overall farm economy is strong, farm loan activity 
declines; during times of financial stress in the farm economy, demand 
for FSA loans rises. This makes sense, given that 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 in 2013, reached its highest levels since FY 1985. Demand 
has continued at, and in some programs increased above, those near-
record FY 2009 levels. In each of the last 4 years FSA has closed out 
the fiscal year with a significant backlog in approved, but unfunded 
loans. Application activity in FY 2014 reflects demand levels similar 
to the higher levels of the previous 5 years. To manage the increased 
demand, the President's budget request for FY 2015 recommended that 
loan levels to be increased to $6.4 billion. If these funds are 
provided, FSA expects, for the first time in many years, to have 
sufficient funds to meet the demand. This will allow our customers to 
better prepare and execute their business plans, and compete on an even 
playing field for land and pre-season discounts on inputs.
    Over the past 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 in any given 
year are from farmers who do not have FSA loans. In FY 2013, 37 percent 
of the direct operating loans made were to customers who did not have 
existing FSA operating loans.
Performance and Portfolio Conditions
    Farm loan programs continue to emphasize the importance of 
processing applications in a timely manner. Between FY 2008 and FY 
2013, the length of time to process direct loans has averaged 28 days. 
During this period, FY 2010 (the largest loan volume year since the 
mid-1980s) had the highest average, at just less than 31 days, while 
the lowest of 25 days was achieved in FY 2013. Similarly, loan 
processing timeliness in the guaranteed loan program has remained very 
strong with an average of 9 days over the past 6 years. These results 
for both the direct and guaranteed programs represent historic lows. 
This strong performance is continuing in FY 2014. As of May 31, 2014, 
the average processing time for the direct loan program was 24 days, 
and 9 days for guaranteed loans. These long-term results are remarkable 
given that loan demand has surged and staffing levels have declined. 
The fact that there has not been a noticeable deterioration in 
application processing time is a testament to the dedication of FSA 
field staff, implementation of efficiency measures in loan processing, 
and the effectiveness of the Information Technology (IT) solutions farm 
loan programs has deployed.
    As of May 31, 2014, the FSA direct loan portfolio consisted of $8.2 
billion owed by 70,445 borrowers, while the guaranteed portfolio 
consisted of $11.5 billion owed by 33,847 borrowers. The quality of our 
portfolio has continued to improve, with foreclosure and loss rates 
falling while borrower graduation to commercial loans has increased.
    Loss Rates. In FY 2013, losses in the direct loan program were just 
1.6 percent (see Chart 1). Losses for FY 20l3 in the guaranteed loan 
program were 0.3 percent, (see Chart 1).
    Delinquency Rates. As with losses, the direct loan delinquency 
rates have been at historic lows for the past 2 decades at 5.4 percent 
for FY 2013 (see Chart 2). 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 
delinquent borrowers' loan obligations with their Federal payments, 
salaries and income tax refunds. In the guaranteed program, the FY 2013 
delinquency rate was 1.07 percent; the lowest on record (see Chart 2).
    Graduation rates: FSA does not provide permanent financing; direct 
loan borrowers are required to move to commercial credit or graduate 
when they are able to do so. Statistics indicate that the vast majority 
of borrowers leave the FSA portfolio in a relatively short (given a 
potential 40+ year farming career) period of time. Eighty six percent 
of the operating loan borrowers in the FSA portfolio in 2000 no longer 
owed an operating loan by 2013. In the farm ownership program, over 70 
percent of the borrowers in the FSA portfolio in 2000 had left by 2013. 
These statistics indicate the program is providing new and beginning 
farmers an opportunity to obtain credit, but after establishing 
themselves financially, are able to seek and obtain commercial credit.
Equitable Treatment and Participation
    I, along with all members of the FSA management team, remain fully 
committed to providing equal access and opportunity to all those FSA 
serves. In FY 2013, while FSA received more than 50,000 loan 
applications, more than 2,700 loan servicing requests, and tens of 
thousands of applications for various farm commodity, income support, 
and disaster assistance programs, the Assistant Secretary for Civil 
Rights received only 19 civil rights complaints related to FSA 
programs. While this is the lowest number of FSA civil rights 
complaints received since records have been kept, it is our goal to 
further reduce this number.
    I will closely monitor the operations of farm loan 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. FSA has significantly increased the amount of loan funds 
provided to socially disadvantaged applicants. Between 2008 and 2013, 
the FSA direct loan caseload for socially disadvantaged borrowers 
increased from 14,068 to 15,514.
    New and Beginning Farmers. The continuing increase in the average 
age of farmers and decline in rural population both point to a pressing 
need for more beginning farmers. As a result, assisting and fostering 
beginning farmers and ranchers remain a primary concern and focus for 
FSA farm loan programs. While the general strength of the agriculture 
economy is certainly a positive factor for rural America, the resulting 
increases in land values and other capital costs have made it ever more 
difficult for beginning farmers to get started and become established. 
More than ever, beginning farmers need a hand up to start their journey 
toward success.
    FSA is committed to effective use of farm loan programs and 
authorities to assist beginning farmers. Beyond implementation of the 
2014 Farm Bill provisions benefitting beginning farmers, FSA has 
implemented or modified programs under existing authorities to better 
fit the needs of beginning farmers. Most notably, the microloan 
program, a subset of the direct operating loan program, has been 
tremendously successful in assisting beginning farmers. This program, 
launched in January 2013, reduces paperwork by half and is designed to 
fit the business plans of non-commodity operations such as local food, 
community-supported agriculture, urban agriculture and niche market 
farm businesses which are attracting many beginning farmers. So far 
this year, 72 percent of the microloans made have gone to beginning 
farmers. Although the program is still new, performance, so far, is 
very good, with over 7,200 loans made.
    In addition to the microloan program, FSA implemented a 
``streamlined loan'' application process for repeat operating loan 
customers with good repayment history on FSA loans. This allows FSA to 
provide more timely service to many beginning farmer borrowers and 
frees staff time so they may spend more time with those borrowers who 
need additional help or technical assistance.
    2014 Farm Bill Implementation. Congress also recognized the 
criticality of the situation for beginning farmers and re-affirmed the 
focus on them for FSA programs in the 2014 Farm Bill. 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 caseload for beginning farmers increased from 
18,785 in 2008 to 31,659 borrowers in 2013.
    FSA was able to implement several nondiscretionary provisions of 
the farm bill shortly after enactment, including provisions to increase 
the guarantee percentage on guaranteed conservation loans, reduce the 
interest rate on joint financing loans, increase the loan limit on down 
payment loans, eliminate guaranteed loan term limits, change the land 
ownership limitation for beginning farmer applicants, eliminate the 
restriction on youth loans to rural areas, and reduce credit 
limitations for delinquent and defaulted youth loan borrowers. Several 
of these had an immediate impact on beginning farmers. In particular, 
the change in interest rates on joint financing farm ownership loans 
benefitted hundreds of applicants with applications pending, but not 
yet funded, at the time of implementation.
    Several additional farm bill provisions will be implemented through 
an interim rule scheduled for publication in October 2014, including 
changes to eligibility rules for entities, experience requirements for 
direct ownership loans, and increasing the microloan limit to $50,000. 
These provisions will add flexibility or enhance programs for beginning 
farmers as well. The Agency plans to publish a request for suggestions 
for pilot projects authorized in Section. 5302, and hopes to receive 
suggestions for projects that demonstrate new approaches to assist 
beginning farmers and others through farm loan programs. In addition, 
we are prepared to implement the Individual Development Accounts 
authorized by the farm bill if funding is provided.
    IT Modernization. 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 recovery dollars flowing to those who urgently 
needed it. The modern, web-based IT systems in place for farm loan 
programs, such as the Direct Loan System and the Program Funds Control 
System, were, and are, a key factor in our ability to provide such 
timely service.
    The continued efforts to move all automated systems to the Web will 
allow for the elimination of duplicate data collection and for farm 
loan services to be delivered even more efficiently. This will further 
our mission to conduct USDA business from any location where there is 
broadband or WiFi Internet access and allow us to conduct business with 
producers at locations and times convenient to them. Additionally, loan 
information is stored on a centralized server allowing employees to 
quickly access portfolio information and provide real time management 
reports.
Conclusion
    Through modernization efforts, maintaining focus on program 
objectives, and the hard work and dedication of FSA employees, FSA farm 
loan program staff 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. It will require every bit of innovation, management 
expertise, and determination that we can muster to maintain the 
efficiency and efficacy of farm loan programs over the next several 
years.
    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 look forward to working with you to 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 and to seek a level of resources appropriate for this 
important mission.
    Because of our rural delivery system and experienced loan officers, 
FSA's 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.
    Thank you for allowing me to share our Department of Agriculture 
perspective as you seek to address this important issue. I am available 
to answer your questions now or at any time in the future.
                                 Charts
Chart 1
Farm Loan Programs Loss Rates
10 Year Trend


Chart 2
Farm Loan Programs Dollar Delinquency Rates
10 Year Trend



    The Chairman. Thank you, sir. Now, I am pleased to 
recognize the Vice President, Federal Reserve Bank of Kansas 
City, Mr. Nathan Kauffman. You are recognized for 5 minutes.

  STATEMENT OF NATHAN S. KAUFFMAN, ASSISTANT VICE PRESIDENT, 
  FEDERAL RESERVE BANK OF KANSAS CITY, OMAHA BRANCH, OMAHA, NE

    Mr. Kauffman. Thank you, Mr. Chairman, and Members of the 
Subcommittee. Thanks for the opportunity to speak to you this 
morning. My name is Nathan Kauffman, and I am Assistant Vice 
President and Economist at the Federal Reserve Bank of Kansas 
City, our regional reserve bank that has long devoted 
significant attention to U.S. agriculture. In my role, I lead 
several efforts to track the agricultural and rural economy, 
including a regional agricultural credit survey and the Federal 
Reserve System's Agricultural Finance Databook, which is a 
national survey of agricultural lending activity at commercial 
banks.
    I am pleased to share with you this morning information on 
the current state of agricultural credit markets. Before I 
begin, let me emphasize that my statement represents my view 
only, and is not necessarily that of the Federal Reserve System 
or any of its representatives.
    The U.S. agricultural economy has been very strong since 
2009. According to the USDA, average farm income from 2010 
through 2013 annually was about 46 percent higher than the 
average of the previous 10 years. Crop prices surged and 
cropland values increased dramatically during that time. In key 
crop producing states, cropland values rose by more than 20 
percent annually for several consecutive years, which 
strengthened overall farm sector balance sheets. The crop 
sector was a primary driver of these near record farm incomes, 
while the livestock sector experienced multiple years of poor 
profits or losses due to elevated feed costs.
    Several key measures of agriculture credit conditions 
monitored by the Kansas City Fed also improved from 2009 to 
2013. According to Federal Reserve surveys of agricultural 
banks, repayment rates for agricultural production loans in the 
Kansas City, Chicago and Minneapolis districts all improved 
considerably alongside rising farm income. Profitability and 
agricultural banks also strengthened significantly.
    During this time, however, bankers commented that 
agricultural loan demand had fallen despite declining interest 
rates, as farmers used more cash to pay for farm related 
expenses. Although the overall financial position of the farm 
sector had improved, some agricultural producers were more at 
risk for financial stress than others. Our banker contacts 
consistently voiced concerns about the viability of some 
livestock operations facing steep losses, as well as young and 
beginning farmers with significantly less equity in their 
operations.
    Since last fall's crop harvest, sharp changes in 
agriculture commodity prices have led to corresponding changes 
in the outlook for the farm sector and agricultural finance. 
Current corn prices are about 40 percent less than last year. 
Conversely, average fed cattle prices are approximately 25 
percent higher than a year ago. And overall livestock prices 
and lower feed costs have contributed to a rebound in livestock 
sector profitability.
    Lower crop prices and persistently high input costs have 
reduced profit margins for U.S. crop producers and have 
affected recent trends in agricultural lending. Toward the end 
of 2013, declining profit margins reduced farm cash flow. As a 
result, demand for some agricultural loans began to rise, and 
lending activity jumped considerably in the first quarter of 
2014. The Federal Reserve's Agricultural Finance Databook, 
included with my written testimony, shows that the volume of 
new short-term farm loan originations increased by 28 percent 
from the previous year in the first quarter. Total farm debt at 
commercial banks increased by 9.1 percent from the year 
earlier. And non-real estate farm debt rose by 9.9 percent, 
which was the biggest year over year increase since 2001. 
Delinquency rates on agricultural loans, however, have remained 
historically low. And bankers have continued to report that 
ample funds are available for agricultural borrowers, amid a 
relatively competitive environment for high quality 
agricultural loans.
    Looking ahead, the level of working capital and overall 
liquidity in the farm sector will be crucial components of the 
financial health and credit conditions surrounding U.S. farm 
operations. If profit margins remain under pressure in the crop 
sector, and debt continues to rise, the ability of crop 
producers to withstand an increase in financial stress may be a 
concern, even as the outlook for the livestock sector has 
improved. Farmers with lower levels of equity, including young 
and beginning farmers, may be most vulnerable to financial 
stress, particularly if cropland values fall and farm income 
declines from its historically high levels.
    Despite these concerns, commercial banks have continued to 
recognize the long-term potential for U.S. agriculture and have 
financed the sector accordingly, albeit more cautiously in some 
areas.
    Thank you, Mr. Chairman, for inviting me today. This 
concludes my remarks. I would be happy to answer any questions 
there may be.
    [The prepared statement of Mr. Kauffman follows:]

  Prepared Statement of Nathan S. Kauffman, Assistant Vice President, 
      Federal Reserve Bank of Kansas City, Omaha Branch, Omaha, NE
    Thank you Mr. Chairman and Members, of the Subcommittee. My name is 
Nathan Kauffman, and I am Assistant Vice President and Economist at the 
Federal Reserve Bank of Kansas City, a regional Reserve Bank that has 
long devoted significant attention to U.S. agriculture. In my role, I 
lead several efforts to track the agricultural and rural economy, 
including a regional agricultural credit survey and the Federal Reserve 
System's Agricultural Finance Databook, a national survey of 
agricultural lending activity at commercial banks. I am pleased to 
share with you the following information on the current state of 
agricultural credit markets. Before I begin, let me emphasize that my 
statement represents my view only and is not necessarily that of the 
Federal Reserve System or any of its representatives.
Agricultural Finance and Credit Conditions: 2010 to 2013
    The U.S. agricultural economy has been very strong since 2009. 
According to the U.S. Department of Agriculture (USDA), average real 
net farm income from 2010 through 2013, annually, was about 46 percent 
higher than the average of the previous 10 years. Crop prices surged 
and cropland values increased dramatically during that time, rising by 
more than 20 percent annually in key crop-producing states for several 
consecutive years, which strengthened overall farm sector balance 
sheets. The crop sector was a primary driver of these near-record farm 
incomes, while the livestock sector experienced multiple years of poor 
profits or losses due to elevated feed costs.
    Several key measures of agricultural credit conditions monitored by 
the Kansas City Fed also evolved positively from 2009 to 2013. 
According to Federal Reserve surveys of agricultural banks, repayment 
rates for agricultural production loans in the Kansas City, Chicago and 
Minneapolis districts all improved considerably alongside rising farm 
income, and profitability at agricultural banks strengthened 
significantly. During this time, however, bankers commented that 
agricultural loan demand had fallen, despite declining interest rates, 
as farmers used more cash to pay for farm-related expenses.
    Although the overall financial position of the farm sector had 
improved, some agricultural producers were more at risk for financial 
stress than others. Our banker contacts consistently voiced concerns 
about the viability of some livestock operations facing steep losses, 
as well as young and beginning farmers with significantly less equity 
in their operations.
Current Agricultural Finance and Credit Conditions
    Since last fall's crop harvest, sharp changes in agricultural 
commodity prices have led to corresponding changes in the outlook for 
the farm sector and agricultural finance. Current corn prices are about 
40 percent less than last year. Conversely, average fed cattle prices 
are approximately 25 percent higher than a year ago and, overall, 
higher livestock prices and lower feed costs have contributed to a 
rebound in livestock sector profitability.
    Lower crop prices and persistently high input costs have reduced 
profit margins for U.S. crop producers and have affected recent trends 
in agricultural lending. Toward the end of 2013, declining profit 
margins reduced farm cash flow, and as a result, demand for operating 
and other agricultural loans began to rise and lending activity jumped 
considerably in the first quarter of 2014. The Federal Reserve's 
Agricultural Finance Databook, included with my written testimony, 
shows that the volume of new, short-term farm loan originations 
increased by 28 percent from the previous year in the first quarter. 
Total farm debt at commercial banks increased by 9.1 percent from a 
year earlier, and non-real estate farm debt rose by 9.9 percent, the 
biggest year-over-year increase since 2001. Delinquency rates on 
agricultural loans, however, have remained historically low and bankers 
have continued to report that ample funds are available for 
agricultural borrowers amid a relatively competitive environment for 
high-quality agricultural loans.
    Looking ahead, the level of working capital and liquidity in the 
farm sector will be crucial components of the financial health and 
credit conditions surrounding U.S. farm operations. If profit margins 
remain under pressure in the crop sector and debt continues to rise, 
the ability of crop producers to withstand an increase in financial 
stress may be a concern, even as the outlook for the livestock sector 
has improved. Farmers with lower levels of equity, including young and 
beginning farmers, may be most vulnerable to financial stress, 
particularly if cropland values fall and farm income declines from its 
historically high levels, as projected by USDA and Federal Reserve 
surveys. Despite these concerns, commercial banks have continued to 
recognize the long-term potential for U.S. agriculture and have 
financed the sector accordingly, albeit more cautiously in some areas.
    This concludes my formal remarks and I would be happy to answer any 
questions you may have. Thank you.
                               Attachment
Agricultural Finance Databook
Operating Loans Drive Recent Increases in Farm Lending
By Nathan Kauffman and Maria Akers
April 2014

    Farm loan volumes at commercial banks rose dramatically in the 
first quarter of 2014, driven by increased demand for short-term 
production loans. According to a national survey of commercial banks 
from the first full week of February, agricultural producers borrowed 
larger amounts compared with last year to cover current operating 
expenses. Lower crop prices reduced cash flow for farmers selling the 
remainder of last year's crop and overall crop input costs remained 
high despite a moderate decline in fertilizer prices. Feeder livestock 
loan volumes also rose as low inventories pushed feeder cattle and hog 
prices higher. In contrast, farm capital spending slowed further, 
lessening the need for intermediate-term farm machinery and equipment 
financing.
    Small and midsize banks added loans faster than their larger 
competitors under differing terms. Non-real estate farm loan volumes 
increased nearly 30 percent from last year at small and midsize banks 
compared with a 20 percent rise at large banks. Commercial banks 
competed for larger average loan amounts by extending loan maturities 
and lowering interest rates. The majority of loans at large banks 
featured a floating interest rate, while customers of small and midsize 
banks locked in more fixed-rate loans compared with last year.
    Loan quality at agricultural banks improved during 2013 and 
contributed to solid profits. Following steady improvement the past 3 
years, the return on assets at agricultural banks in the fourth quarter 
held at a high level and annual net income distributions strengthened. 
Despite a drop in crop prices at harvest, producers still paid down 
debt, reducing delinquency rates and net charge-offs for both farm real 
estate and non-real estate loans.
    After several years of exceptionally strong price appreciation, 
farmland values rose at a much slower pace in the fourth quarter. With 
lower crop prices expected to persist in 2014, most bankers expected 
farmland values would stabilize while some expected modest declines.

    Section A

    First Quarter National Farm Loan Data

    Farm borrowing ramped up in the first quarter as farmers prepared 
for spring planting. Operating loan volumes reached a record high, 
exceeding year-ago levels by 28 percent (Chart 1). Crop prices at the 
beginning of 2014 had fallen 40 percent from the previous year, 
lowering cash receipts for producers still marketing fall crops. In 
addition, while prices fell for some crop inputs, such as fertilizer, 
others, such as seed and fuel, were expected to hold at high levels 
(Chart 2). Reduced cash flow coupled with elevated crop production 
costs contributed to the upswing in operating loan volumes. The volume 
of feeder livestock loans also rose as low cow inventories kept feeder 
cattle prices elevated and hog prices jumped as an ongoing swine virus 
continued to limit hog supplies.
    Larger operating loans contributed to loan portfolio growth, 
particularly at small and midsize banks. In the first quarter, non-real 
estate lending at small and midsize banks rose 28 percent, exceeding 
the 20 percent rise at large banks (Chart 3). In a competitive lending 
environment, average effective interest rates continued to edge down 
and average loan maturities lengthened regardless of bank size. 
However, at large banks twice as many loans were made with floating 
interest rates compared with small and midsize banks where fixed-
interest rate loans were more prevalent.
    Despite an overall increase in loan volumes, the volume of farm 
machinery and equipment loans fell by almost a third compared with the 
previous year, marking the fifth straight quarter of decline. Capital 
spending may have declined because operators recently upgraded 
equipment in high income years when tax depreciation rules were more 
favorable. Additionally, the prospect of lower farm income in 2014 may 
have shifted financing from intermediate-term equipment loans to short-
term operating needs.
Chart 1: Non-Real Estate Farm Loan Volumes by Purpose


          Source: Agricultural Finance Databook, Table A.3.
Chart 2: Principal Crop Input Costs


          Source: USDA Economic Research Service, Farm Income and 
        Wealth Statistics.
          Note: Data for 2013 and 2014 are forecasts.
Chart 3: Non-Real Estate Loan Volumes by Bank Size (First Quarter)


          Source: Agricultural Finance Databook, Table A.3.

    Section B

    Fourth Quarter Call Report Data

    Commercial bank call report data showed that agricultural loan 
volumes in the fourth quarter exceeded year-ago levels. Total farm debt 
outstanding as of December 31, 2013, rose seven percent year-over-year, 
outpacing the five percent gain at the end of 2012 (Chart 4). The 
volume of loans secured by farmland rose 7.3 percent, followed closely 
by a 6.6 percent increase in production loans. A drop in crop prices at 
harvest tightened margins and may have contributed to the rise in 
production loan volumes at year-end.
    Commercial banks reported improved loan performance in the fourth 
quarter. Delinquency rates on farm real estate loans continued to trend 
down at both large and small banks. In addition, delinquency rates on 
non-real estate farm loans dipped below two percent at the 100 largest 
commercial banks for the first time since 2008 (Chart 5). Furthermore, 
the percentage of farm loans 30 to 90 days past due was smaller than 
last year, suggesting delinquency rates could fall further. The volume 
of loans charged off against reserves at agricultural banks fell by 
almost half compared with the fourth quarter of 2012.
    Profitability at agricultural banks remained strong at the close of 
the year. The return on assets at agricultural banks stabilized at the 
10 year average and exceeded returns at other small banks by more than 
\1/3\ (Chart 6). Net income distributions as a share of average equity 
improved and there were no agricultural bank failures in 2013. With 
more lending activity, average capital ratios dipped slightly at both 
agricultural and other small banks in the fourth quarter and average 
loan-to-deposit ratios were higher than a year ago.
Chart 4: Farm Debt Outstanding at Commercial Banks
Percent Change From Previous Year


          Source: Agricultural Finance Databook, Table B.1.
Chart 5: Delinquency Rates on Non-Real Estate Farm Loans
Percent of Outstanding Loans, Seasonally Adjusted


          Source: Federal Reserve Board of Governors.
Chart 6: Rate of Return on Assets (Fourth Quarter)


          Source: Agricultural Finance Databook, Table B.7.

    Section C

    Fourth Quarter Regional Agricultural Data

    Demand for farm operating loans rose sharply in many major grain 
producing areas in the fourth quarter while farm capital spending 
waned. The steep drop in crop prices at harvest lowered earlier 
expectations for 2013 farm income, particularly in the Kansas City 
Federal Reserve District where drought affected crop yields. Low crop 
prices also prompted some producers to store grain inventories rather 
than sell in case prices rebounded later. Reduced cash flow increased 
demand for operating loans, particularly across the Corn Belt and 
northern Plains in the Chicago, Kansas City and Minneapolis Districts. 
Crop receipts were also down in the Dallas District, but bankers 
indicated strong cattle prices and revenue from oil and gas leases 
supported overall farm income levels. Conversely, bankers in the St. 
Louis District reported farm income strengthened compared with the 
previous year and loan demand weakened. In a reversal of recent trends 
in which farm capital spending spiked at year-end, contacts in the 
Chicago, Kansas City, Minneapolis and St. Louis Districts noted a drop 
in capital investment in the fourth quarter of 2013.
    Farm income levels influenced farm credit conditions in the fourth 
quarter. Loan repayment rates in the Chicago, Kansas City and 
Minneapolis Districts eased from strong positions earlier in the year. 
Bankers in these Districts also reported a modest rise in the number of 
loan renewals and extensions in the fourth quarter and slightly tighter 
collateral requirements. However, the Dallas and St. Louis Districts 
reported stronger loan repayment rates and fewer loan renewals and 
extensions. Despite minor deterioration in credit conditions in some 
areas, interest rates on farm operating loans were steady to lower in 
all Districts except Kansas City where they edged higher. Interest 
rates on farm real estate loans fell further in the Dallas, 
Minneapolis, Richmond and St. Louis Districts, held steady in the 
Kansas City District and rose slightly in the Chicago District.
    Agricultural bankers indicated farmland value gains slowed 
dramatically in the fourth quarter despite less farmland for sale 
compared with last year. In particular, bankers in Corn Belt states 
reported year-over-year increases in nonirrigated cropland values 
moderated from previous highs (Map). There was even a slight pullback 
in cropland values in parts of Minnesota and Iowa. Energy activity 
continued to support farmland value gains in the Dakotas, but a 
majority of bankers felt that lower farm income expectations for 2014 
would limit further farmland value gains in major crop producing areas.
Map: Value of Non-Irrigated Cropland (Fourth Quarter, 2013)
Percent Change From Previous Year


          * Mountain states include: Wyoming, Colorado, and northern 
        New Mexico, which are grouped because of limited survey 
        responses from each state.
          Sources: Federal Reserve District Agricultural Credit Surveys 
        (Chicago, Minneapolis, Kansas City, and Dallas).
Addendum
Agricultural Finance Databook
Previous Charts Updated Through First Quarter 2014
    Section B
Chart 4: Farm Debt Outstanding at Commercial Banks
Percent Change From Previous Year


          Source: Agricultural Finance Databook, Table B.1.
Chart 5: Delinquency Rates on Non-Real Estate Farm Loans
Percent of Outstanding Loans, Seasonally Adjusted


          Source: Federal Reserve Board of Governors.
Chart 6: Rate of Return on Assets (First Quarter)


          Source: Agricultural Finance Databook, Table B.7.
Map: Value of Non-Irrigated Cropland (First Quarter, 2014)
Percent Change From Previous Year


          * Mountain states include: Wyoming, Colorado, and northern 
        New Mexico, which are grouped because of limited survey 
        responses from each state.
          Sources: Federal Reserve District Agricultural Credit Surveys 
        (Chicago, Minneapolis, Kansas City, and Dallas).

    The Chairman. Thank you. And I want to thank all the 
panelists for being so accurate on your time. It was wonderful. 
It doesn't happen all the time. Again, I thank you. And I thank 
the witnesses.
    The chair would remind the Members that they will be 
recognized for questioning in order of seniority for Members 
who were present at the start of the hearing. After that, 
Members will be recognized in order of their arrival. I 
appreciate your understanding.
    I will recognize myself to begin the questioning. I 
recognize myself for 5 minutes. I want to start with Dr. Long 
Thompson.
    You testified that non-performing loans totaled $2.1 
billion, which is a decrease of nearly $600 million. Is the 
non-performing loan portfolio--is that a geographic 
prerogative? Is it dominated by any certain sector of the ag 
industry, or is there a region in the country that may 
contribute more so than others?
    Dr. Long Thompson. Well, certainly, among those 
institutions that we regulate, if they happen to be located in 
a part of the country where there has been stress, you might 
see some additional--a higher level of non-performing loans. 
But we haven't detected a specific pattern geographically. I 
would, however, be very happy to provide you--we have very good 
data. We do analyses of the overall farm economy, as well as of 
the health of the System regularly. And we have some very good 
data that I would be happy to share with you and your staff.
    [The information referred to is located on p. 91.]
    Dr. Long Thompson. The non-performing loans tend to occur 
in those areas of agriculture that are under stress. And if 
there happens to be a small association that has a high 
percentage of loans in that area, you might find that within 
one association or another association. But, generally 
speaking, across the board, the System is safe and sound.
    The Chairman. Okay. Excellent. You also mentioned the Farm 
Credit Insurance Fund. Do any other GSAs have any similar type 
of insurance fund or reserves that you are aware of?
    Dr. Long Thompson. Well, someone else could probably better 
answer that question. I think you know very well the history of 
the Farm Credit System Insurance Corporation, which was 
established in the late 1980s after the crisis in the farm 
economy. And that fund, of course, exists to insure the banks 
should there be a situation where they were not able to repay 
their loans. So I can't really speak to other agencies and what 
they do. Of course, the FDIC has an insurance fund that is not 
unlike what the Farm Credit System insurance fund is.
    The Chairman. Okay. I want to move on to something that 
will more than likely come up in the next panel. I think you 
are obviously someone who should be given an opportunity to 
comment on it. And it relates to CoBank's role in two 
transactions. One was the finance package with Verizon, the 
other being a financing package with Frontier Communications. I 
would like to get your perspective on that. First, does CoBank 
have the authority to participate in those transactions? And, 
second, did FCA have any role in approving those transactions?
    Dr. Long Thompson. The answer to your first question is 
yes, they did have the authority. As you know, Congress gave 
the entities that we regulate the authority to engage in 
similar-entity participation lending to be used as a risk 
mitigation tool. And we reviewed those transactions in complete 
detail and found that they met any reasonable reading of the 
statutory authority provided.
    Now, in the interest of full disclosure, I have to tell you 
that I was on the ag committee and the subcommittee that had 
jurisdiction over credit issues at the time that the language 
was adopted. And I recall supporting it. However, I also have 
to say that it is not a model of drafting clarity. And I am not 
sure anywhere else in Federal statute you would even find the 
terms functional similarity. Even so, there are statutory 
limits. And those statutory limits include, for example, a 
single credit held by a System institution may not exceed ten 
percent of total capital; a single System institution, and all 
System institutions combined, must hold less than 50 percent of 
the credit; a System institution may not exceed 15 percent of 
its total assets in similar-entity participations. And at the 
present time, System-wide, somewhere around five percent of the 
System's total assets are held in some form of similar-entity 
participation. But we do examine--we do ensure that they are in 
compliance. And they are.
    The Chairman. Thank you. I yield the balance of my time. I 
now recognize the Ranking Member for 5 minutes.
    Mr. Costa. Thank you very much, Mr. Chairman.
    Mr. Beyerhelm, you mentioned increased demand for loans 
with FSA. And, as you know, we are the authorizers. But did the 
appropriators provide sufficient funding to meet what you 
believe is going to be the demand in Fiscal Year 2015?
    Mr. Beyerhelm. From what I understand, from the--at least 
the preliminary numbers--both Chambers have authorized the 
President's request for the $6.4 billion. So in addition to 
that, previous appropriation bills have had language that 
provided for programs that are zero subsidy to get an 
additional 25 percent. Both of our guaranteed farm ownership 
and our direct farm ownership, for the first time ever, are 
going to be zero subsidy programs. So the answer to your 
question is yes, $6.4 billion, plus the 25 percent bump in both 
of those programs, will actually exceed $7 billion. And we 
expect that to be sufficient.
    Mr. Costa. And, historically, in terms of the level of 
lending activity that is taking place, would you say that the 
trends--that the appropriations reflect the demand out there?
    Mr. Beyerhelm. Absolutely. As I mentioned in the previous 4 
years, the programs have been oversubscribed. So we have always 
had periods----
    Mr. Costa. One could argue that maybe we should provide 
additional support for that effort then?
    Mr. Beyerhelm. That would be up to this body to decide.
    Mr. Costa. No, I understand that part. Can you update us on 
where things are with the changes that were made as I stated as 
a result of the 2014 Farm Bill in terms of the relending 
provision of the microloan program. When that will be up and 
running?
    Mr. Beyerhelm. Yes----
    Mr. Costa. Obviously, for young farmers and ranchers, that 
is a potential source of financing.
    Mr. Beyerhelm. Yes. Thank you for that question. We are in 
the process of drafting proposed regulations on how to 
implement that among the other discretionary provisions of the 
farm bill. That is one of the things we expect to have some 
clarity on by October of this year.
    Mr. Costa. So before the end of this year?
    Mr. Beyerhelm. Yes.
    Mr. Costa. That is important. When would the ability for 
application take place? Let us figure there are folks that are 
looking to maybe lease land or maybe purchase a farming entity, 
and they are looking at next year and are making decisions in 
the Fall. So in the timelines for the applications for those 
who would be interested, would it be in a timely enough fashion 
so that they could possibly be able to participate in 2015 with 
the advantage of that microloan?
    Mr. Beyerhelm. We would hope so. Once the regulations have 
been drafted, we are going to have to work with----
    Mr. Costa. Yes, but there is a comment period, isn't there?
    Mr. Beyerhelm. That is correct.
    Mr. Costa. I am trying to figure the timeline.
    Mr. Beyerhelm. Yes, it will be close, to answer your 
question. We are going to make every effort, with any changes, 
to make them available to the 2015 lending season. But it will 
be close.
    Mr. Costa. Well, it is important, because if you get a loan 
in the middle of the year, you are past planting season, you 
are past a lot of decisions, depending upon the nature of the 
agricultural enterprise, obviously.
    Mr. Beyerhelm. I think the good part about it is, is that 
our program is still going to be there for those that need that 
credit. So if there is somebody that needs financing----
    Mr. Costa. Have you done an an estimation of the potential 
demand out there for the microloans?
    Mr. Beyerhelm. Well, as I mentioned earlier, we have been--
we are right at the 7,200 mark right now. We did 3,500 the 
first year. And we are on pace to do about 4,500 this year. We 
would expect that demand to continue, especially one of the 
things we are going to do is increase the loan limits from 
$35,000 to $50,000--or at least propose to increase to $50,000.
    Mr. Costa. All right.
    Mr. Beyerhelm. So that will increase the pool.
    Mr. Costa. Okay. Dr. Long Thompson, and thank you by the 
way for your previous service to our country as a Member of the 
House of Representatives. And it is good to see you here in 
your current role. In your opening statement, you talked about 
the nature of Farm Credit. But I would like you to give a 
better snapshot. For example, from the time when you served in 
Congress in the late 1980s, until today; you want to give a 
comparative analysis in 30 seconds or less?
    Dr. Long Thompson. I can do that in 30 seconds or less. The 
Farm Credit System today--the institutions that we regulate--
are much more professional, much more financially sound. It is 
an incredibly strong system of lending institutions. And part 
of that is the result of changes that were made by Congress in 
the late 1980s. But in terms of underwriting standards and 
reaching out to creditworthy eligible borrowers, I think the 
System has strengthened incredibly. And I am proud to be a 
regulator of the System.
    Mr. Costa. Thank you very much. My time has expired, Mr. 
Chairman.
    The Chairman. Thank you. The gentleman's time has expired. 
I now recognize the gentleman from Iowa, Mr. King, for 5 
minutes.
    Mr. King. Thank you, Mr. Chairman. I thank all the 
witnesses for your testimony. And I would turn first to Dr. 
Long Thompson. And I would like to just get some definitions 
down to understand the parameters that we are working with 
here. And could you define a little bit more clearly the 
mission statement of Farm Credit?
    Dr. Long Thompson. May I ask, the mission statement of the 
Farm Credit System or the mission statement of the Farm Credit 
Administration?
    Mr. King. I understand the mission statement of Farm Credit 
Administration. But the System and the--how to identify the 
borrowers.
    Dr. Long Thompson. The mission of the Farm Credit System is 
to provide credit to creditworthy eligible borrowers across the 
country for the purpose of making credit available for 
agriculture, but also for strengthening rural America.
    Mr. King. And does that include a definition for small, 
beginning, young farmers?
    Dr. Long Thompson. Yes.
    Mr. King. And so you just left that out. Does it also 
include for socially disadvantaged farmers?
    Dr. Long Thompson. All farmers who are creditworthy and 
eligible.
    Mr. King. Okay.
    Dr. Long Thompson. And, in fact, since my coming to the 
Board, we have adopted a policy that requires our examiners 
take a look at how the System is doing in this regard, for 
borrowers of all types. And they are to have a diversity and 
inclusion provision, both in their marketing--in reaching out 
to borrowers--but also in their human resources.
    Mr. King. All creditworthy, with a diversity and inclusion. 
Is this statement as written and approved by whom? Not 
Congress, I take it? How is this arrived at?
    Dr. Long Thompson. The statement--the diversity and 
inclusion regulation--that is a regulation that we issued.
    Mr. King. And who produces that document then? Who are the 
people that signoff on it?
    Dr. Long Thompson. It would be the Board of the Farm Credit 
Administration.
    Mr. King. Okay. And it is an authority that is at least 
presumed granted by Congress?
    Dr. Long Thompson. I missed that.
    Mr. King. It is an authority that is at least presumed 
granted by Congress to make that decision?
    Dr. Long Thompson. Yes. Yes.
    Mr. King. And you mentioned also that the share of the Farm 
Credit debt was 46 percent in your testimony?
    Dr. Long Thompson. Farm Credit real estate debt.
    Mr. King. Yes.
    Dr. Long Thompson. Overall, including production loans, it 
is about 41 percent.
    Mr. King. Well, what is the 46?
    Dr. Long Thompson. The 46 is real estate loans.
    Mr. King. Just real estate?
    Dr. Long Thompson. Yes.
    Mr. King. Okay. Can you tell us about the trend of Farm 
Credit? The 46 percent today, what would that have been if you 
would go back say 10 years? What has been the trend?
    Dr. Long Thompson. I will have to ask my staff. I don't 
have that trend for the last 10 years. But if you will give me 
a second, I think I can give you the answer.
    Mr. King. I would.
    Dr. Long Thompson. Thank you. Regarding total debt, and 
that would be real estate and operating loans, it is gone from 
about 35 percent to 41 percent in the last 10 years.
    Mr. King. Okay. And on the real estate debt, we would just 
anticipate, without turning back, a similar trend. And who 
holds the balance of that, if it is 46 percent in real estate? 
And where is the other 54 percent?
    Dr. Long Thompson. The majority of that comes from 
independent banks----
    Mr. King. Independent banks.
    Dr. Long Thompson.--or from banks--many from independent 
community banks.
    Mr. King. Okay. I would like to turn to Mr. Kauffman. Thank 
you very much. Mr. Kauffman, you testified that it is a 
relatively competitive environment--lending environment. That 
seemed like a qualifying word, and I would ask if you could 
define that to me. The word relatively seemed to be a 
qualifier.
    Mr. Kauffman. We have heard from our bank contacts that it 
is a competitive lending environment in the sense that there 
are--agricultural lending activity has been strong and 
repayment rates have been strong. So competitive in that sense 
that they have been--we have heard from bank contacts that not 
only have they been competitive perhaps with other commercial 
banks, but also with Farm Credit institutions that are lending 
in those areas overall.
    Mr. King. What about interest rates, do you know of any 
banks that are lending at a lower rate than Farm Credit?
    Mr. Kauffman. I can't speak to that specifically. I would 
say anecdotally, we have heard some bankers say that they may 
be reluctant in some cases to reduce interest rates beyond a 
certain point, taking a more cautious approach perhaps in some 
areas as it relates to particularly on the farm real estate 
side.
    Mr. King. Sounds like a qualified answer. Do you know of 
any cases, or even any anecdote about banks that are lending at 
a lower rate than Farm Credit?
    Mr. Kauffman. Again, I do not know of any specific cases.
    Mr. King. You do not. I would turn to Dr. Long Thompson. Do 
you?
    Dr. Long Thompson. I can tell you that I know of instances 
where that is the case. And I am wondering if you are 
expressing or leading to expressing concerns about interest 
rates that are charged in the System? Because they are required 
to be competitive, but they are not to engage in predatory 
pricing.
    Mr. King. Dr. Long Thompson, I just--as our clock has run 
out, I will just conclude this. I am concerned about the 
competition side of this and the mission of providing credit, 
although I am grateful for the service that you all provide. 
Thank you very much, and I yield back.
    Dr. Long Thompson. May I answer?
    Mr. King. That is fine.
    The Chairman. Go ahead.
    Dr. Long Thompson. Thank you. Whenever there is a concern 
expressed from someone across the country regarding predatory 
pricing in the System, we take that very seriously. And we do 
examine it, take a look at it. And if it were to occur, we 
certainly would then take the appropriate corrective action to 
get that corrected. But competitive is not by definition 
predatory, as you very well know.
    Mr. King. Agreed. Thank you.
    The Chairman. The gentleman's time has expired. I recognize 
the gentleman from Oregon for 5 minutes.
    Mr. Schrader. Thank you, Mr. Chairman. Dr. Long Thompson, 
how did Farm Credit Service, particularly Farmer Mac, fare 
during the recent recession, particularly compared to other 
banks and commercial institutions?
    Dr. Long Thompson. The Farm Credit System did very well, 
including Farmer Mac. Some of the challenges that they faced 
were access to capital in the markets, liquidity, but no issues 
regarding the safety and soundness of their particular 
operations.
    Mr. Schrader. Did you lose----
    Dr. Long Thompson. They did very well----
    Mr. Schrader. Did you lose any institutions under your 
purview as a result of the recession?
    Dr. Long Thompson. We did not lose any institutions as a 
result of the recession. There had been some mergers that have 
occurred since, but that was occurring beforehand.
    Mr. Schrader. Right. When Dodd-Frank was written, this 
group and the entire Agriculture Committee spent a lot of time 
trying to differentiate between institutions of systemic risk 
and to protect end-users from overregulation. Similarly, in 
Dodd-Frank itself, a lot of the small independent banks were 
never part of the problem, we tried to make sure they were not 
burdened with burdensome regulations. And yet the Prudential 
Regulators have been frankly very overzealous. And I hear 
reports again and again how the small, independent folks are 
seeing the same degree of regulatory overreach that was only 
intended for these big systemic risk institutions. How has Farm 
Credit services fared in that System? How are you keeping your 
regulations under control, if I may ask?
    Dr. Long Thompson. Well, as you know, for the most part, 
the System was not included in Dodd-Frank reforms. And you know 
that very well. It is my sense that we are not over-regulating. 
But the one thing that we have to be very careful about in 
overseeing the Farm Credit System is that it doesn't have the 
potential for diversifying its portfolio in the same way that 
banking institutions are able to do. And so we have to be very 
conscious of what that means in terms of things like capital 
requirements and liquidity. One of the reasons the System is 
strong is that the ag economy has been quite strong overall 
over the last 20 years. There have been some pockets of issues. 
But we take the regulatory responsibilities very seriously, 
recognizing that over-regulation can in fact impede their 
ability to do their job and fulfill their mission.
    Mr. Schrader. Very good. Mr. Beyerhelm, to that point, I 
can confirm that the Pacific Northwest and our nursery industry 
was particularly hard hit in the recession. Our seed producers 
were particularly hard hit. Christmas trees producers are just 
trying to get their feet underneath them. How are they fairing 
in the Farm Credit System at this point in time?
    Mr. Beyerhelm. I don't have specifics for that particular 
enterprise, but I can surely get those for you. Certainly, they 
are eligible enterprises for our loans, both our direct and 
guaranteed loans.
    Mr. Schrader. All right. I appreciate that. And then could 
you explain a little bit about what you alluded to in your 
testimony, how a farmer graduates, if you will, to commercial 
lending. What do you see as your main role to encourage people 
to graduate? That is the way it is supposed to work. Could you 
explain that more for us?
    Mr. Beyerhelm. Yes. Obviously, we don't compete with the 
commercial lending industry. So most of the customers who come 
to us, their balance sheets are not strong enough to go to 
commercial lending. Perhaps their cash flows don't have the--a 
debt repaying capacity. So what we do is try to work with them 
to improve their balance sheets, their cash flows and also 
their production skills. Our loan officers actually work very 
closely with them, provide technical assistance. And at any 
point during their tenure with us that we feel that those three 
indicators have risen to the level that commercial lenders will 
make them a loan, as you said, we politely ask them to go to a 
commercial lender, pay us off and move on to the next customer.
    Mr. Schrader. And that is to make sure that your capital 
can flow onto the next young farmer or rancher coming in?
    Mr. Beyerhelm. Absolutely.
    Mr. Schrader. Good.
    Mr. Beyerhelm. Yes. Yes.
    Mr. Schrader. Okay. Mr. Kauffman, one of the problems on 
the Small Business Committee, and one of the problems we have 
seen there is that there is a lot of demand for small business 
loans, a lot of demand for Farm Credit Service loans. In tough 
economies, as people figure out they want to start a business, 
start a farm, or get their dad's ranch going again, one of the 
problems we have seen is that while creditworthiness of some of 
the loans have actually gotten a little better, there are far 
fewer loans made. The Small Business Administration is making 
bigger loans to fewer people. And the real small businesses 
sometimes have a tough time. They are still having a very tough 
time getting the credit they need. How would you compare that 
to what is going on with Farm Credit Services, the medium and 
slightly larger size ranch and farm operations? What does the 
portfolio look like for FSA?
    Mr. Kauffman. I would say in general from the commercial 
lending institutions, what we have seen has been some 
producers, in terms of the scale of agriculture, capital 
requirements are quite large. I think that we have seen even 
the USDA Census of Agriculture has revealed there has been a 
bit of a shift to large producers, but also a number of 
increasing small producers. I think that there have been some 
small producers that have been able to obtain the credit that 
they need, albeit in some cases maybe needing to provide more 
collateral if they have--if they are perceived as being a more 
risky borrower.
    Mr. Schrader. All right. Thank you. And I yield back, Mr. 
Chairman.
    The Chairman. The gentleman yields back his time. I now 
recognize the gentleman from Texas, Mr. Conaway, for 5 minutes.
    Mr. Conaway. Thank you, Mr. Chairman. Lady and gentlemen, 
thank you for being here. Dr. Long Thompson, the FCA is 
currently working on a regulatory scheme to impose margin 
requirements on derivative transactions. We have just passed 
the House yesterday, H.R. 4413, which amends the CEA that would 
provide that initial and variation margin requirements shall 
not apply to a swap in which one of the counterparties to the 
swap is not a financial institution and qualifies for the end-
user clearing exemption. If enacted into law, how would that 
change the FCA's efforts to impose margin requirements of end-
users?
    Dr. Long Thompson. If you will give me just a minute, I 
want to turn to our General Counsel.
    Mr. Conaway. Sure.
    Dr. Long Thompson. This is actually a very simple answer. 
It is going to be consistent with the law. And we will make 
sure that we are working with the other regulators. But the 
stage that we are in the process, there is nothing definitive 
for me to provide in terms of specifics.
    Mr. Conaway. Okay. Well----
    Dr. Long Thompson. But we will make sure that it is 
consistent with the law.
    Mr. Conaway. Okay. That is like art.
    Dr. Long Thompson. I am sorry. I missed that.
    Mr. Conaway. I mean, that statement is like trying to 
decide what is pretty and what is not pretty. I mean, I 
understand----
    Dr. Long Thompson. It will be pretty. I promise you.
    Mr. Conaway. Okay. Mr. Beyerhelm, you had a comment that 
you provide credit to creditor--borrowers. Can you give use the 
distinction between--or the difference between your words, not 
qualifying for commercial credit due to lender standards but 
otherwise creditworthy? What--can you help me understand that?
    Mr. Beyerhelm. Well, most commercial lenders require a--
some sort of equity position, maybe let them qualify--at least 
30 to 40 percent equity position and a debt service capacity of 
probably 20, 25 percent in excess of what their expenses will 
be. So when a customer comes in and doesn't meet those 
qualifications, they can come to FSA. When I say they are 
creditworthy otherwise, that means they have a good credit 
history. They can show repayment, perhaps not at the 20 percent 
level but something less than that. And they don't have the 
required equity position to go to the commercial lender.
    Mr. Conaway. Okay. All right. Also, Dr. Long Thompson, you 
are redoing the capital requirements. You have regulations out 
right now. Can you give me some sense of what the response has 
been from the regulated industry with respect to your changes?
    Dr. Long Thompson. At the stage of the process that we are 
in, I don't have any summarizing data on what the responses 
are, because it is still in the comment period.
    Mr. Conaway. Okay. But--well, maybe some other panelists 
can get--thank you very much. I appreciate you being here. And 
I yield back.
    Dr. Long Thompson. Thank you.
    The Chairman. The gentleman yields back his time. I now 
recognize the gentleman from Florida for 5 minutes, Mr. Yoho.
    Mr. Yoho. Thank you, Mr. Chairman. Thank you, panelists, 
for being here. Agriculture is dear to my heart, because I like 
to eat, mainly. But I have been involved in it since I was 
about 16 years old. The Farm Credit Service or System has done 
a remarkable job. But I kind of want to expand on what Mr. King 
was bringing up about mission creep, have we gone over where we 
need to go with the Farm Credit System. Has it overstepped its 
boundaries, knowing when it first started in some form in 1916 
when we had about 32 percent of the population of America 
involved in agriculture. Today, we have roughly maybe one 
percent right as agriculture as our source of income, with two 
percent of the Americans--America's population involved, or 
living on a farm. And the role seems like, of the Farm Credit 
System, has grown. I get--I don't want to say complaints. I get 
inquiries about the Farm Credit System competing with the small 
rural banks. And I want to build off what Mr. Schrader said, my 
fellow veterinarian here in Congress, on the rules and 
regulations of Dodd-Frank you brought up that you are pretty 
much excluded from those. All right. And the small community 
banks that they don't have a large portfolio. They are bound by 
those, and they are restricted by those. And it really put them 
at a disadvantage. And some of the conversations we have is 
that the Farm Credit System can be more competitive because of 
the operating expenses. How do you view that?
    Dr. Long Thompson. I think that is a very good question. 
And it has a certain complexity to it. My experience as a 
regulator of the System has informed me that there really 
hasn't been significant, if any, mission creep in the Farm 
Credit System. But it is a balancing act, because--and it is a 
balancing act not just for the System, but for the regulatory 
agency as well.
    Mr. Yoho. Can I interrupt you? Let me ask you----
    Dr. Long Thompson. Sure.
    Mr. Yoho. In your portfolio, I think you said 41 percent of 
your assets are in farm--or not assets--your loans are in 
agricultural land, correct?
    Dr. Long Thompson. No. What I said was----
    Mr. Yoho. Then 46 percent was----
    Dr. Long Thompson. No. What I said was that of the farm 
loans across the country, 41 percent of those are made by the 
Farm Credit System.
    Mr. Yoho. Okay. Go ahead then on what you were talking 
about as far as your mission.
    Dr. Long Thompson. And so the challenge for any regulatory 
body is to find the balance. We work very hard with a very 
professional staff of examiners, regulatory policy folks, 
lawyers, to ensure that whatever businesses engaged in by the 
System is consistent with the law. I think that the agency has 
done a good job of that.
    Mr. Yoho. Mr.----
    Dr. Long Thompson. Yes, sir?
    Mr. Yoho. Go ahead. And I was going to ask Mr. Kauffman his 
opinion on that.
    Dr. Long Thompson. Okay. But, in a market economy, as we 
have--in a capitalist economy, there is going to be 
competition. And I think that competition benefits--it 
benefits----
    Mr. Yoho. Well, since you brought that up. In a market 
economy, in the free market, they are kind of--like a community 
bank, they are kind of dependent upon themselves. Whereas in 
the Farm Credit System, you have the backing of the United 
States Government. It seems that is not quite as fair or as 
equitable as it should be in the free market economy.
    Dr. Long Thompson. Well, let me clarify. The System that we 
regulate is private sector.
    Mr. Yoho. Yes.
    Dr. Long Thompson. And it gets its funding by selling 
securities in the marketplace.
    Mr. Yoho. But yet if you don't have to abide by Dodd-Frank 
financial regulations, you are talking about being fair. And my 
time is--we have about a minute left.
    Dr. Long Thompson. But we do have a book this thick of 
laws--of statutes that we have to ensure is followed by the 
Farm Credit System.
    Mr. Yoho. I have heard from the other banks, they have one 
about this thick. Mr. Kauffman, what is your opinion on----
    Dr. Long Thompson. Ours is getting thicker.
    Mr. Kauffman. We do hear similar inquiries from community 
bankers asking similar questions. I would corroborate what Dr. 
Long Thompson had said in terms of the split between real 
estate and non-real estate at community banks. You do typically 
see a bit more lending activity in the non-real estate space. 
And that has been a trend that we have seen here recently. But 
we do hear similar inquiries from community bankers.
    Mr. Costa. Would the gentleman yield?
    Mr. Yoho. Yes, sir.
    Mr. Costa. If I understand your questioning correctly, you 
are attempting to try to get a snapshot on the balance of the 
lending activity between the Farm Credit and between the 
private sector institutions, correct?
    Mr. Yoho. Well, what I would like to do is kind of--do we 
need a Farm Credit System as big as we do now, compared to what 
we did when we had 32 percent of the population involved in 
farming----
    Mr. Costa. Right.
    Mr. Yoho. And, today, we have less than one percent 
actively involved in farming.
    Mr. Costa. But with FSA, especially, there is a 
partnership.
    Mr. Yoho. Right.
    Mr. Costa. If I understand it correctly, with the community 
banks that are the private sector that are banks made up of 
people we know in our communities----
    Mr. Yoho. Right.
    Mr. Costa. You are providing in essence the secondary 
mortgages or the guarantees on these loans for the community 
banks, in many instances. Is that correct?
    Mr. Beyerhelm. Yes, that is correct, up to--we do have a 
restriction requirement that they be family size farms. So to 
some extent, for the smaller operators. But for the larger 
operators, there would not be a comparable--an opportunity to 
participate in FSA programs.
    Mr. Costa. Mr. Chairman, can I ask something on family size 
farms?
    The Chairman. I thank the gentleman for yielding.
    Mr. Yoho. Yes, sir.
    Mr. Costa. On the family size farms, what is the definition 
of that? Is that just one person with a tractor, or----
    Mr. Beyerhelm. I think it is what is pretty and not pretty 
question. A general definition of family sized farm is that the 
applicant themselves, whether it is a corporation or 
individual, whatever, provide the majority of the labor 
required and all of the management required to run the 
operation.
    Mr. Costa. Thank you.
    Mr. Beyerhelm. That is the general definition.
    The Chairman. The gentleman's time has expired. Just for 
clarification, Dr. Long Thompson, can you leave ag space at any 
point in time?
    Dr. Long Thompson. I missed that question.
    The Chairman. Can you leave ag space at any point in time? 
That is your core mission, correct?
    Dr. Long Thompson. We are the regulator. The Farm Credit 
System----
    The Chairman. Farm Credit System. I am----
    Dr. Long Thompson. Yes. They do have, as authorized by 
Congress, the ability to make rural housing loans. Beyond 
that--well, and then the title III lending authority is for 
rural electric co-ops, for telephone co-ops, for co-op 
business, various kinds of co-op business.
    The Chairman. So what we are really talking about is a--
sort of a broad definition of what constitutes agriculture 
versus non-agriculture portfolio. And I don't want to encroach 
on Mr. Roger's time. So I will recognize the gentleman from 
Alabama for 5 minutes.
    Mr. Rogers. Thank you, Mr. Chairman. That is what I was 
going to ask about. And I was late. And I am sorry. And I know 
that the Chairman visited this topic earlier. But one--the 
primary criticisms I get about the Farm Credit System is 
issuing loans in non-agriculture. And so do you know what 
percentage of the loan portfolio the Farm Credit System is 
issued to non-farm entities?
    Dr. Long Thompson. I think it probably would be best for me 
to get a detailed breakdown for you. But it is primarily 
agriculture and ag related. It is agriculture--and let me also 
say that, even though the System did not fall for the most part 
under the jurisdiction of Dodd-Frank, there are other kinds of 
rules that statute requires--for example, the territories, the 
districts that are established. So there are a number of 
restrictions in the Farm Credit System that simply are not 
restrictions in the banking sector. And I also think that there 
is a very strong case to be made for a group of farmers going 
together and setting up a cooperative model of lending, 
particularly when there is not always access in traditional 
banking.
    [The information referred to is located on p. 91.]
    Mr. Rogers. Now, I represent a very rural Congressional 
district. There is access to credit in our communities. I have 
been a supporter of the Farm Credit System. But, it is pretty 
hard for me to explain--I can't explain why you are financing a 
merger deal with Verizon, or the Farm Credit System is. I 
recognize that from a making money standpoint you want to do 
that, but--and while it is not illegal to do it----
    Dr. Long Thompson. Yes.
    Mr. Rogers. Why would you do it?
    Dr. Long Thompson. Well----
    Mr. Rogers. When you and Mr. Kauffman talked about what you 
are really there for is to take the shaky young farmer and help 
to get him on stable footing so they can then go into the 
commercial lending, why would Farm Credit get outside the farm 
world for lending?
    Dr. Long Thompson. Verizon does provide service to rural 
communities. And in the title III lending authority, loans are 
made for co-op-owned rural utility services that are member-
owned. And this similar-entity provision that was included in 
the law back in the early 1990s was included for the purpose of 
mitigating risk in a lending institution's portfolio. If you 
felt that it was important to remove that particular provision, 
Congress could certainly do that.
    Mr. Rogers. Yes, I think that we may have to visit that, 
because this really is pretty indefensible in my world. So with 
that, I thank you, Mr. Chairman.
    The Chairman. The gentleman yields back his time. I see no 
further--we have one more Member, the gentlelady from New 
Mexico is recognized for 5 minutes.
    Ms. Lujan Grisham. Thank you very much, Mr. Chairman. And I 
want to thank the panel for your testimony and presence here 
today. Mr. Beyerhelm, I want to talk about the loan application 
process and tie it to what I know many states are concerned 
about and you are concerned about as well, which is the graying 
or the aging of our farmers and ranchers. We have in New 
Mexico, which I am sure you are aware, the highest percentage 
of older farmers and ranchers who are age 65 and up, at 37 
percent. That is seven points higher than the national average. 
Further, we expect that \1/2\ of those 65 and older farmers to 
retire over the next decade. So we are very interested in our 
state at making sure that there is a sense of urgency by USDA, 
a sense of urgency by everybody in the state to do what we can 
to grow, if you will pardon the pun, the younger farmers and 
ranchers an interest in the agricultural industry. And I know 
that you have ramped up your efforts to reach out to this 
demographic. But I continue to hear from young farmers and 
ranchers that it is not enough, that the application process 
for loans and support is arduous at best.
    And I want to give you a couple of examples. And if you 
could give me some specifics about what we might do to make 
that simpler, more effective and to really encourage folks to 
get the resources that they need and the educational support 
and expertise that they need to actually enter into the 
industry. So, for example, in New Mexico, even if you go 
online--and I realize that you have now created an online sort 
of resource directory, you have to be able to go online. But 
even then, you are still going to have to make an application. 
But, you can't do any of it online. You have to go in-person to 
an office. In New Mexico, there are only four offices. They are 
all in the southern part of the state. That means for some 
people, they are going to have to make a 6, 7, 8 hour drive, 
make an appointment at one of those four offices, and then, as 
I understand it, even if you look at the sort of guide on the 
online application, you are talking about making several trips 
to that loan office over periods of several months. And what 
happens is that people give up. And they don't get access to 
the support, the expertise, the credit, the resources or 
anything else to engage in this industry. Can you give me a 
sense about what we might do in the rural states to make sure 
that we are doing more than just creating an online resource 
directory? And I don't want to minimize that that is a step in 
the right direction. But it isn't getting to this demographic 
or actually getting what they need so that they enter the 
agricultural business.
    Mr. Beyerhelm. Yes. Thank you so much for that. And you are 
entirely correct. I think the situation is exacerbated a little 
bit when you get out into the West and you have these huge 
geographical regions. And then when you combine that with a 
continued budget constrained environment in which we have lost 
25 percent of our employees in the last 4 years and had to 
restrict our footprint a little bit in rural America. So to try 
to respond to your question, one of the things are we are 
working very hard to create an online application to reduce 
some of the repeated need that you have to go to the office. So 
it is our goal and our hope that in the very near future that 
somebody is going to be able to apply, going to be able to do a 
lot of the pre-stuff--at some point, we have to have that face-
to-face.
    Ms. Lujan Grisham. And I appreciate that. Can you give me a 
sense of the timeframe? I don't mean to sound like I am pushing 
back. And I know that you have talked about the streamline 
process in your testimony, but that is only for repeat loan 
applicants. I can do a loan, and I can get prescreened at my 
bank. I could do it while I am sitting here in this Committee, 
and just pull up my personal account information and send a 
loan application to my bank of choice. And probably, before I 
finish my remaining 46 seconds, I would get an answer about how 
eligible I am and what else they need. We could be using 
colleges and universities, and we could be using extension 
services, and we could be using state government partners and 
local government partners, so that you have a much broader 
footprint in this regard. So talk to me, if you can--I know I 
am over time, Mr. Chairman--about how long before you get the 
entire application online, and please tell me your thinking 
about broadening your partnerships to achieve the goals that we 
are interested in.
    Mr. Beyerhelm. Yes. As I said, I can't give you an exact 
timeline on the online application. It would certainly be my 
hope that sometime in the next 12 months we would have that 
done. The other thing that we are doing, in the farm bill, we 
were given authority to do pilot projects. And one of the 
things we want to look at is exactly what you are talking about 
is partnering with CDFIs, local CBOs and have those folks help 
us in reaching out to individuals in remote areas, actually 
underwriting loans, bringing to those to actually leverage 
their expertise. So I am glad you mentioned that, because that 
is one of our objectives under the pilot project authority.
    Ms. Lujan Grisham. Mr. Chairman, if I might, can I make one 
quick statement?
    Thank you, Mr. Chairman. And I really appreciate that. And, 
I am probably going to send you in this terrible circle. I am 
an old bureaucrat myself. And I know that we can just go in 
circles--finding the right size. So I applaud that effort. And 
I know that we want to make sure that the loans that we provide 
are creditworthy. But you have to also make this burden much 
smaller, because you could certainly make the argument that 
instead of having to figure out these partners and going out to 
nonprofits and funding them and supporting them to do the loan 
application, wouldn't it be much smarter and swifter to make it 
less burdensome so that we don't need so much stuff, without 
minimizing that you have to assess the risk? So I just want to 
push that balance is great, but urgency really is important 
here. And we stand ready to help you in any way that we can to 
make the difference.
    Mr. Beyerhelm. Yes. And thank you very much for that. And 
no, certainly, we will continue to look at ways to streamline 
the process. I do want to say though that because we make loans 
that are very highly leveraged--I mean, we can actually--if 
somebody wants to borrow $200,000 to buy a $200,000 piece of 
property, we can do the whole 100 percent financing. And their 
cash flow may have a three percent margin in it. So as a 
consequence we do have to spend some time, for the taxpayer's 
benefit, but even more importantly for the customer's benefit 
that we do not provide them financing that they cannot repay 
and then wreck their credit. So there is a fine line in there 
somewhere. But I appreciate your comments. And we will look 
into it.
    The Chairman. I thank the gentlelady. The gentlelady from 
New Mexico makes a good point--most of us on this Committee 
serve a rural constituency. I would think that she brings a 
unique perspective in that she serves a remote constituency, 
and we have seen such consolidation with respect to FSA office 
closures and so on. The irony in this whole thing is that rural 
broadband has not kept pace. So it is that much more 
challenging. And the point that she has made is very well 
noted.
    So with that, I will recognize the gentleman from Virginia 
for 5 minutes, Mr.--no. Okay. Seeing no further requests for 
time, we will dismiss this panel. Thank you all very much. We 
appreciate your testimony. And we certainly appreciate you 
being here. And we will prepare for the next panel.
    Dr. Long Thompson. Thank you.
    The Chairman. In the interest of time, as we prepare the 
second panel, I would just go on ahead and take a minute to 
introduce those individuals. This is a bigger panel than the 
first one. We have a total of five. Mr. Bob Frazee, President 
and CEO of MidAtlantic Farm Credit, Westminster, Maryland; Mr. 
Timothy L. Buzby, President and CEO, Farmer Mac; Mr. Leonard 
Wolfe, President and CEO, United Bank & Trust of Marysville, 
Kansas, on behalf of the American Bankers Association; Mr. Sean 
H. Williams, President and CEO of The First National Bank of 
Wynne, Wynne, Arkansas, on behalf of the Independent Community 
Bankers of America; and, finally, Mr. Brett Melone, Loan 
Officer, California FarmLink, Santa Cruz, California, on behalf 
of the National Sustainable Agriculture Coalition.
    And it appears that we have all of our panel members 
seated. I would remind our panelists, just as I did the first 
panel, green is go. You are good to go. When you see yellow, 
step on the gas. And red indicates your time has expired.
    So with that said, we will start by introducing Mr. Bob 
Frazee, President and CEO, MidAtlantic Farm Credit, ACA, 
Westminster, Maryland, on behalf of the Farm Credit System. Mr. 
Frazee, you are recognized for 5 minutes.

          STATEMENT OF BOB FRAZEE, PRESIDENT AND CHIEF
 EXECUTIVE OFFICER, MidAtlantic FARM CREDIT, ACA, WESTMINSTER, 
              MD; ON BEHALF OF FARM CREDIT SYSTEM

    Mr. Frazee. Thank you, Mr. Chairman, and Members of the 
Subcommittee. I appreciate the opportunity to testify today on 
behalf of the Farm Credit System.
    At MidAtlantic Farm Credit, we are part of the nationwide 
Farm Credit System that is privately owned by farmers, 
ranchers, agricultural cooperatives, rural utilities and others 
in rural America. MidAtlantic is owned by more than 10,000 
farmers that borrow from us in Delaware, parts of Maryland, 
West Virginia, Virginia and Pennsylvania. I report to an 18 
member board, 16 of whom are farmers elected by the borrower-
owners of our cooperative. The Board sets the policies that 
guide our institution.
    Farm Credit funds its lending by marketing System-wide debt 
securities to the investing public. We do not have access to 
deposits guaranteed by the FDIC and backed by the U.S. Treasury 
as a source of funding. The Farm Credit System remains 
financially strong. Our earnings have been good. Loan volume 
has continued to grow. And our capital at the end of the first 
quarter this year was 16.6 percent of total assets. The 
investors that buy our bonds want to see the strength so that 
they will continue to make their capital available to farmers, 
ranchers and rural America through us.
    Being a cooperative, we share our profits directly through 
patronage dividends with the farmers who borrow from us. In 
2013, MidAtlantic distributed nearly $19 million, and the 
System over $1 billion in earnings as patronage dividends. This 
puts money back in the pockets of farmers, and that supports 
rural communities.
    System institutions are regulated by the Farm Credit 
Administration. And I am on the receiving end of their 
attention, so I will let you know that they are doing their job 
thoroughly. The Farm Credit Act makes clear that our 
responsibility is to meet the needs of all types of 
agricultural producers that have a basis for credit. Our 
customer base reflects the fact that farming has changed 
dramatically since the System was established almost 100 years 
ago. Our territory contains a diversity of farming operation 
that is today's agriculture. We serve Maryland and Delaware 
poultry producing operations that are sophisticated, complex 
business, as well as startup vegetable growers in Virginia who 
are producing food for farmer's markets right here in 
Washington.
    If agriculture is going to be able to continue to feed a 
planet of nine billion people in the year 2050, it is important 
that all types, all sizes of farms have access to capital and 
the infrastructure to support them. We are focused on doing all 
that we can to help with that. One way we are helping is 
through the StartRight Program we created in 2008 to address 
the challenges faced by young, beginning and small agricultural 
producers. Last year, we developed a Farm Fresh Financing 
Program, created to help producers involved in local foods and 
sustainable agriculture.
    An example of Farm Fresh Financing is the Urban Tree 
Connection in Chester, Pennsylvania. They have been building 
gardens in vacant city lots for over 10 years, growing fresh 
produce for their neighborhoods. We help them purchase 
equipment and have provided a revolving line of credit so that 
they will continue to grow and serve more communities.
    As of the end of May, we had over $57 million in loans in 
the StartRight Program and over $83 million in Farm Fresh 
Financing. Every Farm Credit Association has programs that are 
specifically targeted to serve these young, beginning and small 
farmers. During 2013, the System made $8.3 billion in new loans 
to young farmer, and almost $11 billion to beginning farmers 
and $11.4 billion to small farmers. System institutions also 
deployed capital in support of rural communities, making 
investments in our borrower's communities that will help to 
make them places where their children and grandchildren want to 
live. For example, the Farm Credit System provided $140 million 
to fund a rural business investment company that will begin 
operations this summer to save and create new jobs in rural 
communities.
    We are also very proud of a $250,000 Farm Credit grant that 
has enabled the Farmer Veteran Coalition to take a labeling 
program that was started in Kentucky to a national level. This 
will allow consumers to choose products produced by farmers 
that are veterans when they make purchases.
    Now, agriculture has experienced some very good years 
recently. However, some sectors have experienced stress, as we 
have heard earlier today. We have seen the livestock sector 
that was hit hard by high feed costs, but we have seen 
improvements there recently. In the Midwest, there have been 
issues around land value inflation. Our institutions took 
aggressive steps to manage their lending programs to avoid 
taking on increased credit risk as land values have increased. 
We make our credit decisions based on repayment capacity, not 
inflating collateral values.
    Drought conditions are impacting many parts of the country. 
In California, the third consecutive year of drought and water 
restrictions pose significant risk to producers. Institutions 
there tell us that borrower's liquidity will be helpful this 
year. But another dry year in 2015 is likely to create 
financial adversity for them. We will work with those customers 
on a case by case basis to help them.
    In conclusion, the Farm Credit System continues to make 
credit available to all segments of agriculture. We cover the 
expense of being regulated by the government. We pay insurance 
premiums to protect investors. And we rely on continued access 
to the debt markets and a built in oversight mechanism for our 
member-owners.
    Mr. Chairman, thank you again for the opportunity to 
testify. And I will be pleased to respond to your questions.
    [The prepared statement of Mr. Frazee follows:]

    Prepared Statement of Bob Frazee, President and Chief Executive 
 Officer, MidAtlantic Farm Credit, ACA, Westminster, MD; 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 Bob Frazee and I am President and CEO of MidAtlantic Farm 
Credit.
    MidAtlantic is part of the nationwide Farm Credit System. My 
remarks today will provide some background on the Farm Credit System, 
an overview of current credit conditions, and comments on how Farm 
Credit is meeting our mission, and serving the credit needs of 
agriculture and rural communities.
Background on the Farm Credit System
    The Farm Credit System is a federally chartered network of 
borrower-owned lending institutions. Established in 1916, the Farm 
Credit System is comprised of 82 privately owned institutions. This 
includes four wholesale banks and 78 direct lending local associations. 
Farmers, ranchers, agricultural cooperatives, rural utilities and 
others in rural America cooperatively own all of these institutions. 
The four wholesale banks include CoBank. In addition to lending to Farm 
Credit associations, CoBank lends to agricultural, rural electric and 
telephone cooperatives, as well as rural water and sewer systems, 
broadband providers, agribusiness and to support exports. Farm Credit's 
mission is to provide sound and dependable credit and other related 
financial services to our owners and others consistent with the 
eligibility criteria set out in the Farm Credit Act.
    MidAtlantic is a direct lending association. We are owned by more 
than 10,000 farmers that borrow from us in Delaware, and parts of 
Maryland, West Virginia, Virginia and Pennsylvania. As President and 
CEO, I report to an 18 member board of directors. Sixteen of these 
directors are farmers elected by the borrower-owners of our 
cooperative. In addition to elected borrower-owners, each System 
institution is required to have at least one appointed outside director 
on their board that has financial expertise. At MidAtlantic, we have 
chosen to have two appointed directors. In no case are employees 
allowed to serve as directors of our lending institutions.
    The board of directors is responsible for setting the policies that 
guide how we run our institution and serve our marketplace. They 
approve the cooperative's capitalization plan consistent with Federal 
regulations and ensure that management makes available loan products 
and related financial services appropriate to the unique needs of 
agriculture in the territory the association serves.
    Each Farm Credit association obtains funds for its lending programs 
through one of the four Farm Credit banks. At MidAtlantic, we get our 
funding through AgFirst Farm Credit Bank, located in Columbia, South 
Carolina. AgFirst is owned by MidAtlantic and 18 other associations.
    The four Farm Credit System banks cooperatively own the Federal 
Farm Credit Banks Funding Corporation. The Funding Corporation, as 
agent for the banks, markets to the investing public the System-wide 
debt securities that are used to fund the lending operations of all 
Farm Credit System institutions. Unlike commercial banks, Farm Credit 
institutions do not have access to secured deposits guaranteed by the 
Federal Deposit Insurance Corporation and backed by the U.S. Treasury 
as a source of funding.
Regulatory Oversight by the Farm Credit Administration
    All Farm Credit System institutions are regulated by the Farm 
Credit Administration (FCA). The FCA is an arm's-length, independent 
safety and soundness regulator. The agency's three Board members are 
nominated by the President and confirmed by the Senate. The FCA has the 
oversight and enforcement powers that other Federal financial 
regulators have in order to ensure that Farm Credit institutions 
operate in a safe and sound manner. FCA examiners are required to be 
engaged with every System institution at least once every eighteen 
months. As one who is on the receiving end of that attention, you 
should feel comfortable that they are doing their job thoroughly.
    The terms of two of the three FCA board members have now expired. I 
understand that this Committee is not directly involved in the 
nomination and confirmation process; however, we urge the Committee to 
encourage the White House to bring forward nominees to the Senate in a 
timely basis.
    The Farm Credit System's mission, ownership structure and 
authorizing legislation are unique among financial institutions. It is 
critically important that Farm Credit's safety and soundness regulator 
understands our mission and what it takes to be successful in 
accomplishing that mission. Sometimes they need to be reminded of that, 
so we appreciate very much the language included in the farm bill 
reminding the regulator that the System's unique cooperative structure 
should be taken into consideration as they promulgate rules.
    The System's safety and soundness also is overseen by the Farm 
Credit System Insurance Corporation (FCSIC). FCSIC administers the Farm 
Credit Insurance Fund. The Fund and the operations of the Insurance 
Corporation are supported by premiums paid by Farm Credit institutions 
every year. The Fund is there to protect investors in System debt 
against loss of their principle and interest to the extent there are 
funds available in the Fund. There is no direct taxpayer backstop for 
the Fund. The Farm Credit Act sets the funding goal for the Fund at 2% 
of the aggregate outstanding insured obligations of the System. FCSIC 
also has the authority to examine System institutions and would act as 
the conservator or receiver of a System institution should one fail.
Fulfilling Farm Credit's Mission of Service to U.S. Agriculture and 
        Rural America
    All Farm Credit institutions are focused on accomplishing the 
mission established for us by Congress: to serve agriculture and rural 
America. Our cooperative structure and governance is designed 
specifically to ensure that our lending and related financial service 
activities are driven by the needs of our borrower-owners and to ensure 
that there is a reliable and competitive credit source available to 
agriculture that America's farmers and ranchers 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 relationships. Our services 
are delivered in the manner that best suits our customers' needs--
whether that means talking to them and completing loan documents at a 
poultry farmer's kitchen table, online while a vegetable producer is 
working in the field, or in the conference room of a regional 
agribusiness.
    The diversity found in our customer base is indicative of the fact 
that farming has changed dramatically since the Farm Credit System was 
established almost 100 years ago. We are constantly evaluating our 
programs to ensure that we are able to serve the full breadth of 
agriculture. Much has been said and written about how agriculture needs 
to be prepared to feed a planet of nine billion people by the year 
2050. Very little focus has been given to the amount of capital that 
will be needed to make sure our agriculture and infrastructure that 
supports it will be up to the task. Many have different visions 
regarding what agriculture should look like to accomplish this. Our job 
is to be positioned to meet the needs of each--whether small and local, 
large and national, traditional or organic. As the Farm Credit Act 
makes clear, our responsibility is to meet the needs of all types of 
agricultural producers that have a basis for credit.
    In our territory at MidAtlantic, we see the diversity that is 
today's agriculture first hand. We serve some of the premier poultry 
producing operations in the nation. These are sophisticated, complex 
businesses with tight margins and substantial credit needs. Our staff 
understands the needs of this industry and works closely with them on a 
whole host of issues. On the other end of the spectrum, we serve the 
needs of the Amish farming community in Pennsylvania, financing 
business improvements like solar panels that provide energy to their 
farms. In between those extremes are customers and businesses with 
similarly varied needs, from entrepreneurs working to develop a wine 
industry in Maryland, to dairy farmers in Delaware, to fruit and 
vegetable growers in Virginia producing food for local farmers' markets 
right here in Washington, D.C.
    Our experience with this large swath of agriculture also gives us 
the knowledge, insight and expertise to develop special programs 
targeted at farmers who may need special help. We created the 
StartRight program in 2008, which is a suite of loan products 
specifically designed to address the challenges faced by young, 
beginning and small agricultural producers. Just last year, we 
developed a Farm Fresh Financing program, created to help producers 
committed to local foods and sustainable agriculture. As of the end of 
May, we had over $57 million in loans in the StartRight program, and 
over $83 million in loans in Farm Fresh Financing. I'd like to give you 
two examples of the types of businesses and organizations that these 
loans help:
    The Urban Tree Connection in Chester, Pennsylvania has been 
building gardens in vacant city lots for over 10 years, growing both 
fresh produce for the neighborhoods, as well as growing a sense of 
community among neighbors. Farm Credit provided funding to help them 
purchase equipment. We also provided a revolving line of credit so that 
they could continue to grow and serve more communities. Since its 
inception, Urban Tree Farm has partnered with several additional 
companies to help them meet their community goals, and Farm Credit is 
currently talking to them about financing options.
    Groundworks Farm in Pittsville, Maryland is another example. Owners 
Margaret Evans and Kevin Brown didn't grow up on farms, but they knew 
farming is what they wanted to do with their lives. Farm Credit helped 
them buy a small farm on the Eastern Shore of Maryland to grow produce 
and offer shares in their CSA, a Community Supported Agriculture farm. 
Last year, they offered almost 150 shares in their farm to local 
residents.
    It should be of no surprise to the Committee that when you look 
across Farm Credit's loan portfolio you will see represented in it the 
broad array of operations that are U.S. agriculture. The Farm Credit 
Act was designed to ensure that we can continue to meet the needs of 
agriculture, cooperatives and rural infrastructure as they have 
developed. Parts of the law have not been updated for over forty years, 
and it can be challenging at times for us to continue to fulfill that 
mission when old law has to be applied in a very changed world.
    Sometimes when changes in law are made, they take time to get 
implemented. Back in the 2002 Farm Bill Congress authorized the 
formation of Rural Business Investment Companies (RBIC) and made clear 
that Farm Credit institutions could create and invest in these entities 
to further the goal of making available equity capital for rural 
entrepreneurs. It took additional changes in the law and final 
regulations that were not completed until 2013 for our institutions to 
be able to put this authority to work for rural America. This summer a 
Farm Credit System funded RBIC will begin operations thanks to a 
commitment of about $140 million from Farm Credit to capitalize the new 
effort. This will mean jobs saved and jobs created in rural 
communities.
    We also are very proud of our partnership with the Farmer Veteran 
Coalition to serve veterans involved in agriculture. As the result of a 
$250,000 grant from the Farm Credit System, farmers who are veterans 
now have access to a national labeling program that will allow 
consumers to choose products they know are produced by farmers that are 
veterans when they make purchases. These funds facilitated moving this 
program from one operated only in the state of Kentucky to a national 
program.
    Our cooperative structure ensures that our focus remains on the 
success of our owners rather than on achieving quarterly returns to 
impress stockholders. When our customer-owners achieve success, 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. Farm Credit does 
not enter and exit agricultural lending as farm profitability waxes and 
wanes.
Distributing Profits to Farmers Through Patronage
    Our commitment to our borrower-owners' business success is 
demonstrated further by the fact that we share our profits directly 
through patronage dividends with the farmers who borrow from us. Each 
year, MidAtlantic's board of directors makes a determination based on 
our profitability and financial strength as to what portion of our net 
earnings will be returned to our members who borrow from us.
    In 2013, MidAtlantic distributed more than $18.9 million in 
earnings as patronage dividends to the member-borrowers of our 
cooperative. In total, the Farm Credit System in 2013 distributed over 
$1 billion in patronage. This patronage distribution puts money back in 
the pockets of farmers. It is a rural stimulus that allows our 
customer-owners to re-invest in their own operations and to support 
rural communities through local spending.
Farm Credit's Financial Strength
    The Farm Credit System remains very strong financially. The 
System's combined net income was $4.64 billion for 2013, and we are 
pleased to report that in the first quarter of 2014, the System's net 
income was nearly $1.1 billion. Nationwide, Farm Credit ended 2013 with 
a loan portfolio of about $201 billion, and we added another $3.5 
billion in loans during the first quarter of this year. Our capital 
position exceeds that of most every other financial institution. At the 
end of the first quarter of this year, the System had just over $43 
billion of capital, or 16.6 percent of total assets. This level of 
capital substantially exceeds that required by our regulator. This 
means that the investors that continue to make their capital available 
to farmers, ranchers and rural America through us should feel secure 
that they will be repaid.
Overall Farm Credit Loan Portfolio
    As I noted before, at the end of the first quarter of this year we 
had outstanding about $204.5 billion in loans. To give you some 
perspective on the breadth of that portfolio of loans, that total was 
comprised of about $93 billion in real estate mortgage loans, $42 
billion in production loans, $32 billion in agribusiness loans, $15.6 
billion in energy and water and sewer, $6.5 billion in rural home loans 
and about $4.3 billion in communications loans. In addition we 
supported exports with $4.7 billion in financing.
    Consistent with our authority under the Farm Credit Act, we are 
engaged in the rural community beyond agriculture. Because of the 
System's capital strength, institutions are also making investments 
that support the quality of life in rural communities. Institutions 
have invested in bonds issued to support critical care hospitals, 
nursing facilities, congregate housing for the elderly, and schools. 
Because our owners understand the needs of their communities, these 
investments demonstrate their commitment to making their hometowns the 
places where their children and grandchildren will want to live.
A Commitment to Serving Young, Beginning and Small Farmers
    Every Farm Credit association must have programs in place targeted 
specifically at meeting the needs of three special categories of 
borrowers: those that are young, those that are beginning in farming, 
and those that are small farmers. Our regulator sets the definitions 
for each of these categories. Young farmers are defined as those 35 
years old or younger. Beginning farmers are those with 10 or fewer 
years of farming experience. In the case of small farmers, we are 
required to look specifically at the gross farm sales of the individual 
producers. Small farmers are those with less than $250,000 in annual 
gross farm sales.
    Each institution is required to report on their lending activity to 
these individual categories of producers. This data is not additive 
since individuals may fall into more than one category. During 2013 
Farm Credit institutions made $8.3 billion in new loans to young 
farmers, almost $11 billion in new loans to beginning farmers and $11.4 
billion to small farmers.
    We work hard to serve the needs of young, beginning and small 
farmers. Across the country we do this not only by fulfilling their 
credit needs but also by supporting training and education programs, 
hosting seminars on intergenerational transfer of family farms, on risk 
management techniques and establishing and maintaining effective 
business plans. We are engaged across the spectrum with those entering 
agriculture whether they are focused on organic, sustainable, or local 
food related operations, direct-to-retail, or any other emerging 
business models. Our trade association, The Farm Credit Council, has 
been actively engaged with the support of USDA in reviewing the 
effectiveness of financial skills training for young and beginning 
farmers and encouraging the development of new tools that will help 
ensure those starting out in agriculture do so with the improved 
business management skills that are so necessary for farm businesses to 
be successful over the long term.
Current Conditions in Agriculture
    Agriculture has experienced some very good years recently. As you 
know, however, several sectors have seen stress. We have seen many in 
what we call the green industry--sod, nursery and ornamental growers 
and greenhouse--struggle alongside the struggling housing industry. The 
stagnant housing sector also affected the timber industry. While the 
protein sector was hit by high feed costs, we have seen improvements 
recently. In the Midwest, there has been considerable attention paid to 
land value inflation. Our institutions early on took aggressive steps 
to manage their lending programs so as to not take on increased credit 
risk exposure as land values increased similar to what some lenders did 
during the housing bubble. Farm Credit System institutions approach 
their markets prudently. Caps were placed on lending against land based 
on realistic projections regarding commodity prices. We make credit 
decisions based on the repayment capacity of the individual borrower 
rather than the inflating value of the collateral. 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.
Crop Insurance
    Crop insurance remains an extremely important risk management tool 
for farmers throughout the country. We appreciate very much that the 
farm bill provided more crop insurance options and ensured new policies 
will be made available for specialty crops. We believe that it is 
important as a lender to agriculture that we know our customers have 
insured their production. This protects the farmer and it protects the 
lender as we provide credit to farmers to cover their operating 
expenses. A strong, effective, fully funded Federal Crop Insurance 
Program is vitally important to maintaining credit flows to 
agriculture. We look forward to providing input as implementing 
regulations are developed and proposed.
Drought Conditions
    Our institutions continue to monitor drought conditions in parts of 
Texas, Oklahoma, Kansas, New Mexico and particularly in California. 
While there has been some improvement in certain areas of the country, 
severe conditions still exist. I will address California separately but 
across all Farm Credit institutions it is important to note that in 
each situation we assess the circumstances of individual borrowers 
adversely impacted by weather conditions and work with them 
accordingly.
    California is now in its third consecutive year of drought 
conditions and experiencing water restrictions to most areas of the 
state. This situation poses significant risk to agricultural production 
across the state in 2014, with ramifications into 2015 and beyond. It 
is fortunate that California farmers and agricultural cooperatives 
strengthened their balance sheets coming in to the current situation 
and are in a better overall financial position to withstand drought-
related business impacts.
    The drought's impact differs from region to region. Farm Credit 
institutions in California assess the drought's impacts by 
understanding the specific and unique circumstances of each customer. 
Our institutions then work collaboratively with individual borrowers 
who are experiencing distress related to the drought.
    Overall, high grower liquidity, coupled with relatively strong 
commodity prices mean most agricultural producers should be able to 
adjust their plantings and their feed rations for livestock in the near 
term. It also is fortunate that the agricultural sector has become much 
more sophisticated in utilizing conservation measures to more 
efficiently use the water they have. However, the continuation of 
drought conditions risks adverse impacts on reserve groundwater storage 
and a substantial increase in groundwater overdraft. If this results, 
there will be substantial long-term costs of groundwater overdraft that 
are yet to be determined. Furthermore, if another critically dry year 
occurs in 2015, studies suggest the impacts likely will be much more 
severe, including reduction in water availability, crop acres and farm 
related employment. This will require close monitoring and early 
coordination among all interested parties to manage through without 
significant disruption.
    The Farm Credit System remains well positioned to meet borrowing 
needs of agricultural producers impacted by the drought. The System's 
role is to stand by its customers and it will continue to fulfill that 
role in a safe and sound manner. This includes working collaboratively 
with individual borrowers who are experiencing financial distress 
related to the drought. Whatever the challenges presented by the 
drought, access to credit will not be one of them.
Conclusion
    The Farm Credit System remains financially strong, economically 
vital, and focused on fulfilling its mission of service to U.S. 
agriculture and rural America. We continue to make credit available to 
all segments of agriculture, including commercial producers as well as 
young, beginning and small farmers and ranchers. We support 
agricultural cooperatives, rural infrastructure and the marketing 
channels that agriculture depends on to sell their product and we serve 
the needs of rural communities to the extent our authority permits. We 
are proud of our commitment to rural America.
    There are no Federal dollars invested in the Farm Credit System. We 
pay for the expense of being regulated by the Federal Government 
through assessments on all Farm Credit System institutions. We pay 
insurance premiums to provide protection for those who invest in our 
debt securities. To continue serving our mission, we rely on continued 
access to the national debt markets and an independent, arm's-length 
regulator that comprehends the unique requirements of our cooperative 
structure and agriculture. In addition to being closely regulated, we 
have the built-in oversight mechanism of our member-owners holding our 
feet to the fire to keep service quality high while protecting their 
equity in their cooperative.
    Mr. Chairman, thank you again for the opportunity to testify today 
on behalf of the Farm Credit System. I will be pleased to respond to 
your questions.

    The Chairman. Thank you, Mr. Frazee. I now recognize Mr. 
Timothy L. Buzby, President and CEO of Farmer Mac. You are 
recognized for 5 minutes.

 STATEMENT OF TIMOTHY L. BUZBY, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, FEDERAL AGRICULTURAL MORTGAGE CORPORATION (FARMER 
                     MAC), WASHINGTON, D.C.

    Mr. Buzby. Chairman Crawford, and distinguished Members of 
the Subcommittee, thank you for your invitation to appear today 
to testify on behalf of the Federal Agricultural Mortgage 
Corporation, which is commonly known as Farmer Mac. My name is 
Tim Buzby, and I am the President and CEO of Farmer Mac.
    Farmer Mac exists to deliver capital and liquidity to rural 
America, and offers a variety of financing options tailored to 
the needs of its customers, America's rural lenders. In Farmer 
Mac's role as the secondary market for rural America, we work 
closely with all types and sizes of rural lenders. Through 
alliances and partnerships, we work with over 900 institutions, 
including commercial and community banks, Farm Credit System 
institutions, insurance companies and rural electric lender 
cooperatives. By working with such a vast network, Farmer Mac 
introduces additional competition into the marketplace to 
ensure that your constituents are receiving the lowest interest 
rates and most favorable terms possible for their financing 
needs.
    To fund the needs of our lending partners, Farmer Mac 
raises money in the capital markets as investors have looked to 
Farmer Mac as one vehicle to invest in rural America. Investors 
are attracted to the fact that today's agricultural producers 
are more efficient and productive than ever, more sophisticated 
in their financing arrangements and are providing quality 
commodities at competitive prices.
    One indication of this interest in the investment of rural 
America is regular demand for Farmer Mac's debt and equity 
securities. As an example, Farmer Mac has seen great demand in 
its auction of over $250 million of securities during just the 
past 3 months. These securities have attracted competitive bids 
from multiple financial institutions, driving down Farmer Mac's 
cost of funds. Lower cost funding for Farmer Mac directly 
benefits your farmers, ranchers and rural utility cooperatives 
in the form of lower interest rates on products financed by 
Farmer Mac.
    With regard to credit, the quality of Farmer Mac's 
portfolio remains a great story. We are extremely proud of our 
credit profile. And it will continue to be the cornerstone of 
our success in the future. Currently, our overall borrower 
delinquency rate on the loans in our $14.1 billion portfolio is 
only \1/5\ of 1 percent. That said, Farmer Mac understands that 
agriculture is cyclical with many diverse industries that 
respond in different ways to changes and economic conditions. 
We take pride in the diversified nature of our loan portfolio 
that ranges from almond groves in California to wheat, corn and 
soybean crops in the Midwest, and from cattle ranches in the 
Southwest to electric distribution cooperatives in the 
Southeast and across America.
    We have found over the years that this diversification 
serves us well as the inevitable cycles of weather and 
commodity prices impact profits in agricultural industries 
across geographies.
    As we look forward, although farm incomes are projected to 
decrease in 2014 compared to 2013, they are still very high 
from a historical perspective and will be above the 10 year 
average. In Farmer Mac's experience, farmers and ranchers today 
generally have stronger balance sheets than in the past, with 
higher working capital and lower leverage. In the agricultural 
lending space, there is great competition, particularly for the 
most successful producers who have become more sophisticated in 
their financing and are able to demand lower rates and more 
favorable terms. Very often, these borrowers are prudently 
choosing to finance farm purchases and refinancings with long-
term fixed rate mortgages to lock in low and known interest 
costs.
    I realize there is concern about the agriculture land value 
increases experienced over the past several years. But recent 
market activity suggests that land values have moderated, most 
notably in those areas that experienced the greatest increases 
in recent years such as the Midwest. Although lower commodity 
prices and increases in interest rates could put downward 
pressure on the value of farmland, Farmer Mac does not expect a 
repeat of the 1980s when agricultural land values collapsed. 
Fortunately, we see what others in the rural lending industry 
have observed, that farmers and ranchers simply are not taking 
on as much debt as they had in the past.
    In summation, Farmer Mac continues to provide a stable 
source of liquidity, capital and risk management tools to help 
rural lenders meet the financing needs to their customers. With 
a diverse array of lending products and sources of capital, 
Farmer Mac is well positioned to provide rural America with the 
sophisticated and low-cost products and services demanded by 
today's rural borrowers.
    Thank you, and I would be happy to answer any questions you 
may have.
    [The prepared statement of Mr. Buzby follows:]

 Prepared Statement of Timothy L. Buzby, President and Chief Executive
   Officer, Federal Agricultural Mortgage Corporation (Farmer Mac), 
                            Washington, D.C.
Introduction
    Chairman Crawford, Ranking Member Costa, and distinguished Members 
of the Subcommittee, thank you for your invitation to appear today to 
testify on behalf of the Federal Agricultural Mortgage Corporation, 
which is commonly known as Farmer Mac. My name is Tim Buzby, and I am 
the President and Chief Executive Officer of Farmer Mac. I appreciate 
the opportunity to appear before your Subcommittee today to provide you 
with some insight into what we at Farmer Mac see taking place in the 
rural credit financing markets.
    Farmer Mac is a stockholder-owned, federally chartered corporation 
that combines private capital and public sponsorship to serve a public 
purpose. The company was established under Federal legislation first 
enacted in 1988 and amended most recently in 2008. Congress has charged 
Farmer Mac with the mission of providing a secondary market for a 
variety of loans made to borrowers in rural America, including mortgage 
loans secured by agricultural real estate, rural utility loans, and 
certain loans guaranteed by the U.S. Department of Agriculture (USDA). 
This secondary market increases the availability of long-term credit at 
stable interest rates to America's rural communities, including 
farmers, ranchers, other rural residents and businesses, and rural 
utility cooperatives, and provides those borrowers with the benefits of 
capital markets pricing and product innovation. In Farmer Mac's role as 
the secondary market for rural America, we work closely with all types 
and sizes of rural lenders, including commercial and community banks, 
Farm Credit System institutions, insurance companies, credit unions, 
and lenders to rural electric cooperatives. We also deal directly with 
other financial counterparties as we serve as a bridge between the 
national capital markets and the rural credit markets by attracting new 
capital for financing rural borrowers. Farmer Mac's position at the 
intersection of Main Street, where the lending industry and borrower 
community come together in rural America, and Wall Street allows us to 
provide a unique perspective about the environment for rural credit.
    Farmer Mac exists to deliver capital and liquidity to rural America 
and offers a variety of effective financing options and products 
tailored to the needs of its rural lender customers that increase the 
ability of those lenders to offer low-cost funding to their rural 
borrower customers. Although we work directly with rural lenders, 
ultimately the greatest benefit we are able to provide is to your 
constituents--America's farmers, ranchers, rural utility cooperatives, 
and business owners in rural communities. Farmer Mac's current book of 
business includes loans originated by approximately 900 different 
financial institutions across the nation. By working with such a vast 
network of rural lenders, we introduce more competition into the 
marketplace and ensure that your rural constituents are receiving the 
lowest interest rates and most favorable terms possible for their 
financing needs. In fact, the interest rates available to borrowers 
through the products offered by Farmer Mac are some of the most 
competitive in the market today. However, whether or not a rural 
borrower ultimately chooses a Farmer Mac loan product, Farmer Mac's 
participation in the rural lending arena provides that borrower with 
the opportunity to obtain a low interest rate on terms that work for 
that individual. That is good for rural borrowers, their families, 
their communities, and rural America in general. Since its creation in 
1988, Farmer Mac has helped to fund loans to over 60,000 borrowers in 
all 50 states, resulting in nearly $35 billion of investment in rural 
America.
Current Conditions
    The agricultural economy has been robust for several years, driven 
by increased demand for food both in the United States and around the 
world as well as efficiencies in farming production, among other 
factors. This has not gone unnoticed in the capital markets, as 
investors have looked to Farmer Mac as a vehicle to invest in rural 
America. These investors are attracted to the fact that today's 
agricultural producers are more efficient and productive than ever, 
more sophisticated in their financing arrangements, and are providing 
the marketplace with quality commodities at competitive prices. One 
indication of this interest in investing in rural America is the 
regular demand for Farmer Mac's debt and equity securities. As an 
example, Farmer Mac has seen great demand in its auction of over $250 
million of term debt over the past 3 months. These debt offerings have 
attracted competitive bids from multiple financial institutions, 
driving Farmer Mac's cost of funds down by an average of 10 basis 
points per offering. Lower cost funding for Farmer Mac directly 
benefits farmers, ranchers, and rural utility cooperatives in the form 
of lower interest rates on products financed by Farmer Mac.
    The credit quality of Farmer Mac's portfolio remains a great story. 
We are extremely proud of our credit quality, and it will continue to 
be the cornerstone of our success in the future. As of March 31, 2014, 
Farmer Mac's overall 90 day delinquency rate on the loans in its $14.1 
billion portfolio was near historical lows at only 0.21%. Through the 
end of first quarter 2014, Farmer Mac has never experienced any credit 
losses in its Rural Utilities, USDA Guarantees, and Institutional 
Credit lines of business and has experienced cumulative losses of only 
$31 million in its Farm & Ranch line of business during Farmer Mac's 
entire 26 year history on $19.2 billion of cumulative originations 
(0.16%). Although Farmer Mac's talented underwriting staff can take 
much of the credit for the credit quality in Farmer Mac's portfolio, 
growing conditions, commodity prices, and agriculture exports from 
across the nation have been very good over the past 10 years and have 
contributed to growth in U.S. agriculture production and, consequently, 
borrower repayment capacity. Nonetheless, Farmer Mac understands that 
agriculture is cyclical, with many diverse industries that respond in 
different ways to changes in economic conditions. Those individual 
industries often are affected differently, sometimes positively and 
sometimes negatively, by prevailing domestic and global economic 
factors and regional weather conditions. This results in cycles where 
one or more industries may be under stress at the same time that others 
are not.
    Our policy at Farmer Mac is to diversify our Farm & Ranch portfolio 
both geographically and by agricultural commodity. We direct our 
marketing efforts toward agricultural lenders throughout the nation to 
achieve commodity and geographic diversification in our exposure to 
credit risk. Farmer Mac's Farm & Ranch portfolio remains diverse both 
geographically and by agricultural commodity, as illustrated in the two 
charts below that are current as of March 31, 2014. We take pride in 
the diversified nature of our loan portfolio that ranges from almond 
groves in California to wheat, corn, and soybean crops in the Midwest 
and from cattle ranches in the Southwest to electrical distribution 
cooperatives in the Southeast. We have found over the years that this 
diversification serves us well as the inevitable cycles of weather and 
commodity prices impact profits in agricultural industries or 
geographies because as certain portfolio segments are stressed, others 
can benefit. Farmer Mac's overall portfolio also benefits from the 
diversification added by its lines of business other than Farm & Ranch, 
including USDA Guarantees, Rural Utilities, and Institutional Credit. 
We continue to closely monitor sector profitability, economic 
conditions, and agricultural land value and geographic trends to tailor 
underwriting practices to changing conditions as part of our robust 
underwriting process.




                             March 31, 2014

           Commodity Type                         Geography


                                     
                                     
                                     
                                     
    Although farm incomes are projected to decrease in 2014 compared to 
2013 primarily because of lower cash grain prices, farm incomes are 
still very high from a historical perspective and above the 10 year 
average. In Farmer Mac's experience, farmers and ranchers generally 
have stronger balance sheets compared to several years ago, with high 
working capital and low leverage. There is great competition in the 
agricultural lending space, particularly for the most successful 
producers who have become more sophisticated in their borrowing and 
take advantage of lender competition to obtain low rates and favorable 
terms. More and more, these borrowers are choosing mortgage loan 
products with long-term fixed rates to lock in low and known interest 
costs. Another trend that Farmer Mac has observed is that the primary 
use of funds for many new loans is to refinance existing debt rather 
than to purchase new real estate.
    Agricultural land values have increased over the past several 
years, but recent market activity suggests that land values may have 
moderated, most notably in those areas that have experienced the 
greatest increase, such as the Midwestern region. While the increase in 
land values has varied by geographic region, it appears to have been 
spurred by a combination of factors, including strong demand for 
agricultural products and resulting high commodity prices, particularly 
for corn, soybeans, and wheat, as well as good yields, low interest 
rates, and landowners choosing to reinvest their profits in the 
acquisition of more land. Lower commodity prices and increases in 
interest rates could put downward pressure on the values of farmland, 
although Farmer Mac does not expect a repeat of the 1980s when 
agricultural land values collapsed. Some of the reasons for this belief 
are that debt loads are lighter today, the interest rate environment is 
much more transparent than in the 1970s and 1980s, world markets are 
more transparent and interconnected today, and the current run-up in 
land values is lower and more gradual than the increase in land values 
in the 1970s. We see what others in the rural lending industry have 
observed--that farmers and ranchers simply are not taking on as much 
debt as they have in the past. The general increase in land values has 
resulted in less acreage encumbered as collateral, as much of the 
financing being done today is with cash or a mix of cash, free and 
clear collateral, and debt. It appears that farmers and ranchers have 
learned from the mistakes of the past and are not buying land at 
inflated prices with debt, and lenders are also more disciplined than 
in the 1980s.
    Farmer Mac has been diligent in monitoring land values and has 
instituted measures to ensure that its Farm & Ranch portfolio remains 
sound. For example, last year we adopted stricter loan-to-value ratio 
(LTV) requirements for loans located in the Corn Belt in the Midwestern 
states where land prices have seen the highest escalation in recent 
years. Even before this change, the LTVs of loans in Farmer Mac's Farm 
& Ranch portfolio have historically been very low. The weighted average 
original LTV (based on original appraised value that has not been 
indexed to provide a current market value or reflect amortization of 
loans) for the loans in Farmer Mac's Farm & Ranch portfolio was 
approximately 48% as of March 31, 2014. The weighted average current 
LTV (based on original appraised value but which reflects loan 
amortization since purchase) for Farmer Mac's Farm & Ranch loans was 
approximately 41% as of March 31, 2014. The average LTV of Farmer Mac's 
Farm & Ranch loans decreases even more if the values in the original 
appraisals are indexed to current land values.
    Like others with a strong interest in agriculture, Farmer Mac 
continuously monitors significant weather events throughout the country 
and has been paying close attention to the current drought conditions 
in the western part of the United States, including California. The 
water level in many California reservoirs is only half of their average 
year-to-date water storage levels, and the snowpack in the higher 
elevations whose runoff would typically replenish low reservoir levels 
is at a third or less than normal levels. Though many farm irrigation 
districts will receive little or no water from the governing water 
authorities, the impact on individual farmers will vary due to 
alternative water sources the farmer may have in place. Farmer Mac has 
not observed any material effect on its portfolio due to these drought 
conditions as of March 31, 2014, but any continuation of extreme or 
exceptional drought conditions beyond the 2014 water year could have 
adverse future effects. This is particularly true in the permanent 
plantings sector, where the value of the related collateral is closely 
tied to the production value and capability of the permanent plantings, 
and in the dairy sector, which may experience increased feed costs as 
water is diverted away from hay acreage commonly relied upon by dairy 
producers and toward land supporting other agricultural commodities.
    In addition to Farmer Mac's secondary market activities in its Farm 
& Ranch line of business that involves mortgage loans secured by first 
liens on agricultural real estate, Farmer Mac has also been an active 
participant in the secondary market for loans guaranteed by the USDA 
under the Consolidated Farm and Rural Development Act (the CONACT) 
since 1991 after Congress granted that authority to Farmer Mac. In that 
time, Farmer Mac has provided lenders and their customers with 
liquidity and competitive rates, including longer-term fixed rates, on 
loans guaranteed by the USDA under the CONACT that are eligible for 
Farmer Mac to purchase.
    With regard to Farmer Mac's Rural Utilities line of business, the 
demands of that industry for capital and financing have historically 
tended to be linked to the state of the general economy and applicable 
environmental regulations. Continued weakness in the general economy in 
the United States has reduced the demand for rural electric power and, 
consequently, the need for rural utilities cooperatives to expand in 
recent years. This lower demand within the industry has increased 
competition for Farmer Mac's customer base from other lenders. Domestic 
economic indicators continue to show modest growth, and Farmer Mac and 
industry sources expect that demand for rural utilities loans will 
increase as the economy eventually strengthens. Farmer Mac believes 
that the rural utilities industry will have significant needs for 
financing over the course of the next decade, as capital will be needed 
for growth and modernization, including generation and transmission 
(G&T) and distribution system improvements and demand-side management. 
In addition, the industry will also require capital to comply with any 
future public policy initiatives such as environmental regulations and 
clean energy initiatives. Farmer Mac stands ready to work with the 
lenders to help meet the needs of their rural electric cooperative 
borrowers. Since the inception of the Rural Utilities line of business 
in 2008, Farmer Mac's secondary market activities have helped nearly 
170 rural electric cooperatives throughout the United States obtain 
financing to serve approximately 4.6 million customers in rural areas.
Conclusion
    Farmer Mac continues to provide a stable source of liquidity, 
capital, and risk management tools to help rural lenders meet the 
financing needs of their customers. With a diverse array of lending 
products and capital sources, Farmer Mac is well positioned to provide 
rural America with the sophisticated and low cost lending products 
demanded by today's rural borrowers. Last year marked Farmer Mac's 25th 
anniversary of serving rural America, and we at Farmer Mac are more 
energized than ever to continue to deliver the benefits envisioned by 
Congress at Farmer Mac's creation--greater access to affordable credit 
and a wide variety of loan products for rural communities. As I reflect 
on my nearly 14 year tenure at Farmer Mac, I am proud to say that the 
addition of Farmer Mac to the rural financing arena has fulfilled 
Congress's vision. Farmer Mac is a valuable and much relied upon asset 
for rural America, as lenders seek to offer their customers long-term 
interest rates at low levels, fund larger real estate loans, and manage 
borrower exposure levels. We are proud to partner with America's 
agricultural bankers, Farm Credit System institutions, and rural 
electric cooperatives to serve rural communities, and we remain 
steadfast in our commitment to meet their needs. Farmer Mac is 
committed to fulfilling its mission of delivering capital and 
increasing lender competition for the benefit of rural communities 
throughout the nation. Rest assured that we are prepared to build on 
our recent positive results and will continue to innovate, collaborate, 
and provide unparalleled service with a renewed focus on the 
stewardship of our public mission as we help build a strong and vital 
rural America.
    Thank you for the opportunity you have generously provided Farmer 
Mac to give testimony on current credit conditions in rural America. We 
look forward to working with Members of Congress and our business 
partners to do even more to fulfill our mission. I would be happy to 
answer any questions you may have.
Background Information About Farmer Mac
    Farmer Mac currently employs just over 70 people who are located 
primarily at offices in Washington, D.C. and in Johnston, Iowa. 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 by purchasing 
        obligations secured by those loans;

   securitizing assets and guaranteeing the payment of 
        principal and interest on the resulting securities that 
        represent interests in, or obligations secured by, pools of 
        eligible loans; and

   issuing long-term standby purchase commitments (``standby 
        commitments'') for eligible loans.

    Farmer Mac's activities are intended to provide lenders with an 
efficient and competitive secondary market that enhances these lenders' 
ability to offer competitively-priced financing to rural borrowers. 
This secondary market is designed to increase the availability of long-
term credit at stable interest rates to America's rural communities and 
to provide rural borrowers with the benefits of capital markets pricing 
and product innovation. Farmer Mac's activities are subject to 
oversight by Congress as well as a dedicated safety and soundness 
Federal regulator (the Office of Secondary Market Oversight within the 
Farm Credit Administration) and the U.S. Securities and Exchange 
Commission.
    Farmer Mac's purchases of both eligible loans and obligations 
secured by eligible loans, as well as Farmer Mac's guaranteed 
securities sold to third party investors, increase lenders' liquidity 
and lending capacity and provide a continuous source of funding for 
lenders that extend credit to borrowers in rural America. Farmer Mac's 
standby commitments for eligible loans held by lenders, as well as 
Farmer Mac's guaranteed securities retained by lenders in exchange for 
the related securitized loans, result in lower regulatory capital 
requirements for the lenders and reduced borrower or commodity 
concentration exposure for some lenders, thereby expanding their 
lending capacity. By increasing the efficiency and competitiveness of 
rural finance, the secondary market provided by Farmer Mac has the 
potential to lower the interest rates paid on loans by rural borrowers.
    Farmer Mac conducts its secondary market activities through four 
lines of business--Farm & Ranch, USDA Guarantees, Rural Utilities, and 
Institutional Credit. The loans eligible for the secondary market 
provided by Farmer Mac include:

   mortgage loans secured by first liens on agricultural real 
        estate, including part-time farms and rural housing 
        (encompassing the Farm & Ranch line of business);

   agricultural and rural development loans guaranteed by the 
        United States Department of Agriculture (USDA) (encompassing 
        the USDA Guarantees line of business); and

   loans made by cooperative lenders to finance electrification 
        and telecommunications systems in rural areas (encompassing the 
        Rural Utilities line of business).

    Farmer Mac also purchases and guarantees general obligations of 
rural lenders that are secured by pools of the types of eligible loans 
described above (encompassing the Institutional Credit line of 
business). As of March 31, 2014, the total outstanding amount of the 
eligible loans included in all of Farmer Mac's lines of business was 
$14.1 billion.
    Under the Farm & Ranch line of business, Farmer Mac purchases or 
commits to purchase eligible mortgage loans secured by first liens on 
agricultural real estate and rural housing. Farmer Mac also guarantees 
securities representing interests in pools of mortgage loans eligible 
for the Farm & Ranch line of business. Loans must meet credit 
underwriting, collateral valuation, documentation and other standards 
specified by Farmer Mac. As of March 31, 2014, the average unpaid loan 
balance for loans outstanding in the Farm & Ranch line of business was 
$449,000, and the majority of loans were to small farms (less than 
$350,000 in gross farm income) and family farmers (majority owned and 
operated by a family). At the end of 2013, Farmer Mac had 669 approved 
lenders eligible to participate in Farmer Mac's Farm & Ranch line of 
business. In addition to participating directly in the Farm & Ranch 
line of business, some of the approved lenders facilitate indirect 
participation by other lenders by managing correspondent networks of 
lenders from which the approved lenders purchase loans to sell to 
Farmer Mac.
    Under the USDA Guarantees line of business, Farmer Mac's wholly-
owned subsidiary purchases the portions of certain agricultural, rural 
development, business and industry, and community facilities loans 
guaranteed by the USDA under the Consolidated Farm and Rural 
Development Act (CONACT). Any lender authorized by the USDA to obtain a 
USDA guarantee on a loan under the CONACT may participate in Farmer 
Mac's USDA Guarantees line of business. During 2013, 195 lenders, 
consisting mostly of community and regional banks, sold USDA-guaranteed 
portions of loans to Farmer Mac. As of March 31, 2014, the aggregate 
outstanding principal balance of assets in the USDA Guarantees line of 
business was $1.7 billion.
    Farmer Mac initiated the Rural Utilities line of business after 
Congress expanded Farmer Mac's authorized secondary market activities 
to include rural utility loans in the Farm Bill of 2008. Farmer Mac's 
authorized activities under this line of business are similar to those 
conducted under the Farm & Ranch line of business--purchases of, and 
guarantees of securities backed by, eligible rural utilities loans for 
the financing of electrification and telecommunications systems in 
rural areas. To be eligible, loans must meet Farmer Mac's credit 
underwriting and other specified standards. As of March 31, 2014, the 
aggregate outstanding principal balance of rural utilities loans held 
by Farmer Mac was $1.0 billion.
    Under the Institutional Credit line of business, Farmer Mac 
purchases or guarantees general obligations of rural lenders that are 
secured by pools of loans that would be eligible for purchase under one 
of Farmer Mac's other lines of business. Farmer Mac refers to these 
obligations as AgVantage' securities. Farmer Mac guarantees 
AgVantage' securities as to the timely payment of principal 
and interest and may retain AgVantage' securities in its 
portfolio or sell them to third parties in the capital markets. Farmer 
Mac's purchase and guarantee of AgVantage' securities 
provide a continuous source of funding for lenders that extend credit 
to borrowers in rural America. As of March 31, 2014, outstanding 
securities held or guaranteed by Farmer Mac in its Institutional Credit 
line of business totaled $6.1 billion.
    After buying eligible loans, Farmer Mac can either retain them for 
investment or pool the loans together, securitize them, and guarantee 
the timely payment of interest and principal on the resulting 
securities. Securities that Farmer Mac guarantees are sold to investors 
in the capital markets, exchanged for the loans and retained by the 
lender, or held by Farmer Mac.
    Farmer Mac's charter establishes three capital standards for Farmer 
Mac--minimum capital, critical capital, and risk-based capital. Farmer 
Mac is required to comply with the higher of the minimum capital 
requirement and the risk-based capital requirement. Also, in accordance 
with a recently effective FCA regulation on capital planning, Farmer 
Mac's board of directors has adopted a policy for maintaining a 
sufficient level of Tier 1 capital and imposing restrictions on 
dividends and bonus payments in the event that Farmer Mac's Tier 1 
capital falls below specified thresholds. As illustrated in the chart 
below that is current as of March 31, 2014, Farmer Mac has continually 
improved its capital position over the past several years through a 
combination of retained earnings and equity offerings. Farmer Mac also 
just completed a $75 million preferred stock offering last week to 
further enhance its capital position.
Key Company Metrics--Capital


    Additional information about Farmer Mac is available on Farmer 
Mac's website at www.farmermac.com.

    The Chairman. Thank you. I appreciate that. I now recognize 
the President and CEO, United Bank and Trust of Marysville, 
Kansas, on behalf of the American Bankers Association, Mr. 
Leonard Wolfe. You are recognized for 5 minutes.

        STATEMENT OF LEONARD WOLFE, PRESIDENT AND CHIEF
  EXECUTIVE OFFICER, UNITED BANK & TRUST, MARYSVILLE, KS; ON 
             BEHALF OF AMERICAN BANKERS ASSOCIATION

    Mr. Wolfe. Chairman Crawford, and Members of the 
Subcommittee, my name is Leonard Wolfe, and I am the President 
of United Bank & Trust in Marysville, Kansas. We are the 
largest commercial agricultural lender in Kansas, second only 
to the Farm Credit System. I am also currently serving as the 
Chairman of the Kansas Bankers Association, and I serve as Vice 
Chairman of the American Bankers Association Agricultural 
Credit Taskforce. I appreciate the opportunity to present the 
views of the ABA on credit conditions and credit availability 
in rural America.
    The topic of today's hearing is very timely. The 
agriculture economy has been performing extremely well. Farm 
and ranch incomes for the past 5 years have been some of the 
best in history. With the new farm bill in place, farmers, 
ranchers and their bankers have certainty from Washington about 
future agricultural policy. Interest rates continue to be at or 
near record lows. And the banking industry has the people, 
capital and liquidity to help American farmers sustain this 
excellent agricultural economy.
    Banks continue to be the first place that farmers and 
ranchers turn when looking for agricultural loans. In fact, 
more farmers and ranchers receive credit from the banking 
industry than from any other source today. In 2013, farm banks, 
which the ABA defines as any bank with more than 14 percent of 
their loans made to farmers or ranchers, increased agricultural 
lending nine percent to meet these rising credit needs, and now 
provide nearly $90 billion in total farm loans. Farm banks are 
an essential resource for small farmers, holding $45 billion in 
small farm loans and $12 billion in micro-small farm loans. 
These farm banks are healthy, well capitalized and stand ready 
to meet the credit demands of our nation's farmers, large and 
small.
    I would like to thank Congress and especially the 
Agriculture Committees for repealing borrower term limits on 
USDA Farm Service Agency guaranteed loans. Banks work closely 
with the USDA to make additional credit available by utilizing 
the Guaranteed Farm Loan Programs. The repeal of borrower 
limits on USDA's Farm Service Agency guaranteed loans has 
allowed farmers to continue to access credit from banks like 
mine as they grow, ensuring credit access for farmers across 
the country.
    We remain concerned with certain areas of the agriculture 
credit market. In particular, we believe that the Farm Credit 
System, a government sponsored entity, has veered away from its 
intended mission and now represents an unwarranted risk to 
taxpayers. The Farm Credit System was founded in 1916 to ensure 
that young, beginning and small farmers and ranchers had access 
to credit. It has since grown into a $261 billion behemoth. To 
put this into perspective, if the Farm Credit System were a 
bank, it would be the ninth largest bank in the United States, 
and larger than 99.9 percent of banks in the country.
    This System operates as a government sponsored entity, and 
represents a risk to taxpayers the same way that Fannie Mae and 
Freddie Mac do. The Farm Credit System benefits from 
significant tax breaks valued at $1.3 billion in 2013, giving 
it a significant edge over private sector competitors. 
Moreover, the Farm Credit System enjoys government backing 
formalized by the creation of a $10 billion line of credit with 
the U.S. Treasury in 2013.
    The Farm Credit System has moved significantly from its 
charter to serve young, beginning and small farmers, and now 
primarily serves large established farms who could easily 
obtain credit from the private sector. In fact, the majority of 
Farm Credit System loans outstanding are in excess of $1 
million. Any farmer able to take in over $1 million in debt is 
not a small farmer. Moreover, small borrowers accounted for 
less than 16 percent of all new Farm Credit System loans in 
2013.
    Our nation's farmers and ranchers are a critical resource 
to our economy. Ensuring that they continue to have access to 
adequate credit is essential for the wellbeing of our whole 
nation. America's banks remain well equipped to serve the 
borrowing needs of farmers of all sizes. An important step in 
ensuring credit availability is to review entities such as the 
Farm Credit System and ensure that they stick to their charter 
of helping young, beginning and small farmers.
    Thank you. I would be happy to answer any questions you may 
have.
    [The prepared statement of Mr. Wolfe follows:]

   Prepared Statement of Leonard Wolfe, President and Chief Executive
  Officer, United Bank & Trust, Marysville, KS; on Behalf of American 
                          Bankers Association
    Chairman Crawford, Ranking Member Costa, and Members of the 
Subcommittee, my name is Leonard Wolfe, and I am the President, CEO and 
Chairman of the Board of United Bank & Trust in Marysville, Kansas. 
United Bank is a $570 million bank with fifteen branches serving 
Marshall, Nemaha, Brown, Clay, Washington, Cloud, and Riley counties in 
Kansas. We have over $176 million in agricultural real estate and 
production loans in our portfolio--nearly \1/2\ of all of our loans are 
to farmers and ranchers. In addition, we finance businesses that 
support, in some way, the needs of farmers and ranchers in our part of 
the state.
    I am also the Chairman of the Kansas Bankers Association and I 
serve as Vice Chairman of the American Bankers Association's 
Agricultural Credit Task Force. I appreciate the opportunity to present 
the views of the ABA on credit conditions and credit availability in 
rural America.
    The American Bankers Association is the voice of the nation's $14 
trillion banking industry, which is composed of small, regional and 
large banks that together employ more than two million people, 
safeguard $11 trillion in deposits and extend nearly $8 trillion in 
loans. ABA is uniquely qualified to comment on agricultural credit 
issues as banks have provided credit to agriculture since the founding 
of our country. Over 5,470 banks--nearly 81% of all banks--reported 
agricultural loans on their books at year end 2013 with a total 
outstanding portfolio of over $149 billion.
    The topic of today's hearing is very timely. The agricultural 
economy has been performing extremely well. Farm and ranch incomes for 
the past 5 years have been some of the best in history. With the new 
farm bill in place, farmers, ranchers, and their bankers have certainty 
from Washington about future agricultural policy. Interest rates 
continue to be at or near record lows, and the banking industry has the 
people, capital, and liquidity to help American farmers and ranchers 
sustain this excellent agricultural economy.
    Banks continue to be the first place that farmers and ranchers turn 
when looking for agricultural loans. In fact, more farmers and ranchers 
receive credit from the banking industry than from any other source. 
Our agricultural credit portfolio is very diverse--we finance large and 
small farms, urban farmers, beginning farmers, women farmers, and 
minority farmers. To bankers, agricultural lending is good business and 
we make credit available to all who can demonstrate they have a sound 
business plan, the experience, and the ability to repay.
    In 2013, farm banks--banks with more than 14% of their loans made 
to farmers or ranchers--increased agricultural lending 9.1 percent to 
meet these rising credit needs, and now provide nearly $90 billion in 
total farm loans. Farm banks are an essential resource for small 
farmers, holding $45 billion in small farm loans, and $12 billion in 
micro-small farm loans. These farm banks are healthy and well 
capitalized and stand ready to meet the credit demands of our nation's 
farmers large and small.
    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. Agriculture is a vital industry to 
our country, and financing it is an essential business for many banks, 
mine included.
    Banks work closely with the USDA's Farm Service Agency to make 
additional credit available by utilizing the Guaranteed Farm Loan 
Programs. The repeal of borrower limits on USDA's Farm Service Agency 
guaranteed loans has allowed farmers to continue to access credit from 
banks like mine as they grow, ensuring credit access for farmers across 
the country.
    We remain concerned with certain areas of the agricultural credit 
market. In particular, we are worried that the Farm Credit System--a 
government sponsored entity--has veered away from its intended mission 
and now represents an unwarranted risk to taxpayers. The Farm Credit 
System was founded in 1916 to ensure that young, beginning, and small 
farmers and ranchers had access to credit. It has since grown into a 
$261 billion behemoth offering complex financial services. To put this 
in perspective, if the Farm Credit System were a bank it would be the 
ninth largest in the United States, and larger than 99.9% of the banks 
in the country.
    This System operates as a government sponsored entity and 
represents a risk to taxpayers in the same way that Fannie Mae and 
Freddie Mac do. It benefits from significant tax breaks--valued at $1.3 
billion in 2013--giving it a significant edge over private sector 
competitors. Moreover, the Farm Credit System enjoys a government 
backing, formalized by the creation of a $10 billion line of credit 
with the U.S. Treasury in 2013.
    The Farm Credit System has veered significantly from its charter to 
serve young, beginning, and small farmers and ranchers, and now 
primarily serves large established farms, who could easily obtain 
credit from the private sector. In fact, the majority of Farm Credit 
System loans outstanding are in excess of $1 million. Any farmer able 
to take on over $1 million in debt is not a small farmer. Moreover, 
small borrowers accounted for less than 16% of all new Farm Credit 
System Loans in 2013.
    Our nation's farmers and ranchers are a critical resource to our 
economy. Ensuring that they continue to have access to adequate credit 
to thrive is essential for the wellbeing of our whole nation. America's 
banks remain well equipped to serve the borrowing needs of farmers of 
all sizes. An important step in ensuring credit availability is to 
review entities such as the Farm Credit System and ensure that they 
stick to their charter of helping young, beginning and small farmers.
    In my testimony today I would like to elaborate on the following 
points:

  b Banks are the primary source of credit to farmers and ranchers in 
        the United States;

  b Banks work closely with the USDA to make additional credit 
        available via the Guaranteed Farm Loan Program; and

  b The Farm Credit System has become too large and unfocused, using 
        taxpayer dollars to subsidize large borrowers.
I. Banks Are the Primary Source of Credit to Farmers and Ranchers in 
        the United States
    For my bank and for many of our members, agricultural lending is a 
significant component of their business activities. ABA has studied and 
reported on the performance of ``farm banks'' for decades and, we are 
pleased to report that the performance of these highly specialized 
agricultural lending banks continues to be strong. ABA defines a farm 
bank as one with more than fourteen percent farm or ranch loans (to all 
loans).
Farm Banks Exhibit Solid Farm Lending Growth


          Source: Federal Deposit Insurance Corporation.

    At the end of 2013, there were 2,152 banks that met this 
definition. Farm lending posted solid growth during 2013. Total farm 
loans at farm banks increased by 9.1 percent to $87.8 billion in 2013 
up from $80.4 billion in 2012. Approximately $1 in every $3 lent by a 
farm bank is an agricultural loan.
    Farm production loans grew at a faster rate than farm real estate 
loans. Outstanding farm production loans grew at a pace of 9.7 percent, 
or $3.8 billion, to a total of $43.0 billion. Farmland loans rose by 
8.6 percent, or $3.5 billion, to $44.7 billion.
    Farm banks are a major source of credit to small farmers--holding 
approximately $45.2 billion in small farm loans (less than $500,000) 
with $11.5 billion in micro-small farm loans (less than $100,000) at 
the end of 2013. The number of outstanding small farm loans at farm 
banks totaled 778,545 with the vast majority--over 513,000 loans--under 
$100,000.
    One area of concern for farm bankers and their customers has been 
the rapid appreciation in farmland values in some areas of the country. 
The run up in farmland values so far has not been a credit driven 
event. Farm banks are actively managing the risks associated with 
agricultural lending and underwriting standards on farm real estate 
loans are very conservative. The key consideration in underwriting any 
loan is the ability of the customer to repay regardless of the 
collateral position in the loan. To further manage risk, we regularly 
stress test our loan portfolios to judge repayment capacity under 
different scenarios.
    After several years of large increases in farmland values, the 
consensus view among bankers I know is that the increase in cropland 
values has slowed. USDA estimates of lower commodity prices in 2014 
seem to have cooled off the demand for farm real estate somewhat. We 
watch the farm real estate market very closely, as do my customers. 
Eighty-two percent of farmer and rancher wealth is tied up in their 
real estate.
II. Banks Work Closely With the USDA's Farm Service Agency to Make 
        Additional Credit Available by Utilizing the Guaranteed Farm 
        Loan Programs
    I would like to thank Congress, especially the Agricultural 
Committees, for repealing borrower term limits on USDA Farm Service 
Agency guaranteed loans. Term limits restricted farmer access to 
capital, and with the expansion of the farm economy over the past 10 
years, there are some farmers who are not able to obtain credit from 
banks like mine without a guaranty from USDA. The USDA's Farm Service 
Agency guaranteed loan program has been a remarkable success. Today, 
nearly $12 billion in farm and ranch loans are made by private sector 
lenders like my bank and are guaranteed by the USDA. There are nearly 
43,000 loans outstanding--of course some farmers have more than one 
guaranteed loan, so this number is not to be confused with the number 
of individual farmers and ranchers, but the numbers of individuals 
accessing credit under this program is very significant.
    This program has grown over the past 5 years, with less than $9 
billion outstanding at the close of FY08 to nearly $12 billion today. 
The loans made by banks like mine under this program are modest in 
size. The average outstanding guaranteed real estate loan is $439,000 
and the average outstanding guaranteed non real estate secured loan is 
$250,000. Clearly, we are reaching customers who have modest-sized 
operations, who are in the process of starting their farm or ranch 
operation, or who are recovering from some sort of financial set-back. 
Despite the fact that these customers do not have either the earnings 
or collateral to qualify for conventional credit, losses in the program 
have been extremely small. Over the last 5 fiscal years losses have 
ranged from a high of 0.6% in FY10 to a low of 0.3% in FY13. These are 
extremely low losses--especially for customers who are perceived to be 
a higher risk than other customers, hence the need for the USDA credit 
enhancement. Bankers who utilize the guaranteed farm loan programs 
offered by USDA know what they are doing and work very closely with 
their farm and ranch customers to properly service these loans. The 
Farm Service Agency deserves a great deal of credit for administering 
such a successful public/private partnership. We urge you to continue 
to support this very worthwhile program.
III. The Farm Credit System is a Large Government Sponsored Entity That 
        Primarily Serves Large Borrowers at the Expense of Taxpayers
    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. 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 long-term farm real estate loans. Over the ensuing 98 
years the FCS has received numerous charter enhancements, and has 
ventured into areas that are not appropriate for a farmer-owned farm 
lending business.
    Today the FCS is a large and complex financial services business 
with $261 billion in assets. If it were a bank, it would be the ninth 
largest bank in the United States. It is tax-advantaged and enjoyed a 
combined local, state, and Federal tax rate in 2013 of only 4.5%. 
According to the Federal Farm Credit Banks Funding Corporation, the tax 
advantages enjoyed by the FCS in 2013 were worth $1.348 billion or 29% 
of the Farm Credit System's net income in 2013.\1\
---------------------------------------------------------------------------
    \1\ Federal Farm Credit Banks Funding Corporation; 2013 Annual 
Information Statement of the Farm Credit System; February 28, 2014. 
Page F-52.
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The Farm Credit System is a Government Sponsored Entity
    In spite of their size, profitability, and tax advantages the Farm 
Credit System presents the same kind of potential threat 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. This reality was formalized in 2013 
when the Farm Credit System Insurance Corporation arranged a $10 
billion line of credit ``with the Federal Financing Bank, a Federal 
instrumentality subject to the supervision and direction of the U.S. 
Treasury--to which the Federal Financing Bank would advance funds to 
the [Farm Credit System] Insurance Corporation. Under its existing 
statutory authority, the [Farm Credit System] Insurance Corporation 
will use these funds to provide assistance to the System Banks in 
exigent market circumstances which threaten the Banks' ability to pay 
maturing debt obligations. The agreement provides for advances of up to 
$10 billion and terminates on September 30, 2014, unless otherwise 
extended.'' \2\
---------------------------------------------------------------------------
    \2\ Federal Farm Credit Banks Funding Corporation; 2013 Annual 
Information Statement of the Farm Credit System; February 28, 2014, 
page 23.
---------------------------------------------------------------------------
    We believe the farmers who own stock of the Farm Credit System--and 
the American taxpayers who back it--deserve a better understanding of 
what transpired between the Farm Credit System and the U.S. Treasury 
last September, but very little information is available to the public. 
Unlike the housing GSEs which are subject to reform efforts to lessen 
the taxpayer's exposure, the Farm Credit System seems to be increasing 
its dependence upon the U.S. Treasury.
FCS Loans Going to Large Borrowers


          Source: FCA's Annual Report of the Farm Credit System's 
        Young, Beginning and Small Farmer Mission Performance.

    Congress created the Farm Credit System as a public option for farm 
finance when farmers were having trouble getting the credit they needed 
from non-government sources. The conditions that led to the creation of 
the Farm Credit System nearly 100 years ago no longer exist, and yet we 
continue have a government assisted, tax advantaged farm lender 
providing credit to customers who would be able to easily borrow from 
taxpaying institutions like mine. In fact, the heavily subsidized 
credit that FCS lends goes to those who need it least. Despite 
amendments to the Farm Credit Act of 1980 requiring each FCS lender to 
have a program for furnishing credit to young, beginning and small 
farmers and ranchers (YBS), the share of new YBS loans to total new FCS 
loans continues to decline--even as the assets of the System have 
expanded enormously. In all categories of YBS lending, new young, 
beginning, and small farm loans continues to steadily drop with small 
farm loans declining the most--from a high of 30% of total new loan 
volume in 2003 to just 15.4% in 2013.\3\ Clearly, those who would 
benefit the most from the highly subsidized credit made available by 
the FCS are not receiving the benefits that Congress intended them to 
receive.
---------------------------------------------------------------------------
    \3\ ``FCA's Annual Report on the Farm Credit System's Young, 
Beginning, and Small Farmer Mission Performance: 2013 Results''. Office 
of Regulatory Policy, June 12, 2014 Board Meeting.
---------------------------------------------------------------------------
Large Borrows Benefit Most from Farm Credit System Subsidy
    A review of the 2013 Annual Information Statement from the Federal 
Farm Credit Banks Funding Corporation indicates that 51.3% of all Farm 
Credit System outstanding loans at the end of 2013 were in excess of $1 
million. The Farm Credit System does not provide the public with 
aggregated data by borrower; if they did, we would see a much higher 
percentage of borrowers with debt in excess of $1 million. In addition, 
the Farm Credit System does not disclose approved, but unfunded 
commitments. If it did, the numbers would be even higher. In short, 
well more than half of the entire Farm Credit System's portfolio at the 
end of 2013 was to individuals who owed it much more than a million 
dollars.
    We do not believe this is the highest and best use of the Farm 
Credit System's government sponsorship. Borrowers who can amass over $1 
million in credit from the FCS do not need taxpayers to subsidize their 
debt. Again, small farm borrowers, according to data supplied by the 
Farm Credit Administration, accounted for less than 16% of all new FCS 
loans in 2013.
    Moreover, the Farm Credit System has wandered dangerously off 
course into areas of finance that have nothing to do with agriculture, 
or rural America for that matter. Two recent Farm Credit System loans 
demonstrate this point:
    In 2013, Denver based CoBank, the largest Farm Credit System bank, 
approved a $750 million loan to Verizon. CoBank's loan was part of a 
financing package that totaled over $6 billion. Financial institutions 
from all over the world shared a portion of the loan. CoBank was the 
only government sponsored enterprise to be a participant in the loan. 
CoBank's share of the loan was the largest single piece of the credit 
package. The purpose of the loan was to enable Verizon to purchase the 
portion of Verizon Wireless that it did not already own. The proceeds 
of the loan, which closed in 2014, went to London based Vodafone, the 
corporate entity that owned the rest of Verizon Wireless. The Farm 
Credit Administration, the regulator of the FCS, has publicly stated 
that the loan is perfectly legal because Verizon is a ``similar-
entity'' to a rural cooperatively owned telephone company. In other 
words, since Verizon provides telephone services like a rural telephone 
cooperative, the loan is a legal for a Farm Credit System lender to 
make.
    On June 2, 2014, CoBank entered into a $350 million ``credit 
agreement'' with Connecticut based Frontier Communications Corporation 
to help finance a $2 billion acquisition by Frontier Communications 
from AT&T. Frontier Communications is a $16 billion publicly traded 
company. CoBank played a major role in this financing package in that 
they are credited with being the ``administrative agent and lead 
arranger'' by Frontier. While we have not seen a finding from the Farm 
Credit Administration about the eligibility of Frontier Communications 
to borrow from CoBank, we suspect that the regulator will again cite 
the notion that $16 billion Frontier Communications Corporation is 
``similar'' to a rural cooperatively owned telephone company.
    What new benefit has accrued to rural America as a result? These 
loans facilitated corporate deals designed to maximize shareholder 
returns. In the case of the Vodafone buyout, U.S. taxpayer supported 
money was transferred to European investors. As a banker, I understand 
the concept of maximizing shareholder wealth, but as a taxpayer I have 
a hard time understanding how the Farm Credit System can be involved in 
these deals and how the regulator of the Farm Credit System seems to be 
working to aid and abet their activities.
Conclusion
    The banking industry is well positioned to meet the needs of U.S. 
farmers and ranchers. U.S. agriculture has enjoyed one of the longest 
periods of financial prosperity in history; financially, American 
agriculture has never been stronger. USDA projected that at year-end 
2013, farm and ranch net worth was nearly $2.7 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 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 closely 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, including the Farm Credit 
System, shrank their portfolios of agricultural loans or exited the 
business altogether, banks expanded agricultural lending. Bankers saw 
opportunity where others did not. Bankers still see great opportunities 
in agriculture.
    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. Wolfe. I am now pleased to 
recognize one of my constituents who made the trip up from 
Arkansas, the President and CEO of The First National Bank of 
Wynne, Wynne, Arkansas, on behalf of the Independent Community 
Bankers of America, Mr. Sean Williams. You are recognized for 5 
minutes.

 STATEMENT OF SEAN H. WILLIAMS, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, THE FIRST NATIONAL BANK OF WYNNE, WYNNE, AR; ON BEHALF 
                         OF INDEPENDENT
                  COMMUNITY BANKERS OF AMERICA

    Mr. Williams. Thank you, Mr. Chairman. I appreciate the 
invitation to be here today and testify. I am Sean Williams, 
President and CEO of The First National Bank of Wynne, in 
Wynne, Arkansas. And I am testifying today at your invitation 
on behalf of the Independent Community Bankers of America.
    Our bank was established in 1915, nearly 100 years ago. And 
we have branches in five communities, 80 employees and 
approximately $285 million in assets. Seventy percent of our 
$150 million loan portfolio serves farmers. The remainder 
serves businesses that farmers depend on. We are one of the 
largest ag focused lenders in the State of Arkansas, and serve 
row crop agriculture, primarily rice, soybeans and corn. But 
cotton, wheat and milo are also grown in our area. America's 
7,000 community banks, primarily in rural areas and in every--
nearly every small town in rural America do an outstanding job 
of providing the credit that farmers and businesses need to be 
successful in both good times and in bad. Banks under $1 
billion in assets extend 50 percent of farm operating loans and 
60 percent of farm real estate loans from the banking sector.
    Corn and soybean prices are declining. Livestock producers 
will do better, but drought is of concern. USDA projects net 
cash and net farm income will be down 22 to 27 percent. We 
expect about a 15 percent drop locally: 2014 expenses will be 
the second highest level on record. Federal Reserve district 
bank surveys project lower income, stable to lower land prices, 
and higher loan demand and slower repayment rates. Rural credit 
markets remain highly competitive, and banks have ample 
liquidity for loan demand and want to make farm loans.
    We thank you for passing the new farm bill. Crop insurance 
funding is extremely important, with 290 million acres insured. 
We urge Congress not to lower funding or coverage levels. 
Community bankers and rural communities continue to be hampered 
by the CFPB's definition of rural as it relates to home 
mortgage lending. We have urged the CFPB to fix the rural 
definition and to better align the QM and escrow rules to 
eliminate this confusion.
    ICBA's Agriculture-Rural America committee, with bankers in 
every geographical region, recently completed a survey. Credit 
is plentiful. Farm land prices are stable but could decline if 
commodity prices remain lower. Drought and weather conditions, 
problems in many states are concerning. The farm bill and crop 
insurance are vital to extending credit. Reference prices are 
adequate but won't always cover production costs. And more farm 
bill details and decision making tools are needed.
    Bankers surveyed are alarmed by the Farm Credit System 
cherry picking. The FCS leverages tax and funding advantages as 
a government sponsored enterprise to undercut the loan rates on 
community banks biggest and financially strongest customers, 
and ignores less creditworthy borrowers. The Farm Credit Act 
prohibits undercutting loan rates. Bank's larger, more stable 
borrowers are important to bank portfolios, allowing lending 
risks to be spread over both small and large operations. Losing 
the biggest and the best borrowers elevates risk in our 
portfolios. This diminishes bank's ability to serve 
agriculture, lessens credit expertise available to farmers, 
lessens credit choices for borrowers, and lessens credit 
availability in rural America.
    The regulator, FCA, wants to allow FCS to broadly make non-
farm loans. The FCS--when FCS will continue--they won't 
continue to make farm loans. They want to also now cherry pick 
the best non-farm loans from bank portfolios, although not 
authorized by law. FCA's proposed mission related investments 
regulation would allow FCS lenders to seek approval for broad 
non-farm lending programs labeled as investments, loan for 
manufacturing, apartments, office buildings and hospitals.
    The FCA's apparent lack of awareness of CoBank's $725 
million Verizon loan is alarming. Verizon and Vodafone are 
located in New York City and in London. This isn't a rural loan 
and isn't authorized by the statute. FCA's excuse that this is 
allowed under the similar-entity provision is not credible as 
this provision isn't intended to allow enormous non-farm loans 
for hundreds of millions of dollars in size in non-rural areas 
in the world's largest cities to non-cooperatives or Fortune 
500 corporations. We question the FCA obtaining a $10 billion 
line of credit at a time of record profits without seeking 
Congressional approval as recommended in a Brookings 
Institution Report. Why did the FCA act in secret and behind 
Congress' back? We strongly recommend a series of hearings 
reviewing these and other questions. The FCS cherry picks the 
best farm loans they now seek to aggressively win for non-farm 
purposes. This diminishes the number of rural lenders in 
America. The FCA actions therefore threaten the availability of 
credit to rural America as this Congress created this GSE.
    Again, thank you. I am happy to respond to any questions.
    [The prepared statement of Mr. Williams follows:]

 Prepared Statement of Sean H. Williams, President and Chief Executive
  Officer, The First National Bank of Wynne, Wynne, AR; on Behalf of 
                Independent Community Bankers of America
Introduction
    Mr. Chairman, and Members of the Subcommittee, thank you very much 
for the opportunity to testify today on a topic of great interest to 
everyone in rural America including particularly the community banking 
industry. The availability of credit to rural America is vital for our 
nation's farmers and ranchers, and the thousands of community banks 
that serve rural America.
    My name is Sean Williams. I am President and CEO of the First 
National Bank of Wynne in Wynne, Arkansas. I testify today on behalf of 
the Independent Community Bankers of America (ICBA). Our bank is a 
forty-six year member of ICBA.\1\ Our bank is a long-time member of the 
Arkansas Community Bankers Association.
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    \1\ About ICBA

    The Independent Community Bankers of America' (ICBA), 
the nation's voice for nearly 7,000 community banks of all sizes and 
charter types, is dedicated exclusively to representing the interests 
of the community banking industry and its membership through effective 
advocacy, best-in-class education and high-quality products and 
services. ICBA members operate 24,000 locations nationwide, employ 
300,000 Americans and hold $1.3 trillion in assets, $1 trillion in 
deposits and $800 billion in loans to consumers, small businesses and 
the agricultural community. For more information, visit www.icba.org.
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First National Bank of Wynne
    Wynne is located approximately 60 miles northwest of Memphis, or 
120 miles northeast of Little Rock. First National Bank of Wynne was 
established in 1915, providing financial services for almost 100 years. 
Our bank has branches in five communities throughout the region; nearly 
80 employees; approximately $285 million in total assets and a $150 
million loan portfolio. Seventy percent of our loans focus on farmers 
and the remainder serves businesses that supply farmers or are depend 
on their financial health for survival.
    On a personal level, agriculture and the availability of credit are 
very important to me. I was born and raised on a farm in a northeast 
Arkansas community near McCrory. My father, grandfather and I raised 
rice and soybeans. I worked on the farm while attending college and 
also for several years after beginning to work in the financial 
services industry. My farming background led me to pursue both a 
bachelors and masters degree in agricultural business and economics 
from Arkansas State University.
Focus of Our Testimony
    Mr. Chairman, our testimony this morning focuses on how our bank 
and community banks in general serve rural America; the key factors 
that influence credit availability in rural America; the effects of 
competition in influencing credit availability and the results of a 
brief survey conducted with ICBA's Agriculture-Rural America committee.
    However, I want to stress up-front the vast majority of bankers 
believe credit availability is plentiful and competition for loans is 
intense. To the benefit of farmers and ranchers, interest rates are at 
or near historically low levels.
Serving Our Community; Serving Agriculture; Serving Main Street
    Like most community banks, our bank's employees serve our 
communities by volunteering in many civic organizations, churches, city 
councils, school boards, and other activities.
    First National Bank is one of the largest agricultural lenders in 
the State of Arkansas. Our employees know the people who bank at First 
National Bank and care about their success. We are predominately a 
farming region where the economic impact of farmers and their success 
is critical to the economic fortunes of our communities. Our market is 
row crop agriculture where rice, soybeans and corn are produced. 
Cotton, wheat and milo are other crops raised in our area. First 
National Bank provides the vital credit that farmers need to be 
successful.
    On a broader scale, community banks play an important role in the 
nation's economy. There are approximately 7,000 community banks in the 
U.S. and the vast majority of these are located in communities of 
50,000 or fewer residents. Thousands of community banks are in small, 
rural, and remote communities across our nation.
    While community banks comprise just 20 percent of the banking 
industry's assets, institutions with less than $10 billion in assets 
provide nearly 60 percent of the industry's small-business loans. 
According to the Federal Deposit Insurance Corporation's third quarter 
2013 industry data, small-business lending at banks with less than $1 
billion was up 3.8 percent from the previous quarter and 3.0 percent 
from the previous year.
    This is important since small businesses represent an astounding 99 
percent of all employer firms and employ \1/2\ of the private sector 
workforce. In addition, the more than 26 million small businesses in 
the U.S. have created 70 percent of the net new jobs over the past 
decade. Small businesses are important in rural America since many 
farmers and/or their spouses have off-farm jobs. As small businesses 
ourselves, community banks specialize in small business relationship 
lending. When our customers do well, community banks do well.
    Community banks under $500 million in assets extend about 50 
percent of all agricultural credit from the banking sector. In 
addition, commercial banks under $1 billion in asset size extend 
approximately 56 percent of non-real estate loans to the farm sector 
and about 62 percent of all real estate credit from the banking sector.
Farm Bill and Crop Insurance
    There are a number of factors that determine whether credit is 
available in rural America. Congress achieved an important objective in 
February when the President signed the new farm bill into law. The farm 
bill includes a number of programs that provide an economic safety net 
for the nation's farmers and ranchers.
    These programs will provide farmers the choice of reference prices, 
formerly known as target prices, or the new Agriculture Risk Coverage 
(ARC) program on either a whole farm basis using individual farm data 
or an individual crop basis by using county based data. Cotton 
producers will have a new STAX program. The cyclical nature of 
agriculture and the uncontrollable risks of severe adverse weather 
combined with unknown commodity prices and costs of production expenses 
require a continued safety net for farmers and ranchers.
    These programs are intended to complement a strong crop insurance 
program going forward and supplement crop insurance by providing 
support in periods of multi-year price declines and helping producers 
cover the crop insurance policy's deductible.
    In 2013, over 86 percent of insurable acreage was covered by 
Federal crop insurance in the U.S., over 290 million acres. Crop 
insurance protected $1.6 billion of cropland in Arkansas last year. 
Crop-hail insurance provided an additional $1.5 billion in liability 
insurance for Arkansas crops. This is very important since nearly 90 
percent of Arkansas farms are less than 500 acres in size.
    Crop insurance is essential as it allows community banks security 
for loan repayments if disastrous weather strikes. It is very important 
that Congress not diminish the crop insurance program by adopting 
amendments that restrict the ability of producers to enroll or 
discourage producers from obtaining high levels of coverage.
Guaranteed Loan Programs
    The farm bill also continues the important guaranteed operating 
loan and guaranteed farm ownership (real estate) loan programs. 
Importantly, as ICBA requested, the farm bill also wisely removes the 
arbitrary 15 year term limit on guaranteed operating loans. This change 
ensures thousands of family farmers can continue farming utilizing 
credit extended by private sector community banks.
    We are pleased the agriculture appropriations bills also contain 
funding levels adequate to meet loan demand. These programs are almost 
entirely self-funding.
    The farm bill's farm programs, combined with guaranteed loan 
programs and a strong crop insurance program are essential elements 
allowing community banks to ensure adequate credit is available to our 
nation's farmers and ranchers.
Farmer Mac
    Another important tool for agricultural lenders is Farmer Mac, the 
secondary market for agricultural real estate loans and rural 
residential mortgages. Farmer Mac offers community bankers the 
opportunity to provide farm customers access to longer term, fixed rate 
mortgages. These loans, when sold to Farmer Mac's secondary market, 
allow lenders to replenish their existing funds so they can then make 
additional loans. As interest rates rise in the future, which they 
inevitably will, Farmer Mac will become an even more important program 
as farmers seek to lock in long term rates.
Some Concerns for Agriculture
    A farm safety net is vital to agriculture and rural America due to 
the uncertainty, volatility, weather and cyclical nature of 
agriculture. Many farmers and ranchers and their lenders were concerned 
at the start of this year about the potential for lower farm income. In 
some areas, lower farm income is expected due to the severe drought 
impacting many Western states. In other areas, a large corn crop is 
expected to continue the downtrend in corn prices which began last 
year. Soybean prices are expected to be down as well.
Net Farm Income and Net Cash Income, 2000-2014F


          Note: Data for 2013 and 2014 are forecasts.
          Source: USDA, Economic Research Service, Farm Income and 
        Wealth Statistics.
          Data as of February 11, 2013.
          http://www.ers.usda.gov/ersDownloadHandler.ashx?file=/media/
        1013171/net-farm-income-and-net-cash-income.png

    For example, USDA projects that net farm Income will decrease about 
27 percent in 2014 to approximately $96 billion led by a projected $11 
billion decline in corn receipts and a $6 billion decline in soybean 
receipts. Net cash income, projected at $102 billion, is projected to 
be down 22 percent from the $123.5 billion achieved in 2013.
    Although USDA notes net farm income will still be $8 billion above 
the previous 10 year average, we point out the last time we testified 
before this Subcommittee in 2012, the net farm income projection was 
$16 billion above the previous 10 year average.
    Although production expenses will be down slightly, by about $4 
billion, 2014 is expected to still mark the second highest year ever 
for production expenses and farmers and ranchers have witnessed an 85 
percent increase in production expenses from 2002 to 2013.
    Additionally, USDA's Economic Research Service (ERS) noted recently 
that high operating costs, along with a sharp drop in prices, 
contributed to an 18 percent decline in net returns to corn operators 
from 2012 to 2013.
    Fortunately, the ag economy has experienced record price levels in 
recent years allowing many farmers to pay down their debt load. 
Livestock producers are also now benefitting from lower feed costs and 
higher prices providing them much needed profits. The rapid rise in 
farmland values has slowed or stalled meaning that land prices are 
expected to be stable or slightly decline in the near future if crop 
prices continue declining or remain below the cost of production.
Federal Reserve Agriculture Perspectives
    The Federal Reserve districts conduct quarterly surveys of 
agricultural bankers to determine their views on agricultural credit 
conditions. We have summarized a few of these surveys from the first 
quarter of 2014.

       Little Rock Zone Ag. Bankers' Expectations Q1-14 vs. Q1-13
------------------------------------------------------------------------
                                      Lower        Higher        Net
------------------------------------------------------------------------
Loan demand                                 20           20            0
Available funds                              0           20         8200
Loan repayments                             20            0        5^200
Farm income                                 29           14        5^140
Capital expenditure                         29           29            0
------------------------------------------------------------------------

Federal Reserve Bank of St. Louis Survey of Agricultural Credit 
        Conditions \2\-\3\
---------------------------------------------------------------------------
    \2\ Federal Reserve Bank of Saint Louis, Agricultural Finance 
Monitor, First Quarter, 2014. http://research.stlouisfed.org/
publications/afm/2014/afmq1.pdf.
    \3\ Burgundy Book, A Report on Economic Conditions in the Little 
Rock Zone, First Quarter, 2014.
---------------------------------------------------------------------------
    Producers are concerned about lower corn and soybean prices and 
high input costs. Lower feed prices will help producers retain cow 
herds. Quality farmland prices fell slightly in the first quarter, a 
reversal of the gain reported in the fourth quarter of 2013. However, 
quality farmland prices in the first quarter were 7.5 percent higher 
than a year earlier. Bankers continue to expect farm income and quality 
farmland values to decline over the next 3 months compared with year-
earlier levels.

                             Interest Rates
------------------------------------------------------------------------
                                     2014:Q1      2013:Q4       Change
------------------------------------------------------------------------
                                             Interest Rates (%)
                                  --------------------------------------
Operating:
  Fixed                                   5.28         5.39        ^0.12
  Variable                                4.84         5.01        ^0.17
Machinery/Intermediate term:
  Fixed                                   5.53         5.65        ^0.12
  Variable                                5.02         5.21        ^0.19
Farm real estate:
  Fixed                                   5.20         5.23        ^0.03
  Variable                                4.77         4.93        ^0.16
------------------------------------------------------------------------

    Similarly, bankers also expect farm household expenditures and farm 
equipment expenditures in the second quarter to be lower than a year 
earlier. The Saint Louis Fed noted their survey included an important 
conclusion: The vast majority of bankers' indicated the expectation of 
lower farm income in 2014 has not changed the highly competitive 
agriculture loan market.
Federal Reserve Bank of Kansas City 10th District Agricultural Credit 
        Conditions \4\
---------------------------------------------------------------------------
    \4\ Federal Reserve Bank of Kansas City, Survey of 10th District 
Agricultural Credit Conditions, First Quarter, 2014. http://
www.kc.frb.org/research/indicatorsdata/agcredit/#/articles/research/
agcredit/05-15-2014/farm-income-land-values-soften-further.cfm.
---------------------------------------------------------------------------
    Crop producers faced tighter profit margins although livestock 
producers experienced improved profits. Lower corn and soybean prices 
and relatively high input costs limited farm income and cropland 
values. Winter wheat growers were concerned poor yields would limit 
profits despite a rally in wheat prices. With lower income, more crop 
producers borrowed to pay for operating expenses. Bankers saw higher 
levels of carry-over debt versus a year ago.
    Cropland prices have generally stalled due to expectations of lower 
profits. The value of nonirrigated farmland dipped 1.4 percent from the 
fourth quarter of 2013 to the first quarter of 2014, and irrigated 
farmland values rose just 0.5 percent. Higher incomes for livestock 
producers resulted in slight increases in ranchland values.
    Funds for farm loans remained sufficient to satisfy additional 
borrowing and interest rates on farm loans remained steady. Most 
bankers indicated collateral requirements were unchanged despite a 
slight decline in loan repayment rates.
Federal Reserve Bank of Minneapolis Agricultural Conditions Survey \5\
---------------------------------------------------------------------------
    \5\ Federal Reserve Bank of Minneapolis, First Quarter 2014 
Agricultural Credit Conditions Survey, http://www.minneapolisfed.org/
publications_papers/pub_display.cfm?id=5318.
---------------------------------------------------------------------------
    Reduced crop prices and high input costs continue to take a 
financial toll on farmers and may be putting downward pressure on land 
prices. The outlook for the second quarter of 2014 is downbeat, with 
bankers predicting further declines in incomes, capital expenditures 
and household spending. Bankers indicated crop producers face tighter 
profit margins but livestock producers are more profitable with lower 
grain prices.
    Even with the drop in incomes, agricultural producers maintained 
their rate of loan repayments, but renewals increased slightly. Loan 
repayments were unchanged for 75 percent of bankers, while 13 percent 
reported repayment rates decreased.
    A quarter of lenders reported increased loan demand, while another 
\2/3\ experienced no change. The amount of required collateral 
increased slightly, with 92 percent of bankers reporting no change. 
After several years of very strong growth land prices have moderated, a 
trend that continued in the first quarter. Values decreased in some 
cases along with cash rents. Land values fell the most in Minnesota, 
where nonirrigated cropland prices dropped eight percent compared with 
a year earlier.
Federal Reserve Bank of Chicago AgLetter \6\
---------------------------------------------------------------------------
    \6\ The Agricultural Newsletter from the Federal Reserve Bank of 
Chicago, Number 1964, May 2014 http://chicagofed.org/digital_assets/
publications/agletter/2010_2014/may_2014.pdf.
---------------------------------------------------------------------------
    Increases in farmland values in some areas contrasted with 
decreases in others. Demand to purchase agricultural land was weaker in 
the 3 to 6 month period ending March 2014 than 1 year earlier, yet 
pockets exist where farmers remained interested in buying more land.

                               Percent Change in Dollar Value of ``Good'' Farmland
----------------------------------------------------------------------------------------------------------------
                                         January 1, 2014 to April 1, 2014       April 1, 2013 to April 1, 2014
----------------------------------------------------------------------------------------------------------------
                      Illinois                                     ^4                                    0
                       Indiana                                     ^4                                   +7
                          Iowa                                     +1                                   ^2
                      Michigan                                     ^3                                   ^1
                     Wisconsin                                     +1                                   +2
              Seventh District                                     ^1                                   +1
----------------------------------------------------------------------------------------------------------------

    Demand for non-real-estate loans was up relative to a year ago for 
a second straight quarter, which hadn't occurred in 4 years. The 
availability of funds to lend improved compared with a year earlier, 
but repayment rates for non-real-estate farm loans were lower than a 
year ago. There were higher levels of renewals and extensions of these 
loans. The average loan-to-deposit ratio remained close to 67 percent 
for the third quarter in a row. Interest rates moved lower during the 
first quarter and a record low rate was set for feeder cattle loans. 
The livestock sector returned to profitability as milk, hog and cattle 
prices rose sharply (31 percent, 48 percent and 19 percent) since April 
2013. Lower feed costs raised livestock profits helping support 
farmland values in some areas.
Survey Results of ICBA's Agriculture-Rural America Committee
    ICBA conducted a survey of its Agriculture-Rural America committee 
in June to get our bankers' views on credit availability in rural 
America. ICBA's Agriculture-Rural America committee consists of twenty-
five bankers from every geographical region of the U.S. representing 
most agricultural commodities produced in the United States.
    The survey asked bankers whether credit is plentiful, adequate or 
constrained in their area. No bankers felt credit was constrained and 
nearly all members stated credit was plentiful in their marketplace. We 
asked banks if they would desire to make more agricultural loans if 
demand existed. All bankers stated they desired to make more 
agricultural loans.
    Record high commodity prices over the past 4 years, combined with 
good yields in many areas, has generated significant cash for 
producers, allowing them to pay down term debt, pay cash for capital 
purchases and has reduced the need to borrow for operating expenses. 
Banks are very liquid, allowing them ample funds to make more farm and 
rural loans. Regulators, of course, want to ensure that farm loans can 
cash flow.
    We asked bankers if they believed their customers' farm income and 
farmland values would increase, decline or remain stable. Generally, 
bankers stated farm income and farmland values would decline or remain 
stable. Some bankers felt farm income would increase, reflecting their 
customers' involvement in livestock operations.
    A large majority of bankers responded crop insurance is essential, 
allowing them to make loans to farmers and most bankers could not 
extend loans to most customers without the assurance of repayment which 
crop insurance provides. As a banker stated, ``our ability to lend 
would be hurt dramatically without crop insurance.''
    Regarding farm bill programs, most bankers felt the farm bill was 
also indispensable to their ability to make farm loans. Regarding 
program options, most bankers felt the new reference prices were 
adequate but would not cover production costs. Most bankers also felt 
there was not enough information for customers to choose which farm 
program to sign up for. Most banks said they would work with their 
customers to help them decide farm program options.
Farm Credit System Abuses
    We asked bankers several questions related to activities of the 
Farm Credit System (FCS). FCS is a tax advantaged, government sponsored 
enterprise given tax and funding advantages by Congress in the early 
years of the previous century. The expectation was that FCS would 
provide farmers and ranchers access to credit at a time when such 
access was much more limited than today, particularly for long-term, 
fixed-rate financing. However, the banker responses discussed below are 
quite troubling in terms of FCS abuses of their GSE advantages.
    We asked bankers whether they had lost loans to the FCS and if so, 
was this a result of the FCS undercutting banks on their loan rates or 
a result of the FCS providing better service? Nearly all bankers said 
they had lost loans to the FCS and this was a result of FCS 
undercutting loan rates and in no case did bankers say that FCS 
provided better service.
    Next, we asked if banks had lost loans to FCS due to FCS 
undercutting loan rates, was FCS targeting primarily the bank's 
financially strongest customers or a broad mix of customers based on 
financial strength. Nearly all bankers stated that FCS exclusively 
targets their best customers in terms of financial strength. As one 
banker stated, ``I haven't seen FCS take any customers except the best 
and the biggest.''
    We asked bankers whether FCS was making non-farm loans in their 
marketplace. Several banks stated that FCS was indeed making non-farm 
loans. An example provided were FCS lenders making rural hospitals 
loans (an authority the FCS has never been granted by Congress).
The Harmful Impact of FCS Actions on Credit Availability to Rural 
        America
    We asked bankers if FCS activities undermine community banks' 
ability to make agricultural credit available in their market. Bankers 
believed this is the case and noted FCS targets the best operations, 
attracting these businesses through low rates which community banks are 
unable to match since they lack the tax and funding advantages of a 
GSE. Community banks cannot match the below market rates FCS offers to 
the best customers and still remain profitable. One banker noted there 
is stiff competition among all banks in his area; however, they cannot 
match the low rates offered by the FCS to the best customers.
    The large, more stable operations are important to community bank 
portfolios as they spread lending risks over both small and large 
operations. By targeting the large and financially strongest borrowers, 
FCS elevates the risks in community banks' farm loan portfolios.
    As one banker explained, ``Almost every community and regional bank 
in our market is more than willing to make agricultural loans 
(operating, equipment and real estate), yet find ourselves undercut by 
FCS in all those categories.''
    As another banker stated, ``Not only is there an issue with FCS 
lenders cherry picking the best loans in community bank portfolios, but 
also when FCS urges the newly acquired customers to move their deposit 
accounts to one of the large banks, thus taking deposits out of local, 
small communities and hurting the economic base of these remote, rural 
communities. This hurts community banks' ability to loan funds locally 
because of lower deposit balances.''
    Another example of a questionable lending practice by the FCS was a 
banker's comment noting they had lost a large real estate loan to the 
FCS because FCS was willing to take a minimal down payment while 
financing 93 percent of the real estate debt. The banker noted this is 
the type of practice common in the 1980s that led to the ag credit 
crisis and does not put borrowers in a healthy financial position. 
Borrowers with heavy debt loads ultimately lost farms in the 1980s.
    FCS almost exclusively targets top borrowers; offers these targeted 
borrowers below market rates and is willing to fix those below market 
rates at longer terms. By taking top borrowers from community banks, 
FCS weakens the overall community bank portfolio, and leaves the less 
seasoned/younger borrowers and higher leveraged borrowers with 
community banks. Similarly, if community banks stretch to keep top 
borrowers, community banks must accept less return and assume more 
interest rate risk by fixing the rate for a longer period.
    Bankers typically stated the FCS largely ignores young, beginning 
and small farmers. As one banker stated, ``FCS wants us to get these 
types of farmers started first and then later attempts to take them 
away once they become financially stronger.''
FCS Mission Creep
    We remind the Subcommittee the FCS is a GSE, granted several unique 
advantages not afforded to the private sector. These advantages were 
intended to allow the FCS to serve the specialized niche of 
agricultural producers and their cooperatives. However, we are seeing 
the FCS run amuck into non-farm related activities.
    The FCS's regulator, the Farm Credit Administration (FCA), is 
complicit in aiding and abetting this unauthorized behavior. The FCA 
works hand-in-hand with FCS to expand the customer base of the FCS even 
though Congress has said no to the FCS's non-farm legislative agenda.
    Illegal Investment Schemes: Through its `Investments in Rural 
America' (i.e., also termed by FCA as `mission related investments') 
proposal, the FCA has sought to grant FCS powers to engage in 
practically all types of non-farm lending. These activities were 
initially granted as `pilot projects' enabling FCS lenders to engage in 
loans to hospitals, commercial offices (doctors, lawyers), 
manufacturing, apartment complexes, hotels and motels, etc. While their 
initial proposal to grant national, blanket authority by regulation for 
these activities was withdrawn, the FCA is now proposing allowing these 
same activities if approved by FCA on a case-by-case basis. We point 
out these are loans, not `investments' and they are inconsistent with 
the statute's focus on agricultural based lending. FCA needs to stop 
playing name games, calling loans `investments' and stick to the laws 
Congress passed.
    $725 Million Verizon Loan: Additionally, the FCA apparently was 
unaware that CoBank, the FCS's large lender to cooperatives, had made a 
$725 million loan to Verizon to buyout Vodafone's interest in a joint 
venture. Verizon and Vodafone are headquartered in New York City and 
London and this extremely large loan was not rural-based, nor is it an 
allowable lending activity. While the FCA has excused this illegal loan 
as eligible under the Farm Credit Act's `similar-entity' provision, 
this provision was never intended to allow FCS lenders to make loans 
that are completely different from loans that are eligible under the 
statute. FCA is again abandoning their regulatory oversight 
responsibilities in an effort to go to any length necessary to allow 
FCS lenders to make whatever types of non-farm loans they desire.
    $10 Billion Line of Credit: On September 24, 2013, the Treasury 
Department, through its Federal Financing Bank, entered into a $10 
billion note purchase agreement with the Farm Credit System Insurance 
Corporation (FCSIC) to establish a standby line of credit to provide 
FCS lenders funds at the Treasury's cost of funds. This line of credit, 
which the FCA sought in secret, raises a number of serious questions. 
For example, why did the FCA seek a $10 billion line of credit at a 
time when FCS lenders were reporting record profits of $4.64 billion in 
2013? Why did the FCA not seek Congressional approval?
    When the FCS failed in the 1980s, the farmland values which the FCS 
utilized as collateral had collapsed. Yet, the $10 billion line of 
credit, according to FCA is ``collateralized'' meaning that the 
collateral backing for this line of credit could be dramatically 
reduced. If the FCS were to collapse, as it did in the 1980s, American 
taxpayers would be on the hook for the bailout.
    It would appear the FCA and FCS desired to lower their borrowing 
costs even further by acquiring this line of credit. The FCSIC was 
created to collect premiums from FCS institutions as a backstop in the 
event of financial deterioration within the System. Why then did the 
FCA seek and obtain a line of credit from the Treasury's FFB as 
additional protection?
    Further, a report \7\ to the FCSIC prepared by the Brookings 
Institution on behalf of the FCSIC stated: ``FCS should be required to 
approach the Congress and the Administration for legislative help 
(emphasis added).'' Yet, FCA did not go to Congress but secretly went 
to the Treasury to obtain the line of credit.
---------------------------------------------------------------------------
    \7\ The Brookings Institution: Farm Credit System Liquidity and 
Access to a Lender of Last Resort, Report for the Farm Credit System 
Insurance Corporation, page 8, Kohn and McGarry; http://
www.brookings.edu//media/research/files/papers/2012/11/
06%20farm%20credit%20
system%20liquidity%20kohn/
06%20farm%20credit%20system%20liquidity%20kohn.pdf.
---------------------------------------------------------------------------
    Mr. Chairman, we could raise a number of additional issues 
regarding FCS abuses. We believe these types of issues and questions 
warrant a series of separate hearings.
    There are many concerns Congress should explore in their oversight 
capacity of the FCS. Understandably, Congress has been knee-deep in 
writing a farm bill in recent years. However, Congress should not lose 
sight of this GSE's activities particularly when Congress is debating 
what to do with the housing GSEs. Certainly this GSE needs to have 
greater scrutiny.
Conclusion
    Mr. Chairman, thank you for the invitation to testify. As 
explained, there is a plentiful amount of credit available to farmers 
and ranchers at very low interest rates. Community bankers and their 
customers will continue to look forward to implementing the new farm 
bill and we thank you for your hard work on the legislation. We also 
thank you for ensuring a strong crop insurance program and continuing 
the guaranteed loan programs with greater flexibility.
    However, more attention and scrutiny needs to be paid to the FCS's 
inappropriate activities and their unauthorized actions as well as to 
the FCA's laissez-faire attitude towards regulating the mission of this 
GSE, particularly the expansion of their scope and eligibility 
parameters.
    The purpose of today's hearing is to examine credit availability in 
rural America. However, the actions of the FCS undermine the 
availability of credit in rural America as they seek to drive out other 
providers of credit by leveraging their unique GSE advantages in their 
efforts to lend to the very best customers and often ignoring producers 
in a weaker financial position. Is that really what the purpose of a 
GSE should be?
    We look forward to working with you in the future. Thank you.

    The Chairman. Thank you, Mr. Williams. I now recognize Mr. 
Brett Melone, Loan Officer, California FarmLink, Santa Cruz, 
California, on behalf of the National Sustainable Agriculture 
Coalition. Mr. Melone, you are recognized for 5 minutes.

 STATEMENT OF BRETT MELONE, LOAN OFFICER, CALIFORNIA FarmLink, 
             SANTA CRUZ, CA; ON BEHALF OF NATIONAL
               SUSTAINABLE AGRICULTURE COALITION

    Mr. Melone. Thank you. Good morning, Chairman Crawford, 
Members of the Committee. It is an honor and a pleasure to 
address you this morning and talk about credit availability in 
particular for small, beginning and socially disadvantaged 
farmers.
    Again, my name is Brett Melone. I am a loan officer with 
California FarmLink. We are a nonprofit agricultural lender 
based in Santa Cruz, California. And, again, a member of the 
National Sustainable Agriculture Coalition.
    FarmLink's mission is to link independent farmers in 
California with the land and financing that they need to be 
successful. We provide micro and small business loans, lines of 
credit and technical assistance. As a statewide nonprofit, 
our--the farmers that benefit from our lending are primarily 
low to moderate income farmers, about \1/3\ are very low 
income. We do take advantage of the Federal programs available 
to us to serve this population, in particular FSA guaranteed 
program, the rural micro-entrepreneur assistance program, and 
recently within the last year became a certified community 
development financial institution, one of the few 
agriculturally focused CDFIs in the country.
    The typical assistance services and financial products that 
we provide have a strong focus on high risk populations. 
FarmLink's development services focus on farm financing, cash 
flow protections, credit counseling, financial management and 
land access strategies. We see this technical assistance as 
critical not only to their business' success but simply for 
them to be able to access the financing that they need to grow 
their businesses. Due to the cost of making these micro and 
small loans, most banks and commercial lenders don't want to 
make them. Building a pipeline of viable loans requires 
relationships with farming communities that commercial lenders 
generally lack. And, again, it takes time in the form of 
technical assistance to get applicants to the point where they 
can actually qualify.
    As we have heard, the FSA microloan program became 
permanent, and we applaud that. I think this is really going to 
help increase access to capital for this farming population, 
and in addition the lifting of the term limits so that beyond 
the microloans they will be able to have full access to those 
programs. The increased--we would like to thank the Agriculture 
Appropriation Subcommittee for increasing funding for FSA 
direct loans, and also ask you to think about as FSA seeks to 
continue access to credit for farmers who have not historically 
used FSA loans, it will be imperative to ensure FSA has the 
administrative and staffing resources to serve this growing 
demand.
    As the first organization in the country to offer 
agriculture individual development accounts and a champion of 
the effort to establish a national program, we are pleased to 
see the reauthorization of this program in the 2014 Farm Bill. 
And we urge you to work with your colleagues on the 
Appropriations Committee to fund this program for $2.5 million 
in Fiscal Year 2015.
    The 2014 Farm Bill authorized USDA to develop the Whole-
Farm Revenue Protection Program, and this is a welcome addition 
to the risk management toolkit for sustainable and organic 
producers, a segment of American agriculture that has 
historically been under-served by crop insurance. It is an 
important tool, crop insurance is, for lenders in mitigating 
their risk. And we urge you to work with the USDA to expand the 
coverage of this program nationwide, in our area in particular. 
Sustainable and organic growers have been left out of this 
program currently.
    Section 6025 of the farm bill was revised and renewed. And 
this is Strategic Economic and Community Development. And we 
encourage you to work with the USDA in shaping how this program 
will serve the community and regional needs of agriculture and 
particularly around sustainable and organic where we are seeing 
significant growth in California.
    The Rural and Micro-Enterprise Assistance Program was 
reauthorized in the farm bill with $15 million in mandatory 
funding over the 5 year cycle. We would also like to see an 
additional $3 million per year in discretionary funding for 
that program to meet the demand.
    The Microloan Cooperative Lending Pilot Project, which we 
heard a little bit about earlier as well, we think this is 
going to really help FSA reach the farmers that are difficult 
to reach, serve them in a way that is going to meet their 
needs. So we urge USDA to work with partners to shape that 
program in providing underwriting support, guarantees and the 
like.
    Thank you, Chairman Crawford.
    [The prepared statement of Mr. Melone follows:]

Prepared Statement of Brett Melone, Loan Officer, California FarmLink, 
Santa Cruz, CA; on Behalf of National Sustainable Agriculture Coalition
Introduction
    Chairman Crawford, Ranking Member Costa, and Members of the 
Agriculture Subcommittee on Livestock, Rural Development and Credit, 
thank you for this opportunity to provide information about credit 
availability in rural America.
    My name is Brett Melone. I am a loan officer with California 
FarmLink. FarmLink is a nonprofit lender based in Santa Cruz, 
California. FarmLink is also a member of the National Sustainable 
Agriculture Coalition. My remarks reflect the credit needs of farmers 
in California as well as nationally.
    Both of my parents worked in agriculture when I was growing up in 
South Florida. I have dedicated my professional career to supporting 
the success of beginning, minority and small farmers, primarily in 
California, though I have been involved in national policy efforts, and 
spent a number of years living in Latin America as well. My commitment 
to these farmers comes from my first-hand knowledge of their ability to 
make a living in agriculture, provide jobs for others, feed the 
country, and steward our natural resources. This is what I am 
passionate about, and it is clear to me that a key factor in this 
farmer population being able to realize these goals is their ability to 
access capital.
    Much has been done over the last several decades to create programs 
that provide business development services and access to credit 
programs for small businesses. Since the financial crisis this effort 
has increased. Microloans are now part of the vernacular for anyone 
that is interested in economic development. Crowd funding is also 
becoming commonplace. We are even hearing more about policy efforts to 
allow Direct Public Offerings, where individuals who are not certified 
investors can invest their savings in ``Main Street'' or in our case, 
regional farms.
    Despite all of this activity and progress, there are still gaps 
between what farmers with $1 million or less in revenue can access in 
terms of capital. FarmLink recognized these gaps several years ago, and 
is now in its fourth year of direct lending to small, sustainable 
farmers. In 2011 we obtained Standard Eligible Lender status with the 
Farm Service Agency, and began making Rural Microentrepreneur 
Assistance Program loans. In 2013 we became a certified Community 
Development Financial Institution, one of just a handful nationwide 
that focus on agricultural lending.
    California FarmLink is a statewide nonprofit serving Low-Income 
Targeted Populations (LITP) throughout the State of California with 
three regional offices in the North Coast, Central Valley and Central 
Coast. FarmLink's mission is to link independent farmers and ranchers 
with the land and financing they need for a sustainable future. 
FarmLink provides business development services, microloans, small 
business loans and small lines of credit.
    FarmLink serves a target market across California of immigrant and 
other under-served beginning and small farmers. Since 2011, FarmLink 
has made more than 80 loans, deploying $1.5 million in capital to 
farmers, with an average loan size of $25,000, and loan size range of 
$5,000 to $100,000. In 2012, 63% of FarmLink's clients were at or below 
80% of the Area Median Income (AMI) and approximately 24% were very 
low-income, at or below 30% AMI.
    There are very few sources of small agricultural loans available to 
low-income and beginning farmers. The target market has a difficult 
time securing land and/or financing due to: limited history as 
entrepreneurs; limited traditional collateral; no or limited credit 
history; small loan size required; language or cultural barriers; and 
non-traditional marketing and business models.
    The barriers to entry and to gaining stability for new and 
beginning farmers are formidable. According to the 2012 USDA Census of 
Agriculture, the average age of California's farmers has increased to 
60. At the same time, beginning farmers lost ground. From 2007 to 2012, 
California lost more than 6,000 beginning farmers, a 23% drop, largely 
due to the economic downturn starting in 2008.
    FarmLink knows from experience that the first 5 years of farming 
are the most critical. Many start-up farmers have developed solid 
production skills, but have not developed an ideal mix of market 
options, economies of scale, or business savvy to survive. While the 
number of beginning farmers declined over the last 5 years, the number 
of Latino farmers, many of them immigrants, increased by 8% to almost 
10,000 farmers throughout California. In fact Latinos comprise about 
70% of FarmLink's borrowers and 40% of farmers who receive one-on-one 
technical assistance on finances and land tenure.
    Clearly, small farmers lack capital to expand. In a 2011 survey of 
1,000 beginning farmers conducted by the National Young Farmers 
Coalition, 78% identified lack of capital as the biggest challenge to 
achieving success.\1\ As the number of small and beginning farmers 
continues to grow, the financial products and technical assistance 
services offered by FarmLink are essential to ensure that these growers 
succeed.
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    \1\ Shute,``L.L.'' (2011) Building a Future with Farmers: 
Challenges Faced by Young, American Farmers and a National Strategy to 
Help Them Succeed.
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    FarmLink has made more than half of its loans in Monterey and Santa 
Cruz counties where farm labor income is seasonal and closely tied to 
minimum wage, creating endemic poverty in spite of chronic, seasonal 
labor shortages. Unemployment in Monterey County peaked at 17.5% 2 
years ago in the winter months and peaked this past winter at 15%. 
Workers earning subsistence wages turn to self-employment in 
agriculture as a way to increase their income. These small and 
beginning farmers need access to capital and technical assistance to 
start, stabilize, or expand their farming business.
    FarmLink's technical assistance services and financial products 
have a strong focus on higher risk populations. FarmLink development 
services focus on farm financing, cash flow projections, credit 
counseling, financial management and land access strategies. Our 
experience shows that one-on-one technical assistance and training is 
effective in helping farmers establish, operate and expand strong farm 
businesses and access and manage loans.
National Credit Context
    FarmLink is part of a nascent movement of CDFI's working with 
farmer networks, and in particular, farmer networks that serve 
beginning farmers, farmers of color, immigrant farmers, and other 
farmers that have difficulty accessing credit through traditional 
means.
    Current research funded by the Kellogg Foundation and being 
conducted by Michigan State University's Center for Regional Food 
Systems has documented the fact that very few farmer networks, and in 
particular farmer of color networks, are aware of the mission, 
structure and function of CDFIs. At the same time, even those CDFIs 
that have taken steps to increase their agricultural lending admit to 
having limited knowledge of the farming sector.
    This research points to the need to be intentional, at a national 
level, to build the capacity of CDFI and other community lenders to 
serve agriculture. Specifically, the research recommends creating an 
agricultural lending caucus among CDFI's and Farmer of Color Networks 
that focuses on the development of short and long term policies and 
best practices, including designated funding for farmer network 
projects modeled after the Healthy Food Financing Initiative.
    Due to the cost of making micro and small loans, most banks and 
commercial lenders don't want to make them. Building a pipeline of 
viable loans requires relationships with farming communities that 
commercial lenders generally lack. It takes time, in the form of 
technical assistance, to get the applicants to a point where they are 
ready to apply, and the underwriting requires knowledge of direct and 
alternative markets, that commercial lenders typically don't have.
Important Federal Policy Changes
    Policy changes within the USDA, and in large part led by this 
Committee, have created opportunities for FarmLink and other community-
based lenders, to begin to address the need for capital among this 
under-served farmer population.
    On behalf of California FarmLink, the National Sustainable 
Agriculture Coalition, and NSAC's member organizations, and the farmers 
that we serve, I'd like to genuinely thank the Members of this 
Committee for their commitment to improving and increasing access to 
capital for beginning, small and minority farmers.
    The FSA Microloan program that started out as a pilot program is 
now permanent--thanks to the efforts of this Committee during debate of 
the 2014 Farm Bill. Microloans made to beginning and veteran farmers 
will now be exempt from the term limits that otherwise apply on all 
direct operating loans. This important change will allow these farmers 
to continue to take advantage of Federal credit resources as they 
continue to grow their farm operations in the future.
    Additionally, the Microloan Cooperative Lending Pilot Projects 
provision will allow USDA to work with nonprofit community lenders to 
expand access to microloans and financial training for small, 
beginning, veteran and socially disadvantaged farmers.
    The increased priority on lending to beginning and socially 
disadvantaged farmers through FSA Direct and Guaranteed Farm Ownership 
and Operating loan programs will increase access to capital for these 
farmer groups. In addition, increased flexibility in determining what 
types of experiences should count towards the ``farm management 
experience'' requirement for direct farm ownership loans will further 
expand access to these loans.
    The lower interest rate for Joint Financing (or Participation) 
loans that bring together farmers, USDA, and a private lender in order 
to leverage scarce Federal credit appropriations with private lending 
resources will harnesses the power of leveraging and will allow FSA to 
serve more farmers for the same amount of Federal appropriations.
    We also thank the farm bill conference committee for continuing 
mandatory funding the Rural Microentrepreneur Assistance Program (RMAP) 
at the 2008 Farm Bill level of $15 million over the 5 year cycle. This 
program has been essential to FarmLink's ability to make loans to 
beginning, immigrant and small farms in California. In addition to the 
direct spending of $3 million per year, we would like to see 
discretionary funding of $3.3 million in FY15, consistent with the USDA 
request, and more robust discretionary funding in subsequent years. I 
urge you to work with your colleagues on the Appropriations Committee 
to get the $3.3 million request into the FY15 bill. Furthermore, we 
believe greater flexibility is needed in how the formula for technical 
assistance funds is applied, and urge you to work with USDA to achieve 
a workable solution to this problem.
    As the first organization in the country to offer agricultural 
IDAs, and a champion of the effort to establish a national program, we 
were pleased to see the reauthorization of the Beginning Farmer and 
Rancher Individual Development Accounts (BFRIDA) Pilot Program, 
designed to help beginning farmers and ranchers of limited means 
finance their agricultural endeavors through business and financial 
education and matched savings accounts. As the age of the average 
American farmer continues to rise, now is the time to launch this 
important new credit tool, and I urge you to work with your colleagues 
on the Appropriations Committee to fund this program in FY15.
    We'd also like to thank your colleagues on the Agriculture 
Appropriations Subcommittee for increasing funding for FSA direct 
loans. Historically low interest rates and lower default rates 
certainly have helped a great deal in increasing loan volume. In 
addition, agency leadership and staff are doing a great job increasing 
access to credit to farmers, despite dwindling staffing resources. For 
the first time in recent memory, there is no backlog in the number of 
farmers who have been approved but not yet received direct loans. As 
FSA seeks to continue access to credit for farmers who have not 
historically used FSA loans (including a growing number of microloans 
to smaller, diversified farms selling to local and regionally markets), 
it will be imperative to ensure FSA has the administrative and staffing 
support to service and provide technical assistance on the larger loan 
portfolio each office will likely carry.
    The 2014 Farm Bill authorized USDA to develop Whole Farm Revenue 
Protection (WFRP). WFRP is a welcome and long-awaited addition to the 
risk management toolkit for sustainable and organic diversified farming 
operations, a segment of American agriculture that has historically 
been under-served by traditional crop insurance. Crop insurance is an 
important tool that lenders look at to evaluate a farmer's perceived 
risk in their farming operation. We therefore commend USDA for 
responding quickly under its new farm bill authority to develop WFRP in 
time for the 2015 crop insurance year. In order to avoid suffering the 
same under-utilization as AGR and AGR-Lite, and to provide an 
appropriate and accessible risk management option for all producers in 
all states, it is critical that USDA develop and swiftly implement a 
plan to expand WFRP nationwide.
    Finally, revisions to and renewal of Section 6025 of the 2014 Farm 
Bill, Strategic Economic & Community Development hold promise for 
supporting regionally significant economic development efforts. Local 
and regional governments are taking steps to support agriculture and 
rural economic development through planning efforts, and this program 
will leverage those efforts in synergistic ways. We urge you to work 
with local and regional partners to shape this program.
Strategic Partnership
    Increasing consumer demand for local food and a growing recognition 
of the role of food systems in addressing rural economic development, 
public health, climate change preparedness, veteran transition to 
civilian life, among many other national issues, is driving farmer 
demand for micro and small loans all across the country.
    FarmLink and FSA are strategic partners in facilitating access to 
credit. FSA's role as the lender of last resort/first opportunity is 
very complementary to FarmLink's role as an agriculturally-focused CDFI 
making relatively high risk loans. While there are loans that we would 
potentially both make, and thus be competing with one another, the 
reality is that FSA is reaching those farmers that feel comfortable 
going into the USDA Service Center, and FarmLink, as a community-based 
lender, is going to where borrowers are, in the field, and providing 
technical assistance to help them be loan-ready.
    The power of leverage that comes with providing loan guarantees is 
tremendous. The Cooperative Lending Pilot Project represents an 
important opportunity to build on this leverage.
    For example, the current drought in California is affecting farmers 
in diverse ways, depending on where they are located, and what their 
options for accessing water are in each location. California FarmLink 
is working to facilitate access to credit for these farmers who have 
water emergencies. Where possible, California FarmLink is making bridge 
loans to finance irrigation and water efficiency projects supported by 
the Environmental Quality Incentives Program cost-share. California 
FarmLink expects to begin conducting water audits later this summer for 
farmers, and connecting them with financing for irrigation and water 
development projects based on audit findings.
    California FarmLink is also developing a farm mortgage product, in 
response to the growing demand and need we see from farmers in our 
region. We look forward to working with FSA to create a product that 
will serve the needs of our target market and ensure affordable and 
stable land tenure for the next generation of California farmers.
Farmer Profiles
    In addition to the loans that FarmLink has made with FSA 
guarantees, which are an important part of our portfolio, have ranged 
from $25,000-$100,000, and include a diversity of production systems 
and business models, there are other ways that we support each other's 
efforts to facilitate access to credit.
    The borrower target market for FSA and California FarmLink has some 
overlap, and each also has a distinct market. By way of example, this 
becomes clear by considering a few examples of mutual referrals:

   A well-established Community Supported Agriculture farm in 
        Fairfield had obtained two FSA direct operating loans and was 
        then referred to FarmLink in hopes of graduating to more 
        conventional financing. They obtained an annual operating loan 
        with an FSA guarantee from FarmLink for the 2013 season. For 
        the 2014 season the borrower was able to ``graduate'' to a loan 
        with Farm Credit West, benefitting from a lower interest rate 
        and more flexible terms.

   A 12 acre direct market diversified organic fruit and 
        vegetable operation in Humboldt County applied for a microloan 
        from their local FSA office. For reasons that are not 
        completely clear, the applicant was denied, but was referred to 
        California FarmLink. FarmLink made an equipment and operating 
        loan totaling $21,000.

   The FSA Farm Loan Officer in Modesto recently referred a 
        borrower to FarmLink that has reached the term limit on FSA 
        Direct Operating Loans, having received 7 years of Direct 
        Operating Loans, and then an additional 2 years on waiver. 
        FarmLink is likely to finance this bee operation, with the 
        benefit of knowing the type of credit risk they represent.

   A start-up aquaponics operation in the Bay Area sought an 
        operating loan from FarmLink. The borrower was a returning 
        veteran who had completed a training program and 
        apprenticeship, but his experience was not sufficient to meet 
        FarmLink's underwriting standards. FarmLink referred the 
        applicant to FSA, where he was able to obtain a microloan to 
        launch his operation, producing specialty vegetables to 
        restaurants.

    These are just a few examples of farmers that have benefitted from 
the FSA-FarmLink relationship.
Key Policy Recommendations
    As this Committee evaluates the current state of agricultural 
credit across the country, we would like to recommend a few ways that 
Congress and USDA could better meet the credit needs of our nation's 
farmers--especially those beginning, minority and small farmers who 
have struggled over the years to find adequate credit options needed to 
finance their farms.
    First, we would urge the leaders of this Committee to sponsor an 
amendment to the Agriculture Appropriations bill to fund IDA's for the 
2015 Fiscal Year. This is a program that this Committee authorized in 
the new farm bill. USDA sees this program as a key tool they need to 
recruit a new generation of farmers and has requested an initial $2.5 
million to jumpstart the program next year. The Senate also recognized 
this need and the value this program could serve, and matched the 
Administration's request. I therefore strongly urge you to consider 
sponsoring an amendment to the appropriations bill in order to launch 
this important and long overdue credit resource for new farmers, and 
follow through on the House's commitment to this program.
    Second, we would also urge the leaders of this Committee to work 
with stakeholders to shape Section 6025--Strategic Economic & Community 
Development. This updated provision prioritizes the funding of projects 
that are consistent with an adopted regional economic or community 
development plan. It will be important for the success of this program 
to be shaped by regional partners.
    Third, we would urge the leaders of this Committee to work with 
USDA to expand coverage of Whole Farm insurance nationwide as soon as 
possible. The 2014 Farm Bill mandated a pilot program because organic 
and diversified vegetable growers have been pretty much excluded from 
Federal crop insurance. We believe the Congressional intent in the 2014 
Farm Bill was to make the program available to farmers in the major 
organic and specialty crop growing areas--that would without question 
include Monterey and Santa Cruz counties. The pilot as currently 
described by USDA, relies on the current AGR and AGR-Lite designations 
for geographic coverage and crop specifics--which excludes key 
agricultural regions in California and other parts of the country. The 
lack of this risk management tool places these farmers and their 
creditors at a distinct disadvantage, relative to farmers who can 
access this program. We therefore urge you to work with USDA to 
expedite the process of making this program apply nationwide as soon as 
feasible.
    Fourth, we urge this Committee to work with your colleagues on the 
Appropriations Committee to increase discretionary spending for Rural 
Microenterprise Assistance Program (RMAP). In addition to the direct 
spending of $3 million per year that this Committee provided in the 
farm bill, we would like to see an additional $3.3 million in 
discretionary funding for FY15 as requested by USDA, in order to meet 
the high demand for small business loans that exist in rural America. 
This too would be a high priority amendment to the pending FY15 
agriculture appropriations bill.
    Fifth, we urge this Committee to work with USDA to provide greater 
flexibility in the application of the formula that determines technical 
assistance grant awards under Rural Microenterprise Assistance Program 
(RMAP). We believe greater flexibility is needed in how the formula for 
technical assistance funds is applied. RMAP partners--like FarmLink--
are at a distinct disadvantage in accessing technical assistance funds 
because they emphasize annual operating loans--with the associated 
faster pay down of those loans, followed by those funds being revolved 
out in the form of new loans--rather than longer-term equipment and 
infrastructure loans.
    Finally, we urge leaders of this Committee to work with 
stakeholders and USDA to shape the Microloan Cooperative Lending Pilot 
Projects. The bulk of loans that FarmLink has made to date have been 
microloans. We have not sought guarantees on loans less than $25,000, 
due to the underwriting costs and guarantee fee. We are optimistic 
about the promise of this pilot program that may open new opportunities 
to make microloans while providing the much-needed technical assistance 
microloan applicants typically require, along with additional risk 
mitigation features. We are eager to see the new intermediary 
microlending option that this Committee authorized rolled out across 
the country, and would urge you to work with USDA to ensure this option 
is available as soon as possible.
Conclusion
    The face of agriculture in this country is undergoing dramatic 
transformations. Our Federal support structure and safety net has been 
adapting in response to these changes, and must continue to do so if we 
aspire to be efficient with our limited natural and financial 
resources, increase equity and fairness in our delivery of programs, 
and embrace those who seek to produce our food, fiber and fuel, now and 
in the future.
    Thank you for the opportunity to provide this testimony on behalf 
of beginning, small and immigrant farmers and ranchers across the 
country. I look forward to answering any questions you have about their 
credit needs, and California FarmLink's efforts on their behalf.

    The Chairman. Thank you. I appreciate it. And once again, I 
want to thank all the witnesses. I now recognize the gentleman 
from Texas for 5 minutes, Mr. Conaway.
    Mr. Conaway. Thank you, Mr. Chairman. And, gentlemen, thank 
you for being here. Mr. Franz--Frazee, I am sorry. In your 
testimony, you had a couple of comments that I found 
interesting. One that you are working under a 40 year old law 
and that that is causing you challenges in your operations. Can 
you give us a couple of examples of where that is binding----
    Mr. Conaway. Do I have a hand?
    Mr. Frazee. Sure. I mentioned that we are seeing 
agriculture evolve. And I also indicated that we are focusing 
on trying to respond to the credit needs of an evolving 
agriculture that includes more local sustainable foods, urban 
oriented markets. And sometimes the authorities that we have 
are a bit challenging in terms of being able to provide the 
financing that is needed to support that infrastructure.
    Mr. Conaway. So is this the rub that Mr. Wolfe and Mr. 
Williams talked about you are trying to push out beyond the 
original young farmer, beginning farmer, small farmer issue?
    Mr. Frazee. I think what we are talking about aligns very 
well with the young startup issue, the kind of operations we 
are talking about that are locally or sustainable operations 
that are going to serve the farmer's markets here in the area.
    Mr. Conaway. Okay. Well, I would like to visit with you 
about how the law itself is binding that up. You have also 
mentioned in written testimony you have provided--the System 
provided financially to $4.7 billion in exports. Can you put 
some meat on the bone as to what that meant?
    Mr. Frazee. Yes, that is--those are authorities that are 
provided for CoBank to authorize export financing related to 
farmers, cooperatives----
    Mr. Conaway. Is that directly related to rural America 
that----
    Mr. Frazee. Pardon?
    Mr. Conaway. That is where those exports are coming from, 
is that rural America?
    Mr. Frazee. Correct.
    Mr. Conaway. Okay.
    Mr. Frazee. That is correct. It is all directly related to 
the ag production changes.
    Mr. Conaway. All right. Mr. Wolfe, Mr. Williams, crop 
insurance both--I know Mr. Williams mentioned it. Could you 
talk about--is that a requirement on your loans to production 
farmers? And what--I get both of you on the hook here to 
comment about the importance of crop insurance and the other 
risk management tools under the farm bill.
    Mr. Williams. Yes. Crop insurance is extremely important to 
us in our portfolio. It is not required on 100 percent of our 
loans, but I would guess about 90 percent of our loans it is a 
factor. And so, certainly, maybe even more than 90 percent. But 
crop insurance is extremely important in allowing us to make a 
decision and having a comfort level with where the income base 
is going to be for that operation. The farm bill, the target 
prices and--is also something that is very important. But over 
the last 10 years, and certainly in the last 2 or 3, I have 
seen crop insurance play a bigger role than it ever has in risk 
management for farmers, and it is certainly important for 
banks.
    Mr. Conaway. Mr. Wolfe?
    Mr. Wolfe. Yes. We require crop insurance on 100 percent of 
our borrowers that we have--that we provide loans for crop 
production. And I ask our lenders last year to find a borrower 
at any level that didn't have crop insurance. We couldn't find 
any in our banks. So it is close to 100 percent of our 
borrowers, no matter whether they borrow money for crop 
production, but they do participate in that program today.
    Mr. Conaway. All right. The FSA is under--and RMA are both 
trying to implement the changes to the farm bill. Any issues 
with the pace of that implementation and changes that are 
affecting your borrowers? Maybe----
    Mr. Wolfe. What change are you referring to, sir?
    Mr. Conaway. Say again.
    Mr. Wolfe. What change----
    Mr. Conaway. Well, we--based on changes to those risk 
management tools, and there would be the process of 
implementing those. Has it impacted this year's borrowings, 
lendings in production agriculture's, or something that they 
should be doing quicker than they are doing?
    Mr. Wolfe. In our case, it has not. We typically do those 
on interim loans. We work very closely with USDA Farm Service 
Agencies in our area. And if there is the high likelihood that 
that is going to happen, we go ahead and provide interim 
financing for those.
    Mr. Conaway. Right. So you are working--Mr. Williams, 
anything going on about that that we need to know about?
    Mr. Williams. It has not had an impact on us either. We 
have about a $60 million operating loan portfolio, and about 20 
percent of that volume is guaranteed by FSA guarantees. So we 
have been able to do that. It has been very efficient and 
hadn't caused any problems for us.
    Mr. Conaway. Right. Mr. Melone, any issues with you?
    Mr. Melone. Yes, it is virtually nonexistent for our--the 
borrowers that we serve. And that is why we would like to see 
it go nationwide as soon as possible.
    Mr. Conaway. Mr. Frazee, quickly, you keep 100 percent of 
your loans on your balance sheet. Is that a requirement or why 
do you do that?
    Mr. Frazee. We keep our loans on our balance sheet for a 
couple of reasons. One, because we are a cooperative, and we 
want our members to benefit from the ability to have their 
loans on a balance sheet and receive patronage benefits. There 
are times that we may sell loans into a secondary market for 
risk management purposes. But substantially all, we keep on our 
balance sheet.
    Mr. Conaway. All right. Thank you. I yield back.
    The Chairman. The gentleman yields back. I now recognize 
the gentleman from Florida, Mr. Yoho, for 5 minutes--Mr. Yoho.
    Mr. Yoho. Thank you, Mr. Chairman. I appreciate it. Let me 
see. Let me get back to my questions here. You were talking 
about--or let me ask you, is it----
    Mr. Frazee. Frazee.
    Mr. Yoho. Frazee. Mr. Frazee, do you guys classify under-
performing loans and Farmer Mac the same way as Dodd-Frank and 
commercial loans used to do it? Like, say I borrowed $500,000 
on a piece of property and was farming it, paid it off--paid on 
it on a 5 year note. Say I paid 3 years on it. And I have it 
paid down to $350,000. Land prices dropped, or the value of the 
land is now say $250,000. Traditionally, or with the Dodd-
Frank, that was considered an under-performing loan, even 
though I didn't make a--miss a payment. Do you guys, in the 
Farmer Mac program, evaluate loans that way as under-
performing?
    Mr. Frazee. We use a risk rating system that is consistent 
with other financial institutions. It is a 14 point rating 
system that looks at the probability of default. We look at our 
loss given default. And, obviously, we have to comply with the 
standards that--our financial statements are audited by 
external auditors, Price Waterhouse Cooper. So----
    Mr. Yoho. All right. Mr. Wolfe, how about you and your loan 
portfolio, if you have a loan in that kind of a situation, that 
illustration?
    Mr. Wolfe. Well, we would recognize it as a troubled asset, 
if you will, and we would reserve higher for that. But, no, we 
wouldn't just, by the fact that it is under collateral, show it 
as a default.
    Mr. Yoho. Okay. Because in some of the banking situations, 
correct me if I am wrong, I know they looked at it that way, 
and they said you have to get these off the book because it is 
an under-performing based on the rules of the Dodd-Frank. Now, 
they may have corrected that I heard in some of the smaller 
banks.
    Mr. Wolfe. I think that applies to residential real estate 
loans, but not necessarily to ag loans.
    Mr. Yoho. Okay. Let me ask Mr. Wolfe and Mr. Williams, do 
you feel you are in direct competition with Farmer Mac?
    Mr. Wolfe. Well, not with Farmer Mac. No. Farmer Mac--what 
we do.
    Mr. Yoho. With----
    Mr. Wolfe. Farm Credit----
    Mr. Yoho. Farm Credit?
    Mr. Wolfe. Yes. Farm Credit is our largest competitor. We 
compete with local banks every day. But Farm Credit is our 
largest competitor and our biggest competition.
    Mr. Yoho. Have you ever lost a loan based on competitive 
interest rates where they are more competitive than the 
interest rates that you can charge today?
    Mr. Wolfe. Yes. I did--yes, we do every day--not every day.
    Mr. Yoho. What causes that? Why is there that discrepancy? 
Why can you not adjust your interest rates where they can, or 
they can be more competitive?
    Mr. Wolfe. Well, in Kansas, we have a state income tax that 
is applied to banks called a privilege tax that is 4.375 
percent. We are also subject to 34 percent Federal income tax. 
And so when we have to give them a 38 percent head start, it 
does create some added competition for us. Yes.
    Mr. Yoho. What I would like for all of you to do is give 
some recommendations on how we can make this more equitable so 
that there is not this competition, so that in the next farm 
bill we can correct some of these inequities so that it--when 
it comes out to pass, we won't have these discussions. We will 
already have addressed them. Is--I would love for you guys to 
enter in some recommendations so that we can address those 
before they become an issue.
    Mr. Melone, on the end, I have some questions for you. In 
what you do, are--what is the amount of loans you give you in a 
year's time?
    Mr. Melone. So last year--we have been lending since 2011. 
We have made about 90 loans, $1.5 million so far last year, 
2013.
    Mr. Yoho. Yes. And 100 percent of that money comes from the 
Federal Government, right?
    Mr. Melone. No. Probably about \1/3\ of it directly, and 
about the same amount is FSA guaranteed. But we have investors 
that are banks and foundations as well.
    Mr. Yoho. Okay. What is the failure rate of that?
    Mr. Melone. We have a two percent default rate.
    Mr. Yoho. That is great.
    Mr. Melone. So we made about $900,000 in loans last year. 
We are looking to make $1.25 million this year, and doubling 
the number of loans that we are making to about 50 this year.
    Mr. Yoho. Okay. I don't really have any more questions, 
other than my goal is to make agriculture remain a strong 
sector. And my working together with the information and the 
suggestions that you have, we can make better policies up here 
that will affect the availability of credit for our farmers to 
keep ag strong in this country so that we remain a leader in 
that. And I look forward to any comments, and always feel that 
you can reach out to our office. And I appreciate you being 
here.
    The Chairman. The gentleman yields back. The chair now 
recognizes Ranking Member Costa for 5 minutes.
    Mr. Costa. Thank you. Thank you, Mr. Chairman. To any of 
the panel members, and maybe we will start with Mr. Melone. We 
heard a lot of things that we talked about earlier that have 
been positive with the farm economy. Obviously, with different 
regions of the country, especially the West as we talked, this 
multi-year drought has been devastating. But, we have the 
opposite conditions along the Mississippi River where we have 
floods that have been occurring. How do you believe that the 
impacts of floods and droughts taking place concurrently will 
hit the overall outlook on the farm economy at the end of this 
year? Have you made some estimations?
    Mr. Melone. So as you probably well know, there is a lot of 
geographic variability even within California. For instance, 
about how the drought is affecting different farmers, depending 
on how they get their water.
    Mr. Costa. Right.
    Mr. Melone. We are seeing, probably, \1/4\ to \1/3\ of our 
portfolio being affected in some direct way by the drought. So 
we are looking at making bridge loans to farmers that are 
getting funding through NRCS.
    Mr. Costa. How about individual loans for well drilling?
    Mr. Melone. Yes. We are actually working on a couple right 
now, putting in new pumps as well, farmers that were getting 
water from the Central Valley Project, for instance, that now 
no longer have access to that water.
    Mr. Costa. Yes. As you know, we are looking at a 6 to 10 
month waiting list just to get a well driller online. The costs 
for those wells are anywhere from $\1/2\ million dollars to 
$1\1/2\ million and higher. So these kind of loans are 
important. Let me move over to the dairy industry, which I 
spoke about with the first panel and the changes in the dairy 
title as a result of the 2014 Farm Bill. I noted we had some 
terrible years in 2009 and 2010 when we had milk prices at $9 
per hundredweight, and the input costs were far, far higher, 
and we had a number of significant bankruptcies in California 
to underline it. Are you, as lenders, being more selective on 
how you deal with the loans to dairies? And I don't know who 
would like to opine here first?
    Mr. Wolfe. We do finance some dairies in northeast, north-
central Kansas and southern Nebraska. And we haven't seen any 
large issues, except with the milk prices. That is something 
that is very difficult to manage for our borrowers, but it is 
something that they have gone out a little farther, contracted 
prices. It is limited on the upside, obviously. But there are 
some vehicles they can use, and we do require that if we 
finance. And we have half a dozen large--relatively large 
dairies that we finance out of our bank. But we do require 
forward pricing.
    Mr. Costa. And so notwithstanding the volatility, your 
lending has remained somewhat constant?
    Mr. Wolfe. Yes, it has.
    Mr. Costa. On that. Have any of you looked at--in terms of 
forward lending, under the new dairy title, the insurance 
program and how you anticipate that might factor in on future 
loans for dairies?
    Mr. Frazee. We have looked at it. We think it provides some 
stability to the industry in looking at the credit risk around 
dairy. You know, as a cooperative and with the mission charge 
that we have to be there to provide for the income and 
wellbeing of farmers and to be a sustainable source of credit, 
we look at that as being something that helps to provide some 
stability in the industry and helps us to take a longer term 
view of the risk associated with those farmers.
    Mr. Wolfe. I would agree.
    Mr. Costa. So you don't see any different application 
between those dairies that belong to co-ops and those that have 
a different process in which they sell their milk?
    Mr. Wolfe. No, I don't. We finance both cooperative dairies 
and privately owned dairies.
    Mr. Costa. And do any of you have any reaction to the tax 
treatment on bonus depreciation under Section 179 provisions?
    Mr. Wolfe. Would you restate the question, please?
    Mr. Costa. The tax depreciation that is allowed today----
    Mr. Wolfe. Right.
    Mr. Costa. Do any of you think that it provides any more 
favorable conditions for lending that you are involved in?
    Mr. Wolfe. Perhaps. Again, in our area specifically, Farm 
Credit System owns that space through their leasing programs. 
And we do a few farm building programs or farm sheds, if you 
will. But, primarily, that is owned by the Farm Credit System 
in our area.
    Mr. Costa. All right. Well, my time has expired. Thank you 
very much, Mr. Chairman.
    The Chairman. The gentleman yields. I now recognize the 
gentleman from Iowa, Mr. King, for 5 minutes.
    Mr. King. Thank you, Mr. Chairman. And I thank the 
witnesses for their testimony. I would turn first to Mr. Wolfe 
and ask you, I believe you were in the gallery listening to the 
previous panel's testimony. And when I asked the question if 
the Farm Credit personnel could identify an independent bank 
rate that was lower than their rate for credit for our farmers, 
and they apparently could not do so. Were you surprised at 
their response?
    Mr. Wolfe. No.
    Mr. King. And neither was I. But I would ask if you could 
speak to that issue, because I don't think we heard from your 
side of this.
    Mr. Wolfe. Well, yes. I agree that it is--I mean, it is--
she got into predatory lending. I don't think that is where you 
were going with that. You just wanted to know about general 
pricing. Pricing is very difficult for us to match, even the 
Farm Credit System in our areas, I mentioned before, in Kansas 
anyway, my specific bank, it is a 38 percent head start, 34 
percent Federal tax, 4.375 percent for a state income tax. That 
is what makes it difficult to match fund--or match any rate 
that Farm Credit has out there.
    Mr. King. And would you have any comments to make on the 
mission creep question that I asked of the original panel?
    Mr. Wolfe. Well, obviously, it has crept. I mean, the 
Verizon loan is one example of that. Frontier is another that 
has just been recently done. I don't think that that can be 
described by anything other than a mission creep. Their mission 
has expanded. The size of the Farm Credit System has doubled in 
the last 10 years. And it--they haven't done that all within 
traditional agriculture, I do not believe.
    Mr. King. Would it be your recommendation to this Congress 
to take a look at the mission and perhaps help write a mission 
statement since they write their own?
    Mr. Wolfe. Absolutely.
    Mr. King. I thought it might. I don't know if that was in 
your original testimony. I was called away. Was it?
    Mr. Wolfe. No. No, it wasn't. But, absolutely, I would 
support that.
    Mr. King. And, Mr. Williams, your comments on this subject 
matter?
    Mr. Williams. Yes, I would echo Mr. Wolfe's comments. But, 
specifically, in east Arkansas, I could provide about 30 
examples over the last 3 years where we have lost a borrower to 
the Farm Credit System. And without exception, it is a rate 
issue. So what we see is typically 150 to 200 bases points 
difference in short-term rates. And then, of course, as you 
stretch out our real estate lending, it even widens out from 
there. So time after time after time, we see it. And it is 
always based on rate.
    Mr. King. Could you speak to the scope of your 
competition's real estate loans, how broad that scope might be?
    Mr. Williams. Yes, it is pretty well formed in our area. 
But we have also seen the scope widen from the Farm Credit 
System over the past couple years to things like lumber 
companies and things of that nature. So it appears, from our 
perspective, that there is not a lot of restriction in what 
they can or can't do. And we certainly are willing to compete 
and want to compete. And I have in Wynne--we have seven banks 
in Wynne that we compete with every day, as well as the Farm 
Credit System. So we are not afraid to compete. We just would 
like to do it with a level playing field.
    Mr. King. What about non-farm, say grain handling or 
processing, is that also a field of competition?
    Mr. Williams. Absolutely.
    Mr. King. And what about residential?
    Mr. Williams. Absolutely.
    Mr. King. Would that be urban, small town, as well as rural 
residential?
    Mr. Williams. In our area, and we are pretty urban--Wynne's 
a population of about 8,000 people. But Farm Credit certainly 
is making housing loans in Wynne and in our entire market in 
eastern Arkansas.
    Mr. King. Thank you, Mr. Williams. Since I have asked you 
all these questions, Misters Wolfe and Williams, I should turn 
to Mr. Frazee and give him an opportunity to perhaps eliminate 
the other side of this.
    Mr. Frazee. I appreciate that opportunity. First, the story 
I hear about competition are similar to what I hear from my 
loan officers about commercial banks. We are losing deals every 
day to commercial banks. It is a competitive environment. There 
is a lot of liquidity in the banking system. And we have seen 
pressure on our loans and our margins. So--and we think that is 
a good thing for customers, because ultimately farmers are 
going to benefit if they get lower rates. So we see that 
competition as well from banks that are losing loans.
    Mr. King. Mr. Frazee, if I would just ask this, if Farm 
Credit is at 46 percent of their real estate loans, as we heard 
in the previous panel, would there be a number that--if that 
number increased, would there be a number that you would think 
of that this Congress should be concerned about?
    Mr. Frazee. I believe that the FCA panelist said that we 
had 41 percent of the total agricultural debt.
    Mr. King. Yes.
    Mr. Frazee. That means that 59 percent, or the majority of 
it, is somewhere else with other lenders. So the majority of 
the agriculture of that is somewhere other than the Farm----
    Mr. King. But you would agree that 100 percent is too much?
    Mr. Frazee. I would agree with 100 percent is too much.
    Mr. King. But we weren't going to agree on whatever that 
number might be in between 41 and 100?
    Mr. Frazee. I think it ought to be--whatever the number is, 
it ought to be what is in the best interest of the farmers and 
ranchers of this country.
    Mr. King. I gave you the last word. Thank you, Mr. Frazee.
    Mr. Frazee. Sure.
    Mr. King. I yield back, Mr. Chairman.
    The Chairman. The gentleman yields. And with that, we will 
dismiss the panel with our thanks from the entire Agriculture 
Committee. We appreciate you being here today.
    Under the rules of the Committee, the record of today's 
hearing will remain open for 10 calendar days to receive 
additional material and supplementary written responses from 
the witnesses to any questions posed by a Member.
    The Subcommittee on Livestock, Rural Development and Credit 
hearing is now adjourned.
    [Whereupon, at 12:00 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
            Submitted Material by Farm Credit Administration
Insert 1
          The Chairman. . . .
          You testified that non-performing loans totaled $2.1 billion, 
        which is a decrease of nearly $600 million. Is the non-
        performing loan portfolio--is that a geographic prerogative? Is 
        it dominated by any certain sector of the ag industry, or is 
        there a region in the country that may contribute more so than 
        others?
          Dr. Long Thompson. Well, certainly, among those institutions 
        that we regulate, if they happen to be located in a part of the 
        country where there has been stress, you might see some 
        additional--a higher level of non-performing loans. But we 
        haven't detected a specific pattern geographically. I would, 
        however, be very happy to provide you--we have very good data. 
        We do analyses of the overall farm economy, as well as of the 
        health of the System regularly. And we have some very good data 
        that I would be happy to share with you and your staff.
Insert 2
          Mr. Rogers. Thank you, Mr. Chairman. That is what I was going 
        to ask about. And I was late. And I am sorry. And I know that 
        the Chairman visited this topic earlier. But one--the primary 
        criticisms I get about the Farm Credit System is issuing loans 
        in non-agriculture. And so do you know what percentage of the 
        loan portfolio the Farm Credit System is issued to non-farm 
        entities?
          Dr. Long Thompson. I think it probably would be best for me 
        to get a detailed breakdown for you. But it is primarily 
        agriculture and ag related. It is agriculture--and let me also 
        say that, even though the System did not fall for the most part 
        under the jurisdiction of Dodd-Frank, there are other kinds of 
        rules that statute requires--for example, the territories, the 
        districts that are established. So there are a number of 
        restrictions in the Farm Credit System that simply are not 
        restrictions in the banking sector. And I also think that there 
        is a very strong case to be made for a group of farmers going 
        together and setting up a cooperative model of lending, 
        particularly when there is not always access in traditional 
        banking.
        
        
          Source: FCS Annual Information Statements.
Nonaccruals as a Percentage of Loans Outstanding
    The chart shows nonaccruals as a percent of loans outstanding for 
the System as a whole and six key stressed sectors for the past 3 
years. The nonaccrual rate for the six combined sectors is also shown.
    The combined six sectors' nonaccrual rate was 1.8 percent at 
December 2013 compared to 0.9 percent for the System as a whole.
    Each of the stressed sectors experienced improvement in 2013, 
except poultry and eggs.
    The stress experienced by these sectors was due to the high corn 
and soybean prices of the past few years in the case of cattle, dairy, 
poultry/eggs and biofuels; and problems in the housing industry in the 
case of forestry and horticulture.
    The percentage in parentheses indicates that sector's loan volume 
as a percent of total FCS volume.
    The six stressed sectors combined accounted for 56 percent of all 
FCS nonaccruals at December 2013.

          Farm Credit System Institutions Nonaccrual Ratio \1\
                             (as of 3/31/14)
------------------------------------------------------------------------

------------------------------------------------------------------------
         AgFirst District                      AgriBank District
------------------------------------------------------------------------
AgFirst FCB                  0.3%    AgriBank FCB                 0.1%
  Ag Credit ACA              1.2%      1st Farm Credit            0.5%
                                        Services, ACA
  AgCarolina ACA             2.0%      AgCountry ACA              0.6%
  AgChoice ACA               1.7%      AgHeritage ACA             0.2%
  AgGeorgia ACA              4.6%      AgStar ACA                 2.0%
  AgSouth ACA                1.3%      Badgerland Financial       0.3%
                                        ACA
  ArborOne, ACA              1.2%      Delta ACA                  0.9%
  Cape Fear ACA              1.6%      Farm Credit                0.1%
                                        Illinois, ACA
  Carolina ACA               1.8%      Farm Credit Mid-           1.2%
                                        America ACA
  Central Florida ACA        2.3%      FCS Financial, ACA         0.5%
  Central Kentucky ACA       1.0%      FCS of America ACA         0.4%
  Colonial ACA               1.8%      GreenStone ACA             1.2%
  FC of the Virginias        1.4%      Mandan ACA                 0.5%
   ACA
  First South ACA            0.3%      Midsouth ACA               0.2%
  Florida ACA                6.5%      North Dakota ACA           0.4%
  MidAtlantic ACA            1.1%      Progressive FCS, ACA       0.1%
  Northwest Florida          4.1%      United ACA                 0.4%
   ACA
  Puerto Rico ACA            7.9%      Western Arkansas ACA       1.0%
  River Valley               2.1%
   AgCredit, ACA
  Southwest Georgia          0.0%
   ACA
------------------------------------------------------------------------
           CoBank District                      Texas District
------------------------------------------------------------------------
CoBank ACB                   0.2%    FCB of Texas                 0.2%
  AgPreference, ACA          0.0%      Ag New Mexico, FCS,        2.5%
                                        ACA
  American AgCredit,         0.9%      AgTexas FCS                0.2%
   ACA
  Central Oklahoma ACA       0.1%      Alabama ACA                0.3%
  Chisholm Trail ACA         0.1%      Alabama Ag Credit,         1.7%
                                        ACA
  Colusa-Glenn ACA           0.5%      Capital Farm Credit,       1.2%
                                        ACA
  East Central               2.1%      Central Texas ACA          0.0%
   Oklahoma ACA
  Enid ACA                   0.7%      Great Plains Ag            1.4%
                                        Credit, ACA
  Farm Credit East,          1.2%      Heritage Land Bank,        1.8%
   ACA                                  ACA
  Farm Credit West,          1.4%      Legacy Ag Credit,          1.7%
   ACA                                  ACA
  FCS Southwest ACA          1.4%      Lone Star, ACA             1.0%
  Fresno-Madera ACA          0.0%      Louisiana Land Bank,       0.6%
                                        ACA
  Frontier ACA               0.2%      Mississippi Land           0.4%
                                        Bank, ACA
  Golden State ACA           0.0%      Panhandle-Plains           0.2%
                                        FLCA
  Hawaii ACA                 1.8%      Southern AgCredit,         1.1%
                                        ACA
  High Plains ACA            0.0%      Texas FCS                  0.3%
  Idaho ACA                  0.1%
  Ness City, FLCA            0.0%
  New Mexico ACA             1.9%
  Northwest FCS, ACA         0.9%
  Premier ACA                0.2%
  Southern Colorado          1.2%
   ACA
  Southwest Kansas ACA       0.0%
  Western AgCredit,          0.5%
   ACA
  Western Kansas ACA         0.0%
  Western Oklahoma ACA       0.0%
  Yankee ACA                 0.7%
  Yosemite ACA               0.8%
------------------------------------------------------------------------
\1\ Represents nonaccruals loans as a % of loans outstanding including
  accrued interest.

Farm Credit Institution Territories
ACAs & FLCAs by Districts (abbreviated names)


          January 1, 2014
Trends in Farm Credit System Outstanding Farm Loans
Farm Credit System Outstanding Loans, December (million $)


          Source: FCS Annual Information Statements.

                                       Percent Change from the Prior Year
----------------------------------------------------------------------------------------------------------------
                                   2004    2005    2006    2007    2008    2009    2010    2011    2012    2013
----------------------------------------------------------------------------------------------------------------
Real estate mortgage loans          4.8%    8.3%    7.1%   12.3%   13.3%    4.8%    3.5%    3.4%    9.4%    6.7%
Production & intermediate-term      3.4%    9.7%   20.2%   12.3%   16.1%    5.7%    2.5%    1.7%    6.3%    3.5%
 loans
                                 -------------------------------------------------------------------------------
  Total FCS Farm Loans              4.4%    8.7%   11.2%   12.3%   14.2%    5.1%    3.2%    2.8%    8.4%    5.7%
----------------------------------------------------------------------------------------------------------------


                    Farm Credit System Loan Portfolio
                        (as of December 31, 2013)
------------------------------------------------------------------------
                                      (in millions)            %
------------------------------------------------------------------------
Agricultural related loans:
  Real estate mortgage loans                  $94,194              46.8%
  Production and intermediate-term             45,412              22.6%
   loans
  Agribusiness loans                           27,242              13.5%
  Agricultural export finance                   4,588               2.3%
  Lease receivables                             2,706               1.3%
  Other                                           746               0.4%
    s/t agricultural related loans            174,888              87.0%
Non-agricultural related loans:
  Rural residential real estate                 6,557               3.3%
   loans
  Rural utility \1\                            19,615               9.8%
    s/t non-agricultural related               26,172              13.0%
     loans
                                   -------------------------------------
      Total loans                            $201,060             100.0%
------------------------------------------------------------------------
\1\ Represents energy loans, water/waste water loans, and communication
  loans.

    In addition to participating in loans to eligible borrowers, FCS 
institutions have the authority to work with non-System lenders that 
originate ``similar-entity'' loans. A similar-entity borrower is not 
eligible to borrow directly from an FCS institution, but because the 
borrower's operation is similar in function to that of an eligible 
borrower's operation, the System can participate in the borrower's 
loans (the participation interest must be less than 50 percent).
    As of December 31, 2013, similar-entity lending accounts for 
approximately 5% of total System loans.
    Of the 13% in non-agricultural related lending, 2% are similar-
entity loans associated with rural utility lending.
    More than 95% of similar-entity lending is associated with title II 
and title III lending authorities.
                                 ______
                                 
  Submitted Letter by Kenneth E. Auer, President and Chief Executive 
                    Officer, The Farm Credit Council
July 14, 2014

  Hon. Eric A. ``Rick'' Crawford,
  Chairman,
  Subcommittee on Livestock, Rural Development, and Credit,
  House Committee on Agriculture,
  Washington, D.C.

    Dear Mr. Chairman:

    We applaud you and your colleagues on the Subcommittee for holding 
the recent hearing on credit availability in rural America. The Farm 
Credit System appreciated very much the opportunity to present 
testimony and to provide the Subcommittee our insights regarding rural 
credit conditions.
    Unfortunately others appearing before the Subcommittee, 
specifically witnesses for the commercial banks, the American Bankers 
Association (ABA) and the Independent Community Bankers of America 
(ICBA), chose to provide testimony regarding the Farm Credit System 
that was highly inaccurate and deceptive. This letter addresses the 
most egregious inaccuracies in their testimony. We ask that it be made 
a part of the hearing record to ensure that those inaccuracies are not 
left unanswered on the record.
The Farm Credit System's Mission is to Be Agriculture's and Rural 
        America's Customer-Owned Partner
    As you may recall, questions were raised during the hearing 
regarding the mission of the Farm Credit System. The mission of the 
Farm Credit System was established by the Congress and is found in the 
Farm Credit Act of 1971, as amended. Congress stated it clearly in the 
opening clause of the Act, ``. . . making credit available to farmers 
and ranchers and their cooperatives, for rural residences, and to 
associations and other entities upon which farming operations are 
dependent, to provide for an adequate and flexible flow of money into 
rural areas, and . . . to meet current and future rural needs.''
    The System's mission is to serve all types of agricultural 
producers who have a basis for credit, as well as others who help 
ensure that agriculture and rural America are economically successful. 
That includes farm-related businesses, rural homeowners, rural 
infrastructure providers including electric, telecommunications, water 
and waste as well as other entities. The System was not created to 
serve only young, beginning or small producers, as the bankers alleged. 
The Farm Credit Act specifically directs the System to serve all types 
of agricultural producers. In fact, it was almost 65 years after the 
System was established that language was added to the Farm Credit Act 
to require System lending associations to report on programs that focus 
on young, beginning and small farmers. The ABA and the ICBA continually 
and deliberately misstate the mission of Farm Credit System 
institutions including suggestions that Farm Credit institutions are 
supposed to be the lenders of last resort.
    The institutions of the Farm Credit System comprise a borrower-
owned, permanent system of credit for agriculture and rural America, 
just as intended by Congress and provided for in the Farm Credit Act. 
System institutions are doing what they are supposed to do when they 
compete with government-backed commercial banks in the marketplace and 
when they participate in loans with those same banks to support the 
rural economy.
    Congress established the Farm Credit System and over the years 
expanded the operating authority of System institutions to compete 
effectively because farmers, ranchers and rural communities depend on 
timely and reliable access to capital and because it is well understood 
that government-backed commercial banks will seek to maximize profits 
in the face of limited competition.
Farm Credit Associations Have a Great Record of Serving Young, 
        Beginning and Small Farmers and Are the Only Lenders Reporting 
        on Actual Service
    The bankers stated in their testimony that the data reported by 
Farm Credit institutions show that Farm Credit institutions are not 
making loans available to young, beginning and small farmers. This is 
inaccurate, and we are happy to correct the record.
    The truth of the matter is that 83% of the loans made by Farm 
Credit institutions in 2013 were for less than $250,000. Almost 55% of 
all loans made were for $50,000 or less. Over 16% of the loans made by 
the System in 2013 were made to individuals 35 years old or less. This 
represents a great record of service since, according to the 2012 
Agricultural Census, only 6% of principle farm operators are 35 years 
old or less.
    The most relevant data for measuring service to these categories of 
borrowers is the number of loans made and the number of loans 
outstanding that support young, beginning and small farmers. The number 
of loans is the relevant data set instead of the percentage of total 
loan volume because the average loan size to young, beginning and small 
farms is naturally going to be smaller since in most cases their 
farming operations are smaller and can only support smaller amounts of 
debt.
    Just over 40% of the number of new loans made by Farm Credit 
institutions in 2013 were made to borrowers that had less than $250,000 
in gross sales from their farming operation. These are actual loans to 
small farmers. At the end of 2013, more than 49% of the total number of 
loans outstanding were made to individual farmers that had less than 
$250,000 in sales.
    Even if you look at the volume of loans outstanding, the portfolio 
of the System reflects what is happening in agriculture. A study by 
USDA's Economic Research Service released in April 2014 \1\ describes 
the overall percentage of debt held by various sized farm businesses. 
Using this analysis is somewhat complicated because USDA recently 
increased the income threshold in its definition for ``small farm'' to 
those with less than $350,000 of gross farm income \2\ resulting in a 
larger number of farmers being included in the category. Farm Credit 
institutions have maintained their definition of small farmer at 
$250,000 of sales. According to the USDA study, small farmers using 
their broader definition held 27% of total farm debt. As of the end of 
2013, 21% percent of the Farm Credit System's total loan volume was to 
farmers with $250,000 or less of gross farm sales--and this was in a 
year of high commodity prices that drove up the number of farmers with 
gross farm sales that exceeded $250,000.
---------------------------------------------------------------------------
    \1\ Debt Use by U.S. Farm Businesses, 1992-2011; USDA/ERS Economic 
Information Bulletin Number 122; Jennifer Ifft, Amirdara Novini, Kevin 
Patrick. April 2014
    \2\ http://www.ers.usda.gov/amber-waves/2013-may/the-revised-ers-
farm-typology-classifying-us-farms-to-reflect-
todaysagriculture.aspx#.U7rXz7cU_cs.
---------------------------------------------------------------------------
    Farm Credit institutions are the only lenders that collect data on 
their lending to young, beginning and small farmers. Farm Credit 
institutions know how well they are serving these farmers and ranchers 
and are very proud to talk about it. Commercial banks do not collect 
similar data on whom they serve in agriculture. The ABA often reports 
on ``small farm loans'' made by banks. In fact, what they are reporting 
on is the size of loans made not whether the borrower's operation is 
small or large. Small loans are often made to large farmers. The 
commercial bank data provides very little information regarding their 
service to small farmers. Commercial banks do not track whether those 
``small farm loans'' actually are made to small farmers, large farmers, 
beginning farmers, retired farmers or any other type of farmer since 
they are not required to collect the same types of data required of 
Farm Credit institutions. Because Farm Credit institutions collect this 
data, they know the types of borrowers to whom they are lending. In 
fact, and they are required to report on this annually to the Farm 
Credit Administration which reports the collective data to the Congress 
and posts it on their website.
    Do Farm Credit institutions make and participate in large loans? Of 
course they do. The reality of modern agricultural production and the 
modern rural economy requires that large loans be made to finance 
successful projects and businesses that create jobs and provide for the 
quality of life in rural America. It takes a lot of capital for rural 
infrastructure providers to deliver services in rural communities. 
Agricultural cooperatives and other agribusinesses that store or add 
value to the agricultural products of farms or that provide necessary 
inputs to farmers have substantial capital needs.
    Most commercial-sized farming operations, which produce the 
majority of our food and fiber, require substantial credit. Even a 
modest 15 acre pick-your-own strawberry operation requires credit that 
can exceed a million dollars, between land, equipment, plant purchases 
and soil requirements. According to the USDA/ERS analysis, large-scale 
family farms that produced close to 40% of all agricultural production 
in 2011 had average agricultural debt that exceeded $1.1 million per 
family farm. Adequate supplies of competitively priced credit are the 
lifeblood of the rural economy and Congress charged Farm Credit 
institutions with the mission of helping to ensure that supply is 
always available irrespective of market conditions.
Every Financial Institution Must Have a Liquidity Line
    Liquidity is the lifeline for financial institutions. Every 
commercial bank and credit union in the U.S. has access to government-
backed liquidity. This became very evident in 2008 and 2009 when 
financial markets were seizing up due to the debacle that was created, 
for the most part, by banks in the mortgage markets. In excess of a 
trillion dollars of liquidity backed by taxpayers was pumped into the 
commercial banking sector. Having a Federal liquidity line backstop is 
so important that the American Bankers Association, undeniably no 
friend to credit unions, submitted a comment letter to the National 
Credit Union Administration in 2012 commenting on the importance of 
Federal backstops for liquidity. They stated, ``ABA also believes that 
access to Federal liquidity backstops is part of any sound liquidity 
risk management program.'' \3\ Their ``belief'' apparently stops before 
it applies to the Farm Credit System.
---------------------------------------------------------------------------
    \3\ Page 3, ABA letter to Mary Rupp, Secretary of Board, National 
Credit Union Administration, August 7, 2012; Maintaining Access to 
Emergency Liquidity.
---------------------------------------------------------------------------
    Farm Credit System institutions were the only U.S. financial 
institutions without a direct Federal backstop ensuring continued 
access to funding. In fact, the Farm Credit System is the only 
Government Sponsored Enterprise (GSE) that does not have a direct 
statutory backup line of credit with the Treasury.
    When the world financial markets collapsed in 2008, the Farm Credit 
System could only access short-term debt in the financial markets. The 
System could not sell longer term paper. The market for that had 
disappeared virtually overnight. System institutions had to change the 
tenor of loans they could offer farmers and other customers, not 
because of anything the Farm Credit System had done--such as being a 
greater risk due to credit losses or diminished capital strength--but 
because of the fallout from the bad behavior of others.
    The leadership of the System realized that such a situation was at 
odds with the Congressionally mandated mission to ensure credit 
availability for agriculture and rural America. Discussions were held 
with the Federal Reserve and the Department of Treasury. The Farm 
Credit System Insurance Corporation (FCSIC) initiated an interagency 
discussion with Treasury and the Federal Financing Bank (FFB) to 
explore whether the FFB could provide liquidity under exigent 
circumstances to support FCSIC in fulfilling its responsibility to see 
that investors in System debt are repaid in a timely manner. The goal 
was to provide liquidity in the event that financial markets completely 
stopped working and only after the assets of the Insurance Fund and 
other System liquidity had been committed.
    It is important to differentiate between a liquidity line and other 
types of Federal backstop. The liquidity line provided to FCSIC is 
limited to providing access to capital when the funding markets are 
somehow compromised. The liquidity line is not accessible for Farm 
Credit if the System is experiencing financial stress that makes FCS 
bonds unattractive to investors. The FCSIC/FFB agreement makes clear 
that any funds provided would be temporary in nature and provided only 
to ensure that the System can continue to meet its obligations until 
normal financial market conditions return.
    Both ABA and ICBA raised misleading questions about this 
interagency agreement in their testimony. ABA went so far as to suggest 
that the Farm Credit System is ``increasing its dependence upon the 
U.S. Treasury'' and that taxpayers ``deserve a better understanding of 
what transpired between the Farm Credit System and the U.S. Treasury 
last September.'' ICBA stated that, ``the FCA and FCS desired to lower 
their borrowing costs even further by acquiring this line of credit.'' 
Both characterized this as some sort of secret arrangement. None of 
these are accurate and appear intended to mislead the Subcommittee.
    The agreement between FCSIC and the FFB was the subject of 
briefings with key members of the Agriculture Committees. The existence 
of the liquidity agreement has been consistently disclosed to the 
public by the System \4\ and FCSIC has similarly disclosed it publicly 
in its annual report that is available to the public as well.\5\ Both 
the ABA and ICBA are attempting to make an issue out of an action taken 
by a Federal agency to address something administratively that needed 
no Congressional action to resolve and something that every commercial 
bank already has in place to a greater extent than the Farm Credit 
System. This was not an attempt to lower the cost of funds or to become 
dependent on the Treasury. This was a very responsible risk-mitigation 
arrangement undertaken by two Federal agencies. ABA and ICBA have 
sought to paint it as some sort of sinister plot, while failing to 
inform the Subcommittee regarding the extensive Federal liquidity 
backstop commercial banks have.
---------------------------------------------------------------------------
    \4\ See Federal Farm Credit Banks Funding Corporation (FFCBFC) 
Third Quarter 2013 Information Statement page XXX and the 2013 FFCBFC 
Annual Information Statement, Page 71; both accessible through 
www.farmcreditfunding.com.
    \5\ See FCSIC Annual Report for 2013, page 9, available at 
www.fcsic.gov.
---------------------------------------------------------------------------
Commercial Banks Are Subsidized and Backed by Taxpayers--Farm Credit 
        Brings the Benefit of Its GSE Status to Agriculture and Rural 
        America, While Not Operating at Taxpayer Expense
    Both ABA and ICBA frequently make the assertions that the 
institutions of the Farm Credit System operate at ``taxpayer expense'' 
and that because the System has access to government sponsored 
enterprise (GSE) funding, that System institutions harm community banks 
by providing competitive rates for agriculture. The Farm Credit System 
does not operate at taxpayer expense. System institutions are privately 
owned by the farmers, ranchers, agricultural cooperatives and others in 
rural America that borrow from them. The Farm Credit System even pays 
for the cost of the independent Federal regulatory agency that examines 
System institutions and writes the regulations that govern the 
operations of Farm Credit System institutions. In addition, System 
institutions support their own insurance fund that protects investors 
that buy System consolidated notes and debentures used to fund credit 
operations. Unlike commercial banks, System institutions do not borrow 
from the Federal Reserve. As a GSE System institutions obtain their 
loanable funds by issuing paper to the private financial markets. This 
access to dependable funding is essential to the ability of the System 
to fulfill its mission, and no taxpayer dollars are directly involved.
    GSE funding is by no means exclusive to the Farm Credit System. 
Commercial banks have direct access to GSE funding as well. Commercial 
banks obtain GSE funds through Fannie Mae and Freddie Mac. They have 
direct access to GSE funds through Farmer Mac for agricultural lending 
activities. Commercial banks even own their own GSE, the Federal Home 
Loan Bank System, which provides commercial banks advances of GSE funds 
for housing, small business and agricultural lending as well as pays 
them the extra bonus of patronage based on their use of Home Loan Bank 
advances. The Federal Home Loan Banks that are owned by the banks are 
fully tax-exempt. Banks also have direct taxpayer backing on the major 
source of their loanable funds through the Federal Deposit Insurance 
Corporation (FDIC). Thomas Hoenig, the vice-chairman of the FDIC, 
recently noted his view that, ``the government safety net of deposit 
insurance, central bank loans, and ultimately taxpayer support provides 
a multibillion dollar subsidy to commercial banks . . .'' \6\
---------------------------------------------------------------------------
    \6\ http://www.fdic.gov/about/learn/board/hoenig/govsubsidy.pdf.
---------------------------------------------------------------------------
    The size of the Federal safety net for commercial banks is 
substantial. In 2010, the Federal Reserve Bank of Richmond published a 
paper that focused on identifying the extent of taxpayer backing for 
financial institutions. The paper notes a distinction between certain 
liabilities of commercial banks that are ``explicitly guaranteed'' by 
taxpayers and those of GSEs that are ``implicitly guaranteed.'' \7\ The 
estimates of the level of direct taxpayer explicit guarantee for 
commercial banks and savings firms was updated in a follow up study 
published in 2013 using data available through the end of 2011. They 
found that the explicit Federal guarantee for commercial banks and 
savings firms had grown to a staggering $7.156 trillion at that 
time.\8\ It is unfortunate that the facts get in the way of the picture 
that the ABA and ICBA want to paint, but the facts are clear that 
commercial banks have far more taxpayer backing than does Farm Credit.
---------------------------------------------------------------------------
    \7\ How Large Has the Federal Financial Safety Net Become? Nadezhda 
Malysheva and John R. Walter, Federal Reserve Bank of Richmond, 
Economic Quarterly--Volume 96, Third Quarter 2010, pages 273-290.
    \8\ https://www.richmondfed.org/publications/research/
special_reports/safety_net/pdf/safety_net_methodology_sources.pdf.
---------------------------------------------------------------------------
    Farm Credit institutions do have the benefit of specific tax 
treatment that helps them provide long-term mortgage credit to farmers 
and ranchers across the U.S., but Farm Credit institutions are not tax-
exempt entities. Corporate taxes are paid by Farm Credit institutions 
on income derived from short and intermediate term loans, and loans 
made under title III of the Farm Credit Act to cooperatives, rural 
utilities, etc. As cooperatives, System institutions also distribute 
patronage to the farmers and cooperatives that own those institutions. 
Those owners pay ordinary income tax on that patronage. Subchapter S 
commercial banks, which make up the majority of agricultural banks, pay 
little to no Federal tax at the institution level for income derived 
from all of their business. Like cooperatives, taxes are paid by the 
owners on the bank profits that are directly passed through to those 
owners, but since these taxes are paid by the owners, and not by the 
bank itself, Federal tax obligations do not impact on the ability of 
these institutions to price products competitively. The reality is 
commercial banks have considerable direct backing by taxpayers.
Farm Credit System Lending Improves Credit Availability in Rural 
        America
    The existence of the Farm Credit System in the agricultural credit 
markets does not harm commercial banks as they suggested in their 
testimony. ICBA relies on surveys of their own members--commercial 
banks--to conclude that the System is adversely affecting bankers. 
Anecdotal stories from bankers hardly qualify as evidence of harm. 
Surveys of Farm Credit institutions would conclude the same thing--that 
System institutions lose credits to bankers all the time as well. What 
is playing out is competition. The beneficiaries of this competition 
are farmers and ranchers across the U.S. It results in agriculture 
having access to competitive rates and terms for an input critically 
important for the success of today's farming operations.
    Ask farmers or rural business owners if they are better off having 
one, two or more lenders competing for their business. We all know that 
asking bankers this question will result in a different answer. There 
is limited credibility, if any, in the ICBA survey of bankers other 
than to provide a picture painted by bankers eager to minimize their 
competition and maximize their profits.
    An interesting study conducted by two Iowa State economists in 2005 
noted that commercial banks in rural communities in the Midwest may be 
focusing too much on agricultural credit to the detriment of Main 
Street. They noted that, ``banks that specialize in farm lending are 
more profitable,'' but that ``agricultural credit demands may crowd out 
nonfarm demands for bank loans in farming-dependent rural areas.'' They 
also noted that, ``Price discrimination and barriers to entry may 
result in less credit being extended in rural areas than is optimal.'' 
\9\ The point of this is the exact opposite that the ICBA bankers would 
have you believe--competition in credit markets is a good thing. Both 
banking organizations failed to mention that the real challenge for 
smaller banks is not the Farm Credit System but broader competition 
from larger banks.\10\
---------------------------------------------------------------------------
    \9\ Are Rural Credit Markets Competitive? Is There Room for 
Competition in Rural Credit Markets? Maureen Kilkenny and Robert W. 
Jolly; Choices Magazine; 1st Quarter 2005, pages 25-29.
    \10\ Agricultural Lending Shifts to Large Banks, Nathan Kaufman and 
Maria Akers, Agricultural Finance Databook, Federal Reserve Bank of 
Kansas City, July 2013.
---------------------------------------------------------------------------
``Similar-Entity'' Lending Helps Farm Credit Partner with Commercial 
        Banks and is Consistent with the Intent of Congress
    Both the ABA and the ICBA have pointed to several recent lending 
transactions that Farm Credit System institutions have participated in 
and suggested that those are ``illegal'' and inconsistent with what the 
Farm Credit Act allows. These transactions are not illegal and are 
specifically provided for in the Farm Credit Act. Further, they are 
exactly what the Congress contemplated when the authority to engage in 
these types of transactions was provided to the System in 1992 as a 
part of the Farm Credit Banks and Associations Safety and Soundness Act 
of 1992, P.L. 102-552 and then expanded in 1994 in the Farm Credit 
System Agricultural Export and Risk Management Act of 1994, P.L. 103-
376.
    In providing this authority to the System, the Congress recognized 
the growing capital needs of agriculture. The Congress noted at that 
time that in order for those needs to be met, Farm Credit System 
institutions and commercial banks would need to work together by 
sharing participations in loans back and forth to spread risk and 
continue to make the capital available to agriculture and rural America 
that is vital to its continued economic growth. The ABA and ICBA may 
want to rewrite history to fit their own goals, but the words spoken by 
the leaders in the Senate upon final passage of the 1994 legislation 
that expanded the similar-entity lending authority within the Farm 
Credit System are the ones that matter in explaining this authority.
    Senator Patrick Leahy described these provisions as follows, ``The 
Act will accomplish something additional that I believe both the Farm 
Credit System and private banks have been seeking for some time and 
will find mutually beneficial. It creates the opportunity for farm 
credit institutions and private banks to manage and reduce their 
concentration of loan loss risk in terms of geography, industry, and 
account exposure by expanding the System's ability to purchase and sell 
loan participations from commercial banks and other non-System 
lenders.'' \11\
---------------------------------------------------------------------------
    \11\ Senator Leahy, Page S14235, Congressional Record, October 5, 
1994.
---------------------------------------------------------------------------
    Senator Lugar added to Senator Leahy's explanation providing 
additional detail regarding how this authority would help the Farm 
Credit System manage the risk associated with the large loans it was 
involved with to support agriculture and rural America. Senator Lugar 
said, ``. . . these changes will enhance the System's ability to reduce 
its concentration of risk in terms of geography, industry, and account 
exposure. System institutions both purchase and sell participations 
from and to other lenders, a practice that is important particularly in 
the case of larger loans. For example, CoBank recently administered a 
$650 million syndication for Farmland Industries, Inc., a major farmer-
owned marketing and supply cooperative. Seven commercial banks joined 
CoBank to provide funding for the syndication, illustrating the growing 
number of cases where banks and System institutions are working 
together harmoniously to meet the credit needs of rural America.''
    Lugar went on to say, ``It is important to note that the 
legislation will not give System institutions an unfair advantage over 
the commercial banking industry. For example, in the case of loans to 
agricultural entities that are similar to System borrowers, the System 
would be prohibited from providing 50 percent or more of the funds for 
such loans, ensuring that the System's use of loan participations will 
be limited to those cases where commercial lenders desire to involve 
the System, and that the System still will not be able to originate 
loans of this type.'' \12\
---------------------------------------------------------------------------
    \12\ Senator Lugar, Page S14235, Congressional Record, October 5, 
1994.
---------------------------------------------------------------------------
    As noted by Senator Lugar, the similar-entity lending authority 
contains very specific limitations regarding the ability of the System 
to hold a majority of one of these loans and the ability of the System 
to have these types of transactions to be a major portion of its total 
assets. The law limits these to no more than 15% of total assets of the 
participating System institution. The ABA and ICBA should stop their 
disinformation efforts regarding these transactions and instead 
embrace, as their own members have done, the opportunity to work with 
Farm Credit institutions to enhance the agricultural and rural economy.
Focus of Financial Institutions Should be on Improving Rural Economy
    The Farm Credit System on a daily basis works with commercial banks 
across America. In addition, when Farm Credit provides financing for a 
rural electric cooperative, a rural water system, a rural telephone 
company, an agricultural cooperative, and to individual farmers and 
ranchers, all of this activity is enhancing the rural economy. The Farm 
Credit System allows rural areas to benefit from both national and 
international capital markets by moving this capital efficiently from 
those national markets into rural communities.
    The credit needs in rural America are greater than either the 
commercial banks or the Farm Credit System can alone finance. We would 
welcome a discussion on how Farm Credit and commercial bankers can work 
together even more to improve the rural economy.
    Thank you and the Subcommittee for your efforts on behalf of 
agriculture and rural America.
            Sincerely yours,
            
            
Kenneth E. Auer,
President and CEO.
                                 ______
                                 
 Submitted Letter by Jo Ann Emerson, Chief Executive Officer, National 
                 Rural Electric Cooperative Association
July 3, 2014




Hon. Eric A. ``Rick'' Crawford,      Hon. Jim Costa,
Chairman,                            Ranking Minority Member,
Subcommitte on Livestock, Rural      Subcommittee on Livestock, Rural
 Development, and Credit,             Development, and Credit,
House Committee on Agriculture,      House Committee on Agriculture,
Washington D.C.;                     Washington D.C.



    Dear Chairman Crawford and Ranking Member Costa:

    On behalf of the National Rural Electric Cooperative Association 
(NRECA), thank you for the opportunity to submit a letter as part of 
the record for your Subcommittee's June 25, 2014 hearing about credit 
availability in rural America. As the trade association representing 
the nation's more than 900 rural electric cooperatives which serve over 
42 million Americans in 47 states, NRECA understands that the 
availability of credit in rural America is absolutely critical to our 
rural electric consumer owners and their communities. NRECA appreciates 
the Subcommittee's consideration of our perspective.
    Rural electric cooperatives often serve as the hub for economic 
development in their community. Working with other businesses, local 
government officials, and community leaders, our members seek to 
constantly improve the quality of lives of their members. One way they 
do this is to invest in upgrading their electric infrastructure to 
create jobs and improve the delivery of affordable, reliable 
electricity. Key to this investment is the availability of capital for 
the cooperatives.
    Electric cooperatives' unique business model as not-for-profit, 
member-owned electric utilities have driven their emergence as leaders 
in developing innovative financial solutions for rural America. In 2007 
we approached the Congress with a unique concept that would allow rural 
electric cooperative borrowers to benefit from the secondary market 
activities of the Federal Agricultural Mortgage Corporation, also known 
as Farmer Mac. The idea was to allow Farmer Mac to use its established 
access to the capital markets to lower interest costs on rural electric 
cooperative loans similar to the way it already did for agricultural 
real estate loans. By lowering interest costs on rural electric loans, 
the rural electric cooperatives were able to pass those savings on to 
your constituents and thereby make available more dollars in the local 
economies. Congress acted on our request in the 2008 Farm Bill and 
expanded Farmer Mac's charter to allow authorized secondary market 
activities for electric cooperative loans made by lenders organized as 
cooperatives such as our sister cooperative, the National Rural 
Utilities Cooperative Finance Corporation (CFC).
    We are pleased to report that this action by Congress had a 
profound effect. Since Farmer Mac first began participating in the 
rural electric lending sector, Farmer Mac has worked to provide more 
than $5 billion of capital to rural America through secondary market 
purchases of electric co-op loans and securities. Through our 
relationship with Farmer Mac, NRECA member cooperatives have been able 
to diversify their funding sources and add an important liquidity 
management tool, as Farmer Mac provides CFC with access to external 
financing beyond CFC's own offerings of securities in the capital 
markets. As not-for-profit cooperatives, the rural electric 
cooperatives pass these savings on directly to their consumer owners, 
allowing your constituents to continue to receive affordable and 
reliable electric power along with upgraded facilities.
    Rural electric systems currently serve approximately 42 million 
Americans or 12 percent of all consumers of electricity in the United 
States and its territories. The provision in the 2008 Farm Bill that 
expanded Farmer Mac's authorities has directly benefitted these rural 
communities that you and we serve. The resulting innovative partnership 
between Farmer Mac and the rural electric cooperatives allows NRECA to 
better meet the financial needs of its members and allows Farmer Mac to 
further support rural communities in fulfillment of its mission. Farmer 
Mac's ability to provide electric cooperatives with a stable and 
reliable source of credit, as well as liquidity and lending capacity 
that will help stimulate economic growth and job creation in the rural 
communities is extremely helpful and appreciated.
            Sincerely,
            
            
Jo Ann Emerson, CEO, NRECA.
                                 ______
                                 
   Submitted Letter by Sheldon C. Petersen, Chief Executive Officer, 
     National Rural Utilities Cooperative Finance Corporation (CFC)
July 8, 2014

  Hon. Eric A. ``Rick'' Crawford,
  Chairman,
  Subcommittee on Livestock, Rural Development, and Credit,
  House Committee on Agriculture,
  Washington, D.C.

    Chairman Crawford, Ranking Member Costa, and Members of the 
Subcommittee:

    On behalf of the National Rural Utilities Cooperative Finance 
Corporation (CFC), thank you for the opportunity to comment following 
your Subcommittee's June 25, 2014, hearing on credit availability in 
rural America. As the only lender created and owned by America's 
electric cooperative network, CFC plays an important role in providing 
credit to rural America, and we appreciate the Subcommittee's 
consideration of our perspective.
    CFC, a nonprofit finance cooperative, was organized by local, 
consumer-owned and controlled electric cooperatives in 1969 in response 
to their growing need for capital. Initially, rural electric 
cooperatives formed CFC as a source of available financing to 
supplement loan programs administered by the Rural Utilities Service of 
the United States Department of Agriculture. Today, CFC is owned by 
more than 1,000 electric cooperative organizations in 48 states and 
continues providing members with flexible financial products and 
services.
    Since its creation 45 years ago, CFC has provided billions in 
direct funding to the nation's rural electric cooperatives, and we 
continue to work to bring them low-cost private capital so they can 
acquire, construct, and operate electric distribution, generation, 
transmission and related facilities. The ultimate beneficiaries of 
CFC's lending activities are rural electric consumers, the communities 
served by rural electric cooperatives, and the nation as a whole.
    In CFC's role as a lender to rural electric cooperatives, we are 
continually looking for new opportunities to serve our member-owners' 
evolving needs. By providing a secondary market for loans to rural 
electric cooperatives, the Federal Agricultural Mortgage Corporation 
(Farmer Mac) is helping us fulfill this mission.
    In the 2008 Farm Bill, Congress acted on the request of our 
national trade association, the National Rural Electric Cooperative 
Association (NRECA), to provide clear authority for Farmer Mac to 
invest in rural utility loans in much the same manner as they already 
did for agricultural real estate loans. Specifically, Congress revised 
Farmer Mac's charter to authorize secondary market activities loans to 
electric cooperatives made by lenders organized as cooperatives, such 
as CFC. The rationale for this proposal was that Farmer Mac could use 
its established access to the capital markets to provide additional 
liquidity to rural utility lenders and also potentially lower interest 
costs on rural electric cooperative loans with the resulting savings 
ultimately passed through to rural electric consumers.
    We are pleased to report that this action by Congress and the 
relationship with Farmer Mac has produced an important liquidity 
management tool and has helped CFC diversify its funding sources. This 
allows CFC to offer additional capital for lower-cost financing in many 
cases, directly benefiting the nation's electric cooperatives by 
ensuring they can deliver safe, reliable and affordable electric power 
to folks no matter where they may live.
    Today, electric cooperatives currently serve approximately 42 
million Americans, or 12 percent of all consumers in the United States 
and its territories. The changes Congress enacted in the 2008 Farm Bill 
that expanded Farmer Mac's authority directly benefit rural communities 
that you represent. The resulting innovative partnership with Farmer 
Mac enables CFC to better meet the financial needs of its members and 
allows Farmer Mac to further support rural communities.
    Together, Farmer Mac and CFC provide electric cooperatives with a 
stable and reliable source of credit, as well as liquidity and lending 
capacity that stimulates economic growth and job creation across rural 
America.
            Sincerely,
            
            
Sheldon C. Petersen,
CEO.
                                 ______
                                 
Submitted Letter by Brad Thaler, Vice President of Legislative Affairs, 
             National Association of Federal Credit Unions
June 24, 2014




Hon. Eric A. ``Rick'' Crawford,      Hon. Jim Costa,
Chairman,                            Ranking Minority Member,
Subcommitte on Livestock, Rural      Subcommittee on Livestock, Rural
 Development, and Credit,             Development, and Credit,
House Committee on Agriculture,      House Committee on Agriculture,
Washington D.C.;                     Washington D.C.


Re: Credit Availability in Rural America

    Dear Chairman Crawford and Ranking Member Costa:

    On behalf of the National Association of Federal Credit Unions 
(NAFCU), the only trade association that exclusively represents the 
interests of our nation's Federal credit unions, I write today in 
conjunction with tomorrow's hearing entitled ``A review of credit 
availability in rural America.'' As you are aware, in many rural areas 
of the country, there are a limited number of financial institutions 
providing agricultural lending. Credit unions are proud that they have 
been making safe and affordable agricultural loans for a number of 
years, including through the economic crisis.
    As the Subcommittee considers the issue of credit availability in 
rural America, we urge you not to overlook the potential that currently 
exists to do more with our nation's credit unions. Our nation's credit 
unions have money to loan to small businesses; however, an outdated and 
arbitrary business lending cap stands in their way. Representatives Ed 
Royce and Carolyn McCarthy have introduced the Small Business Lending 
Enhancement Act (H.R. 688), a bill that would raise the member business 
lending cap in a sound way for eligible credit unions and help extend 
credit to the small businesses that drive our economy without spending 
a dime of taxpayer funds. We urge you to support this effort.
    Additionally, while the National Credit Union Administration (NCUA) 
took action in 2012 to help credit unions do more to serve low-income 
and rural areas, recent actions by the agency could hamper that 
availability of credit. In January of this year, the NCUA issued a 
proposed risk-based capital rule for credit unions. If implemented as 
proposed, the new rule could have a chilling effect of reducing lending 
in rural areas as the agency's proposed ``risk-weights'' for member 
business loans may negatively impact the ability of credit unions to 
provide agricultural loans to their members. Several Members of 
Congress have already weighed in with their concerns about the 
proposal's potential negative impact on agricultural and rural lending. 
We would urge the Subcommittee to follow developments on this issue as 
well.
    We would welcome the opportunity to discuss these issues further. 
If my colleagues and I can be of assistance to you, or if you have any 
questions regarding this issue, please feel free to contact myself or 
NAFCU's Director of Legislative Affairs, Jillian Pevo, at [Redacted].
            Sincereley,

            
            
Brad Thaler,
Vice President of Legislative Affairs.

CC: Members of the Subcommittee on Livestock, Rural Development, and 
Credit.
                                 ______
                                 
  Submitted Statement by National Association of REALTORS'
Introduction
    The National Association of REALTORS' (NAR) offers this 
statement on the importance of access to credit in rural areas. NAR 
represents a wide variety of housing industry professionals committed 
to the development and preservation of the nation's housing stock and 
making it available to the widest range of potential American 
households. The Association has a long tradition of support for 
innovative and effective Federal housing programs and has worked 
diligently with the Congress to fashion housing policies that ensure 
Federal housing programs meet their missions responsibly and 
efficiently.
    Prospective homebuyers nationwide have found significant barriers 
to obtaining mortgage financing. Credit standards remain very tight, 
and those wishing to purchase a home--especially first-time buyers--are 
facing many obstacles to finding a safe, affordable home loan. The 
situation is especially difficult in rural areas, where rental housing 
is often lacking and access to mortgage finance is challenging. Nearly 
all of the counties with the highest poverty rates in America are 
rural. The lack of multi-family and other rental units in rural 
communities means families have few options other than to purchase a 
home. As a result, access to safe, affordable mortgage financing is 
important in these areas. NAR thanks you for holding this hearing to 
discuss these issues.
Housing in Rural Communities
    Nearly 20 percent of the U.S. population lives in rural areas or 
small towns. Many jobs in these communities are low-wage, and incomes 
in rural areas are often lower than national averages. According to the 
U.S. Census, the number of rural citizens living in poverty increased 
to 8.5 million in 2012, from 8.0 million in 2011. Overall, in 2012, 
rural median household incomes ($41,198) were about 20 percent lower 
than national median household incomes ($51,017) and 22 percent less 
than median urban household incomes ($52,988).\1\
---------------------------------------------------------------------------
    \1\ Income, Poverty, and Health Insurance Coverage in the United 
States: 2012, Issued September 2013, By Carmen DeNavas-Walt, Bernadette 
D. Proctor, Jessica C. Smith, p. 60-245.
---------------------------------------------------------------------------
    Housing conditions in rural areas can be inferior to homes in urban 
or suburban neighborhoods. Housing choices can be limited due to 
differences in infrastructure requirements, lack of public transit, and 
access to other amenities. The availability of rental housing is often 
scarce. The approximately 7.1 million renter-occupied units in rural 
communities comprise only 28.4 percent of the rural and small town 
housing stock.\2\
---------------------------------------------------------------------------
    \2\ Housing Assistance Council, Taking Stock: Rural People, Poverty 
And Housing In The 21st Century, December 2012.
---------------------------------------------------------------------------
    The lack of rental housing means homeownership is frequently the 
only option for rural families. Although homeownership rates are higher 
in rural areas than the national average, many rural families face 
significant obstacles in finding safe, affordable, decent housing. 
According to a report by NeighborWorks, in rural areas, ``the housing 
stock itself varies as greatly as the character of rural areas, but two 
common trends are that (1) it is overwhelmingly comprised of single-
family homes; and (2) a higher percentage of the stock is in 
substandard condition compared to metropolitan areas.'' \3\
---------------------------------------------------------------------------
    \3\ Landscapes of Foreclosure: The Foreclosure Crisis in Rural 
America, Adam Wodka, The Edward M. Gramlich Fellowship in Community 
Development, November 2009.
---------------------------------------------------------------------------
    These findings make it even more important to help rural families 
find quality housing.
Federal Housing Programs
    Federal housing programs are instrumental in providing affordable 
housing opportunities to low- and moderate-income rural homebuyers. The 
National Association of REALTORS' strongly supports Federal 
housing programs that target rural communities and provide sufficient 
Federal assistance needed to meet the housing needs of rural 
communities.
    The Rural Housing Service (RHS) 502 loan program provides 
opportunities for homeownership for these families. In FY 2013, the RHS 
helped nearly 170,000 rural American families become homeowners, nearly 
80 percent of whom were first-time homebuyers. The program includes 
guaranteed and direct loans. Section 502 loans can be used to build, 
repair, renovate or relocate a home, or to purchase and prepare sites, 
including providing water and sewage facilities. The guaranteed loans 
are funded by private lenders and insured by the RHS.
    In many rural communities, the Section 502 direct loan program is 
the only housing assistance available. Section 502 homeownership direct 
loan program loans are used primarily to help low-income households 
purchase homes. These loans may also be used to refinance debts when 
necessary to avoid foreclosure, or when required to make necessary 
house repairs affordable. NAR strongly supports the availability of 
sufficient Federal resources to ensure the Section 502 direct loan 
program responsibly addresses the housing needs of low- and moderate-
income \4\ rural families.
---------------------------------------------------------------------------
    \4\ At least 40 percent of appropriated Section 502 direct loan 
funds must be used to assist families with incomes less than 50 percent 
of area median income (AMI).
---------------------------------------------------------------------------
    In recent years, the Section 502 program has been in jeopardy of 
depleted funding or commitment authority before the end of the fiscal 
year. NAR would encourage Congress to provide adequate funding and 
commitment authority to meet the needs of rural communities.
    It also should be noted that FHA is also a very valuable program 
for families living in rural areas. Some homes, due to their rural 
nature, do not meet FHA standards and are more appropriately suited to 
the programs of the RHS. But for others, FHA has been a very important 
option for home buying families. FHA provided the majority of mortgage 
financing options during the housing crisis, and continues to be a 
critical tool for affordable, safe housing. FHA's countercyclical role 
allowed more than four million families to purchase a home during the 
height of the economic crisis.
Suggestions To Expand Access
Update Definition
    NAR was pleased that Congress approved language as part of the farm 
bill to grandfather existing communities currently participating in the 
RHS programs as eligible for continued participation. Without that 
language, more than 900 communities would have lost access to these 
valuable housing programs. The definition of ``rural'' used by RHS has 
not been changed since 1974, despite the rapidly changing demographics 
of our country. The existing definition requires communities to: (1) be 
outside of a metropolitan statistical area (MSA), (2) be ``rural in 
character'', (3) have a serious lack of mortgage credit, and (4) have a 
population under 20,000. Communities and populations have changed 
dramatically in the last 80 years. Relying on a decades old definition 
is unrealistic and won't meet the needs of rural communities. NAR urges 
Congress to look at ways to update this definition, and ensure that our 
rural communities have access to the programs they need.
Direct Endorsement for 502 Guaranteed Loans
    RHS has proposed language to make the Section 502 Guaranteed loan 
program a direct endorsement program. Today, every loan must be 
approved by staff of the Rural Housing Service. In recent years, 
staffing has been dramatically reduced, and borrowers are now 
experiencing significant delays in loan approval. Both the Veterans 
Affairs loan guaranty and the FHA mortgage insurance program utilize 
private landers for direct endorsement. Adding RHS to this list would 
create great efficiencies for the Service and for homebuyers. RHS, in 
turn, would have additional staff time to focus on a strengthened 
lender monitoring process and risk management. We strongly urge 
Congress to provide RHS with direct endorsement authority to ease 
burdens on the agency and accelerate processing for borrowers.
Resist Calls To Limit Access
    Since the beginning of the economic recovery, there have been calls 
to restrict the role of the Federal Government in housing programs. 
Both RHS and FHA have been shown to provide great benefits to American 
families, and our economy as a whole. Since its inception in 1949, RHS 
has provided more than 3.69 million families with the ability to obtain 
the dream of homeownership. FHA was a driving force pulling our nation 
out of the economic recession. Moody's has estimated that without FHA's 
role during the housing crisis, housing prices would have dropped an 
additional 25 percent, and American families would have lost more than 
$3 trillion of home wealth.
    These programs offer significant benefits to American families, 
with little cost to the taxpayer. Changes to these programs should only 
be made to enhance access for more qualified buyers. NAR strongly 
opposes any changes that further constrain mortgage financing.
Conclusion
    Rural families face unique challenges in accessing mortgage credit. 
NAR encourages you to consider changes to programs that will make it 
easier for these families to obtain safe, affordable, decent homes in 
the communities in which they chose to live, and looks forward to 
working with you to achieve that goal.
                                 ______
                                 
                          Submitted Questions
Response from Hon. Jill Long Thompson, Ph.D., Board Chair and Chief 
        Executive Officer, Farm Credit Administration
Questions Submitted by Hon. Collin C. Peterson, a Representative in 
        Congress from Minnesota
    Question 1. You mentioned the Farm Credit System Insurance Fund 
currently holds more than $3.6 billion. Can you walk me through the 
structure of the Insurance Fund and provide more detail on its creation 
during the credit crisis of the late 1980s? Is it part of the Farm 
Credit Administration or a separate entity?
    Answer. In the Agricultural Credit Act of 1987, Congress 
established the Farm Credit Insurance Fund to provide insurance for the 
timely payment of principal and interest on obligations issued on 
behalf of Farm Credit System (System) banks.
    In the 1987 Act, Congress also established the Farm Credit System 
Insurance Corporation (FCSIC), which administers the Fund. FCSIC sets 
and assesses the premiums that System banks must pay into the Fund. 
Money in the Fund that is not being used must be invested in 
obligations of the United States or in obligations guaranteed as to 
principal and interest by the United States.
    In addition to using the Fund to insure timely payment of principal 
and interest on System-wide and consolidated debt, FCSIC must use the 
Fund to ensure the retirement of protected borrower stock at par value.
    FCSIC may also use the Fund to cover its operating costs and 
provide assistance to troubled System banks and associations. In 
addition, if the Farm Credit Administration (FCA) places a System bank 
or association in conservatorship or receivership, FCSIC must act as 
the conservator or receiver.
    As a former Member of the U.S. House of Representatives, having 
served on the Agriculture Subcommittee with jurisdiction over credit 
from 1989 to 1995, I believe the statute implies the Farm Credit System 
Insurance Corporation is part of the Farm Credit Administration. More 
significantly, the language of the statute makes it clear that FCSIC as 
an entity was not intended to be an additional cost for the Farm Credit 
System and the farmers and ranchers it serves. The Farm Credit Act 
directs FCSIC to carry out its role using the staff, examination 
information, and other resources of FCA whenever possible.
    By statute, FCSIC is a U.S. Government-controlled corporation 
``managed by a Board of Directors that shall consist of the members of 
the Farm Credit Administration Board . . . chaired by any Board member 
other than the Chairman of the Farm Credit Administration Board.'' In 
addition, ``to the extent practicable, the Corporation shall use the 
personnel and resources of the Farm Credit Administration to minimize 
duplication of effort and to reduce costs.''

    Question 2. Testimony from the second panel mentions a $10 billion 
line of credit that was requested through the Treasury Department's 
Federal Financing Bank for the Farm Credit System Insurance Fund 
(FCSIC). Can you tell us more about the situation with the Insurance 
Fund and the letter of credit?
    Answer. It is FCA's understanding that FCSIC entered into the 
agreement with the Federal Financing Bank to ensure ``back-up'' 
liquidity, up to $10 billion, for System banks in the event of a 
general market disruption. An advance from the Federal Financing Bank 
would not be available for deteriorating credit conditions in the Farm 
Credit System. Any advance from the Federal Financing Bank would be 
fully collateralized by the System. The agreement must be renewed 
annually.

    Question 3. Were you aware of the Brookings Institution report 
commissioned by the Insurance Fund? This report goes into detail 
regarding the FCSIC discussions with the Federal Financing Bank. Were 
you aware whether this report was officially shared with the Committees 
of jurisdiction? Has the FCA taken a position on whether to ask 
Congress to reconsider if the structure set up in 1987 is adequate to 
handle extraordinary circumstances?
    Answer. Yes, FCA was aware that FCSIC contracted with the Brookings 
Institution for the report, and we informed staff of the House 
Committee on Agriculture and the Senate Committee on Agriculture, 
Nutrition, and Forestry about the report, which was published on the 
Brookings website.
    FCA has not taken a position on whether to ask Congress to 
reconsider the FCA/FCSIC structure as provided by Congress. The 
structure allowed for the agreement with the Federal Financing Bank, 
and this agreement should be adequate to handle the extraordinary 
circumstances of a liquidity crisis. Nevertheless, projecting the 
effects of the next crisis is very difficult.
    In the wake of the volatile market conditions that began in 2008, 
FCA took a close look at whether the System could continue to fund 
borrowers under adverse market conditions unrelated to the agriculture 
economy. The System is the only federally chartered set of financial 
institutions that did not have a designated source of emergency funding 
in the event of a market shutdown.

    Question 4. The issue of ``cherry-picking'' customers is raised in 
testimony from the second panel. Is there anything that a commercial 
bank can do if they feel that one of their customers has been enticed 
away by a lower interest rate? Is there anything in the Farm Credit Act 
or your regulations that prohibits this?
    Answer. FCA is charged with ensuring the safety and soundness of 
the System. Part of this responsibility is to examine whether the 
System is appropriately pricing its loans. Our examiners regularly 
review loan pricing practices during examinations. We also review 
inquiries received from the public, including commercial banks.
    Congress established the System for serving agriculture and rural 
America. Providing a stable and reliable funding source for that 
industry, in a safe and sound manner, and at competitive rates, helps 
ensure that the System fulfills that mission.
    Three sections of the Farm Credit Act address loan pricing by the 
System under typical market conditions. Those sections are 1.8(b), 
2.4(c)(2), and 3.10(a). Section 1.8(b) states, ``. . . it shall be the 
objective to provide . . . credit . . . at the lowest reasonable costs 
on a sound business basis taking into consideration the cost of money 
to the bank, necessary reserve and expenses of the bank and 
associations, and providing services to members.'' Sections 2.4(c)(2) 
and 3.10(a) are consistent with section 1.8(b). Therefore, just as a 
money center bank or a medium-sized or community bank considers these 
factors in determining its rates, so must a System institution.
    Contrary to some misunderstanding, section 1.1(c) of the Farm 
Credit Act does not prohibit System lenders from charging interest 
rates below other lenders. That provision was added to the Farm Credit 
Act in 1986 to prohibit System institutions from using special 
regulatory accounting practices to charge rates below the competitive 
market. The legislative history of the provision indicates that 
Congress did not intend the language in section 1.1(c) to be a 
provision of positive law or to constitute a formula for determining 
interest rates. (See the 1994 General Accounting Office report, ``Farm 
Credit System Repayment of Federal Assistance and Competitive 
Position.'') When this provision was added to the Farm Credit Act, it 
applied to those System institutions that were temporarily using 
regulatory accounting practices. Therefore, section 1.1(c) did not 
override sections 1.8(b), 2.4(c)(2), and 3.10(a) of the Farm Credit 
Act.

    Question 5. There is a question of whether CoBank's loan to Verizon 
to buy-out Vodaphone's interest in Verizon Wireless was an eligible 
loan under the Farm Credit Act. Can you share with us the FCA's 
position on this?
    Answer. CoBank, ACB, has authority to lend to entities providing 
telephone services in rural areas. Section 3.8 of the Farm Credit Act 
specifically provides CoBank with this authority, which includes rural 
wireless carriers. Over the past 25 years, CoBank was an early and 
active lender for many of the communications companies providing 
wireless telephone services in rural areas. With the evolution of the 
wireless industry, there has been continued consolidation, with smaller 
ventures, many financed by CoBank, being acquired by Verizon or other 
communications companies.
    Further, under section 3.1 of the Farm Credit Act, Congress granted 
banks for cooperatives authority to participate in loans to ``similar 
entities'' for risk management purposes. A similar-entity is a party 
that is ineligible for a loan from the System but has operations that 
are functionally similar to the activities of eligible borrowers. To be 
considered a similar-entity, a party must derive a majority of its 
income from, or invest a majority of its assets in, the conduct of 
activities that are performed by eligible borrowers. Verizon Wireless 
has operations functionally similar to those of directly eligible rural 
wireless carriers.
    The statute limits the System's similar-entity lending in a couple 
of ways. The Farm Credit Act requires non-System lenders to hold 50 
percent or more of the principal amount of all similar-entity loans and 
restricts the cumulative amount of any System institution's similar-
entity participations to 15 percent of its total assets. In addition, 
participations to a single credit risk cannot exceed ten percent of the 
institution's total capital. The System's involvement in the syndicated 
credit was well below the statutory limitations.
    Loans to similar entities are multi-lender transactions often 
involving large companies. Before purchasing a similar-entity credit, 
the System institution must determine that the credit is within its 
similar-entity authorities and satisfies its credit underwriting 
standards. We review the System's participation in similar-entity 
credits.

    Question 6. Can you explain to the Committee what the role is of 
the Farm Credit System institutions which are participating in loans, 
such as the Verizon Wireless buy-out, or in building a local hospital, 
another example raised in testimony?
    Answer. System institutions participate in loans, as authorized by 
the Farm Credit Act, to diversify their loan portfolios and earnings. 
This enables them to meet their mission of providing a stable source of 
credit through good times and bad for farmers and ranchers, their 
cooperatives, and other agribusinesses and rural service organizations. 
The legislative history is clear that Congress expanded the System's 
lending authority to include similar entities as a means to provide the 
System with increased portfolio diversification.
    Likewise, on a very limited basis, as authorized by FCA under pilot 
programs or case-by-case approvals, System institutions have used their 
investment authorities to make investments in rural communities. These 
investments include bonds that finance improvements to deteriorating 
rural hospitals, rural medical clinics, assisted-living facilities, and 
other rural infrastructure projects that are critical to the well-being 
of farmers and ranchers and their communities. They constitute less 
than two percent of the System's total assets.
    These loan participations and rural investments are most often not 
completed in isolation, or in competition with local lending 
institutions, but rather in partnership with other local lending 
institutions, and many times in coordination with the USDA's Rural 
Development Agency.
Response from Chris Beyerhelm, Deputy Administrator for Farm Loan 
        Programs, Farm Service Agency, U.S. Department of Agriculture
Question Submitted by Hon. Joe Courtney, a Representative in Congress 
        from Connecticut
    Question. The USDA Farm Service Agency guaranteed loan program is a 
very important program in my district. The program is used extensively 
by lenders in my District and across Connecticut. During the 2012 Farm 
Bill deliberations, I worked with Congressman Owens, then a Member of 
this Committee, to encourage language to be included in the farm bill 
that provides more flexibility for the types of business structures 
eligible for FSA loans and loan guarantees. Chairman Lucas and Ranking 
Member Peterson included this increased flexibility when drafting the 
farm bill this Congress.
    We have had situations where family farms that are structured as 
family trusts and Limited Liability Companies were not eligible for FSA 
guarantees. Could you check on the status of implementation of these 
farm bill provisions and report back to my office?
    Answer. The provisions you mentioned are included in sections 5001, 
5002, 5101, and 5201 of the 2014 Farm Bill. To implement these sections 
as quickly as possible, FSA is using an expedited rule making process 
and plans to publish an interim rule that will become effective upon 
publication. The Federal Register document has been drafted and is 
currently in clearance. FSA anticipates publication of the interim rule 
this fall. In the meantime, FSA is developing training materials and 
other guidance for employees and customers to help ensure effective 
implementation.

                                  
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