    [Senate Hearing 114-643]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-643

                            THE FARM CREDIT SYSTEM:
                           OVERSIGHT AND OVERLOOK OF
                          THE CURRENT ECONOMIC CLIMATE

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

                                    HEARING

                                   before the

                           COMMITTEE ON AGRICULTURE,
                            NUTRITION, AND FORESTRY

                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                  MAY 19, 2016

                                   __________

                           Printed for the use of the
               Committee on Agriculture, Nutrition, and Forestry

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

      Available via the World Wide Web: http://www.agriculture.senate.gov

                                       ______

                             U.S. GOVERNMENT PUBLISHING OFFICE

    23-591 PDF                     WASHINGTON : 2018

               COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

                         PAT ROBERTS, Kansas, Chairman

    THAD COCHRAN, Mississippi            DEBBIE STABENOW, Michigan
    MITCH McCONNELL, Kentucky            PATRICK J. LEAHY, Vermont
    JOHN BOOZMAN, Arkansas               SHERROD BROWN, Ohio
    JOHN HOEVEN, North Dakota            AMY KLOBUCHAR, Minnesota
    DAVID PERDUE, Georgia                MICHAEL BENNET, Colorado
    JONI ERNST, Iowa                     KIRSTEN GILLIBRAND, New York
    THOM TILLIS, North Carolina          JOE DONNELLY, Indiana
    BEN SASSE, Nebraska                  HEIDI HEITKAMP, North Dakota
    CHARLES GRASSLEY, Iowa               ROBERT P. CASEY, Jr., Pennsylvania
    JOHN THUNE, South Dakota

                   Joel T. Leftwich, Majority Staff Director
                    Anne C. Hazlett, Majority Chief Counsel
                        Jessica L. Williams, Chief Clerk
                   Joseph A. Shultz, Minority Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------
                                                                       Page

    Hearing(s):

    The Farm Credit System: Oversight and Overlook of the Current
      Economic Climate...............................................     1

                                  ----------

                             Thursday, May 19, 2016
                        STATEMENTS PRESENTED BY SENATORS

    Roberts, Hon. Pat, U.S. Senator from the State of Kansas,
      Chairman, Committee on Agriculture, Nutrition, and Forestry....     1
    Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan...     3
    Thune, Hon. John, U.S. Senator from the State of South Dakota....     4
                                  ----------

                                   WITNESSES
                                    Panel I

    Spearman, Hon. Ken, Chairman, Farm Credit Administration Board,
      McLean, VA.....................................................     5
    Tonsager, Hon. Dallas, Member, Farm Credit Administration Board,
      Chairman, Farm Credit Insurance System Corporation Board,
      McLean, VA.....................................................     7
    Hall, Hon. Jeffery, Member, Farm Credit Administration Board,
      McLean, VA.....................................................     8

                                    Panel II

    Barker, Verlin (Gus) J., President and Chief Executive Officer,
      Community Bank of Oelwein, Oelwein, IA.........................    27
    Stark, Doug, President and Chief Executive Officer, Farm Credit
      Services of America & Frontier Farm Credit, Omaha, NE..........    29
    Welder, Jed, Owner, Trinity Farms, Greenville, MI................    31
    Wolfe, Leonard, President and Chief Executive Officer, and
      Chairman of the Board, United Bank and Trust, Marysville, KS...    25
                                  ----------

                                    APPENDIX

    Prepared Statements:
    Stabenow, Hon. Debbie:
        Transcript of floor statements by Hon. Patrick J. Leahy and
          Hon. Richard Lugar for submission into the record..........    46
        Leahy, Hon. Patrick J........................................    51
        Thune, Hon. John.............................................    53
        Barker, Verlin (Gus) J.......................................    56
        Hall, Hon. Jeffery...........................................    70
        Spearman, Hon. Ken...........................................    73
        Stark, Doug..................................................    84
        Tonsager, Hon. Dallas........................................    98
        Welder, Jed..................................................   101
        Wolfe, Leonard...............................................   103
    Document(s) Submitted for the Record:
    Thune, Hon. John:
        Study: Farm Income Plummets in 2015, The Daily Republic......   116
    Stark, Doug:
        American Farmland Trust......................................   120
        Clemson University...........................................   122
        Drake University.............................................   124
        Empire State Council of Agricultural Organization, Inc.......   125
        Farm Credit Agriculture Coilition Letter.....................   127
        Farmer Veteran Coalition.....................................   129
        FreshFarm, prepared statement................................   131
        Frontier Communications, prepared statement..................   132
        Iowa State University........................................   133
        Land for Good, prepared statement............................   135
        Local Food Strategies, LLC, prepared statment................   137
        Market Maker, prepared statement.............................   139
        Matson Consulting, prepared statement........................   141
        Morse Marketing Connections, prepared statement..............   142
        National Rural Electric Cooperative Association..............   144
        National Rural Water Association.............................   145
        National Cooperative Business Association, CLUSA
          International..............................................   147
        National Council of Farmer Cooperatives......................   149
        NTCA, The Rural Broadband Association........................   151
        Originz, LLC, prepared statement.............................   153
        Sustainable Agricultural Education (SAGE), prepared statement   154
        Southern Sustainable Agriculture Working Group...............   156
        The Federation of Southern Cooperatives......................   158
        The Ohio State University....................................   160
        The Rural Advancement Foundation International...............   161
        University of Arkansas.......................................   163
        Wallace Center, prepared statement...........................   165
        Western Telephone Association, prepared statement............   167
        Wholesome Wave, prepared statement...........................   172
    Question and Answer:
    Barker, Verlin (Gus) J.:
        Written response to questions from Hon. Pat Roberts..........   172
        Written response to questions from Hon. John Thune...........   173
        Written response to questions from Hon. Robert Casey, Jr.....   175
    Hall, Hon. Jeffery:
        Written response to questions from Hon. John Thune...........   177
    Spearman, Hon. Ken:
        Written response to questions from Hon. Pat Roberts..........   179
        Written response to questions from Hon. Thom Tillis..........   182
        Written response to questions from Hon. Charles Grassley.....   185
        Written response to questions from Hon. John Thune...........   187
        Written response to questions from Hon. Heidi Heitkamp.......   189
        Written response to questions from Hon. Robert Casey, Jr.....   191
    Stark, Doug:
        Written response to questions from Hon. Pat Roberts..........   194
        Written response to questions from Hon. John Thune...........   195
        Written response to questions from Hon. Robert Casey, Jr.....   198
    Tonsager, Hon. Dallas:
        Written response to questions from Hon. John Thune...........   201
        Written response to questions from Hon. Robert Casey, Jr.....   203
    Welder, Jed:
        Written response to questions from Hon. Pat Roberts..........   203
        Written response to questions from Hon. John Thune...........   203
        Written response to questions from Hon. Robert Casey, Jr.....   204
    Wolfe, Leonard:
        Written response to questions from Hon. Pat Roberts..........   205
        Written response to questions from Hon. John Thune...........   206
        Written response to questions from Hon. Patrick J. Leahy.....   206
        Written response to questions from Hon. Robert Casey, Jr.....   208

                            THE FARM CREDIT SYSTEM:
                           OVERSIGHT AND OVERLOOK OF
                         THE CURRENT ECONOMIC CLIMATE

                                  ----------

                             Thursday, May 19, 2016

                                  United States Senate,
             Committee on Agriculture, Nutrition, and Forestry,
                                                         Washington, DC
        The committee met, pursuant to notice, at 10:17 a.m., in
    room 328A, Russell Senate Office Building, and in room 328A,
    Hon. Pat Roberts, Chairman of the committee, presiding.
        Present or submitting a statement: Senators Roberts,
    Boozman, Ernst, Tillis, Sasse, Grassley, Thune, Stabenow,
    Brown, Klobuchar, Bennet, Gillibrand, Donnelly, Heitkamp, and
    Casey.

     STATEMENT OF HON. PAT ROBERTS, U.S. SENATOR FROM THE STATE OF
    KANSAS, CHAIRMAN, U.S. COMMITTEE ON AGRICULTURE, NUTRITION, AND
                                FORESTRY

        Chairman Roberts. I call this hearing of the Senate
    Committee on Agriculture, Nutrition, and Forestry to order.
    Thank you all for coming.
        Today's hearing will examine the overall climate of credit
    in rural America, the health of ag lending from both the
    commercial bank and the Farm Credit System perspectives, and
    what impact the current credit environment is having on our
    nation's farms. We will also examine whether the Farm Credit
    Administration is exercising appropriate oversight of the Farm
    Credit System.
        Farmers and ranchers all across the country are
    experiencing difficult economic conditions as farm sector
    profitability is forecast to decline for the third straight
    year. Over the past three years alone, net farm income is
    expected to decline by 56 percent. As our nation's farmers and
    rural communities continue to deal with low commodity prices
    and always elevated input costs, access to affordable credit in
    rural America is absolutely crucial.
        The Spring 2016 Agriculture Lenders Survey released by
    Kansas State University's Department of Agriculture Economics
    expects the credit environment for farmers to remain difficult
    for at least a few more years. Lenders indicate that demand for
    operating loans will continue to remain high as liquidity and
    cash flow are problematic for many farmers. Further, non-
    performing loans have increased and are expected to continue on
    this unfortunate trajectory due to low commodity prices.
        In addition to the Lenders Survey, the Federal Reserve Bank
    of Kansas City painted a similarly bleak projection of the farm
    sector credit conditions for the first quarter of 2016. Lenders
    note an increasing share of farmers carrying over outstanding
    debt from previous years, with an increased demand for loans
    and weakening repayment rates.
        Now, for farmers, every year--every year--is a high-stakes
    bet as they put their confidence in their crops, livestock, and
    the business decisions they make all throughout the year. While
    farmers continue to manage their risk through a period of low
    commodity prices and stubbornly high input prices, it is
    vitally important we begin discussions regarding next year's
    borrowing decisions. There is no doubt that today's discussion
    is timely, especially considering it has been just under a
    decade, ten years, since we have had representatives from
    either the banking industry or the Farm Credit System before
    this committee to discuss some of the issues we will cover
    today.
        Rural America relies on a network of credit providers
    consisting of the private sector and the Farm Credit System.
    Created under the Federal Farm Loan Act of 1916, the Farm
    Credit System is a nationwide system of privately owned
    cooperative lenders statutorily required to provide farmers and
    other rural borrowers with a permanent and affordable source of
    credit.
        Currently, the Farm Credit System is comprised of 74
    agricultural credit associations and four regional banks which
    provide the ag credit associations with funds to make loans to
    producers and other retail borrowers. The agency tasked with
    regulating the Farm Credit System is the Farm Credit System
    Administration, or the FCA. The Farm Credit Administration is
    an independent agency comprised of a three-member Board
    nominated by the President, and as we all know on this
    committee, confirmed by the Senate through our committee.
        Like the banking industry, the Farm Credit System is not a
    lender of last resort. The lender of last resort for farmers
    who are otherwise unable to secure private financing is the
    Department of Agriculture's Farm Service Agency. Our commercial
    banks and the Farm Credit System often relies on USDA farm loan
    guarantees to make loans when borrowers are less creditworthy.
        Now, to date, the Farm Service Agency has seen a 21
    percent--that is 21 percent--increase in farm loans as compared
    to last year, a further troubling indication of a struggling
    agricultural economy. Obviously, much has changed since
    Congress established the Farm Credit System a hundred years
    ago. One thing that has not changed, however, is the importance
    of providing farmers and other rural borrowers with easily
    accessible and affordable credit.
        Now, I along with a few of my colleagues on the Ag
    Committee here remember very well the difficult times with the
    farm economy during the 1980s. No one--no one--wants to see a
    repeat of those dark days. I look forward to hearing from our
    two distinguished panels of witnesses regarding the landscape
    of the current economic conditions in farm country, what is
    working or needs improvement from a legislative perspective to
    protect the financial well-being of our farmers and our rural
    communities.
        Now, before we hear from our witnesses, I recognize our
    distinguished Ranking Member, Senator Stabenow, for any of her
    opening remarks.

    STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE
                              OF MICHIGAN

        Senator Stabenow. Well, thank you very much, Mr. Chairman,
    and thank you to our witnesses as well as the leaders from the
    Farm Credit Administration. It is great to see all of you, and
    Mr. Chairman, this is a very important hearing, so thank you
    for holding it.
        I want to especially welcome Mr. Tonsager and Mr. Hall,
    whose nominations this committee unanimously approved last
    year. It is wonderful to see you again.
        I also want to give a warm welcome to Jed Welder, who will
    be on our second panel. Jed served in both the United States
    Marine Corps and the U.S. Army, and he and his wife, Milka, are
    now the proud owners of Trinity Farms in Greenville, Michigan.
    It is great to have you here today, and thank you for your
    service to our country and for taking time away from planting
    corn to join us and tell your story.
        As many of us know, a hundred years ago, as the Chairman
    said, in 1916, Congress passed the Federal Farm Loan Act to
    address the serious problems facing our farmers and
    agricultural producers, a problem that threatened the long-term
    success of our rural economy. At that time, obtaining reliable
    credit was often unaffordable in most rural areas. Many lenders
    avoided farm loans altogether because the inherent risks of
    weather and price swings made lending to farmers unappealing.
    As a result, Congress established the Farm Credit System to
    fill the gap in credit and provide American farmers and
    producers the financing they needed to expand in good times and
    to weather the bad times.
        A hundred years later, the Farm Credit System continues to
    ensure that producers of all types and sizes have adequate and
    reliable access to credit. In fact, farm credit lenders
    nationally provide more than $200 billion in loans to rural
    America. In my home State of Michigan, GreenStone Farm Credit
    provides more than $5 billion in loans to producers, including
    to more than 17,500 small, new, and beginning farmers that need
    access to capital. As we will hear from Mr. Welder, it was
    exactly this type of support that helped him secure land and
    create a new life for himself and his family after his military
    service.
        However, as we look ahead to the next several years, we
    know that we are entering a period of low commodity prices,
    especially compared to what we have seen in the past few years,
    which will make it more challenging for farmers to make ends
    meet. This year alone, net farm income is projected to decline
    for the third consecutive year, a drop of 56 percent from 2013,
    and thank goodness, Mr. Chairman, we did the farm bill.
        To weather this downturn, American farmers will continue to
    rely on commercial banks, USDA, and our Farm Credit System to
    provide the necessary short, medium, and long-term financing
    that will allow American agriculture to continue and prosper.
        I am pleased that we will also be hearing today from
    lenders on our second panel who play an important role in
    providing credit throughout the entire food supply chain.
        I would also like to briefly mention the longstanding
    support of the Farm Credit System by Senator Pat Leahy. I
    understand that he is in an Appropriations Committee meeting
    and will be unable to attend today. But, Mr. Chairman, as Chair
    of the committee during the 1990s when many important reforms
    were made to the Farm Credit System, Senator Leahy has asked me
    to submit for the record a transcript of his and then-Ranking
    Member Lugar's floor statements during the consideration of one
    of those major changes, and I would ask the Chair to enter this
    into the record.
        [The information of Senator Leahy can be found on page 46
    in the appendix.]
        Chairman Roberts. Without objection, it is so ordered.
        Senator Stabenow. Thank you, Mr. Chairman.
        Senator Thune. Mr. Chairman, could I welcome a South Dakota
    witness?
        Chairman Roberts. I would be delighted to have you do that.
    Why do you not just go right ahead.

     STATEMENT OF HON. JOHN THUNE, U.S. SENATOR FROM THE STATE OF
                              SOUTH DAKOTA

        Senator Thune. Dallas Tonsager has a farming operation with
    his brother in northeastern South Dakota. He has also served as
    Under Secretary for Rural Development at USDA, someone who has
    a great and distinguished career in public service here. Thank
    you for being here and welcome to the committee. Give your
    family our best, all right. Thanks, Dallas.
        Chairman Roberts. Thank you, Senator.
        Today, I am pleased to welcome our first panel of witnesses
    who represent the Farm Credit Administration, led by our
    Chairman and CEO, the Honorable Kenneth Spearman. Mr. Chairman,
    we appreciate your joining us while you recover from a medical
    procedure, note that you are under doctor's orders to wear your
    chapeau. I think that is the proper term. As I told you in the
    back room, I was going to give you a black cowboy hat, a
    ``caboy'' hat, as we say in Dodge City, but we do not want this
    to be a hearing with black hats, so----
        [Laughter.]
        Chairman Roberts. But, you are permitted and you are
    looking good.
        Mr. Spearman, appointed to serve on the Farm Credit System
    Board by President Obama on October 13, 2009, has an extensive
    background working in finance, agriculture cooperatives. From
    1980 to 1991, Mr. Spearman served as the controller of a $100
    million citrus co-op in Orlando, where he handled financial
    management, reporting, and supervision of staff accounts. After
    serving in this capacity, Mr. Spearman went on to become
    Director of Internal Audit for Florida's Natural Growers, and
    then served as an outside director on the Ag First Farm Credit
    Bank Board until his appointment to the Farm Credit
    Administration Board.
        Mr. Spearman is also a U.S. Army and Vietnam veteran. We
    thank you, sir, for your service.
        Mr. Spearman, thank you for your service to our country. I
    look forward to hearing your testimony today after I introduce
    your fellow Board members.
        Our next witness on this panel is the Honorable Dallas
    Tonsager, already introduced by my distinguished colleague. Mr.
    Tonsager brings decades of experience working on issues
    concerning farm credit, rural America, and is now on his second
    stint serving on the Board of the Farm Credit Administration.
        In addition to being a Board member of the Farm Credit
    Administration, Mr. Tonsager serves as Chairman of the Board of
    the Farm Credit System Insurance Corporation, which is
    responsible for insuring the timely payments of principal and
    interest on obligations issued on behalf of the Farm Credit
    Banks. Before being nominated by President Obama to serve on
    the Farm Credit Administration Board, Mr. Tonsager served as
    USDA's Under Secretary for Rural Development from 2009 through
    2013, where he worked to expand broadband and other critical
    infrastructure projects all throughout rural America.
        Mr. Tonsager hails from South Dakota, where he grew up on a
    dairy farm. It is a pleasure to have you back before the
    committee, Dallas, and I look forward to your testimony.
        Our third witness on the panel is the Honorable Jeffery
    Hall. Mr. Hall was appointed to the Farm Credit Administration
    Board by President Obama on March 17, 2015. Prior to his
    appointment, Mr. Hall was President of an association
    management and consulting firm he co-founded in 2009.
        Before working in the private sector, Mr. Hall was the
    Kentucky State Executive Director for USDA's Farm Service
    Agency, where he was responsible for farm program and farm loan
    program delivery and compliance, and was a scout for the
    University of Kentucky's basketball team, as I understand. I
    made that up, so you can leave that out.
        [Laughter.]
        Chairman Roberts. Prior to his time at the Department, Mr.
    Hall served as an Assistant to the Dean of Agriculture at the
    University of Kentucky and previously served as a Senior Staff
    Member to our Majority Leader McConnell from 1988 to 1994.
    Altogether, he has enjoyed a 30-year career in ag policy.
        Jeffery, thank you so much for joining us today.
        I look forward to hearing all three of your testimonies
    today, asking you some questions about the state of the Farm
    Credit System.
        Mr. Spearman, why don't you kick things off.

     STATEMENT OF HON. KENNETH A. SPEARMAN, CHAIRMAN, FARM CREDIT
                 ADMINISTRATION BOARD, McLEAN, VIRGINIA

        Mr. Spearman. Thank you, Mr. Chairman.
        Chairman Roberts and Ranking Member Stabenow and members of
    the committee, it is a privilege to appear before you today to
    report on the mission of the Farm Credit Administration. I have
    a written statement to submit for the record.
        President Obama appointed me to the FCA Board in October of
    2009 and designated me FCA Chairman and CEO in March of last
    year. I have the pleasure of serving on the Board with two very
    distinguished colleagues, Dallas Tonsager and Jeff Hall, whom
    you will hear from in a moment.
        FCA is an independent federal agency that regulates and
    examines the banks, associations, and related entities of the
    Farm Credit System, including Farmer Mac. Our responsibility is
    to ensure that the System meets its Congressional mission to
    provide a dependable source of credit for agriculture and rural
    America.
        FCA was created by an Executive Order of President Franklin
    Roosevelt in 1933. During the agricultural credit crisis of the
    1980s, this committee restructured FCA, giving it regulatory
    and enforcement powers similar to those of other federal
    financial regulators. FCA is not an appropriated agency. We are
    funded primarily through assessments paid by System
    institutions.
        The Farm Credit System is the nation's oldest government-
    sponsored enterprise. It is a nationwide network of borrower-
    owned cooperative financial institutions. Currently, the System
    includes four banks and 74 direct lending associations. The
    banks provide loan funds to associations, which in turn provide
    operating loans and long-term real estate loans to farmers,
    ranchers, and other eligible borrowers. One of the System's
    banks also has the authority to lend to agricultural
    cooperatives and rural utilities.
        Farm Credit Banks and associations cannot take deposits.
    The System obtains loan funds by selling securities on the
    national and international money markets. The securities are
    not guaranteed by the federal government.
        The System is the only GSE that makes loans at the retail
    level. It was established to provide a dependable source of
    competitive credit to farmers, ranchers, and farm cooperatives.
    Its mission is to serve American agriculture in good times and
    bad.
        After several years of record farm income, the agricultural
    industry has entered a new period of lower profits. In 2016,
    net farm income is forecast to decline for the third straight
    year. Times like this underscore our nation's need for
    dependable, affordable agricultural credit. Because Congress
    had the foresight to establish the Farm Credit System some 100
    years ago, our farmers and ranchers have been able to provide
    abundant, affordable food and fiber to people at home and
    around the world.
        Of course, stress in the farm industry can also create
    stress for the Farm Credit System and we are already seeing
    signs of stress in a few institutions. However, I am happy to
    report that System banks and associations are fundamentally
    safe and sound, as is Farmer Mac.
        FCA is taking steps to make sure the System remains safe
    and sound. The Board recently finalized a rule that updates our
    capital regulations and aligns them with the Basel III accord.
    We continue to emphasize robust internal controls in all System
    institutions and to monitor for emerging risks.
        Regarding the System's similar entity authority, we have
    taken steps to ensure that it uses this authority only for the
    purpose of mitigating risk, and, as always, if we find a
    transaction that is outside the limits and purpose of the law,
    we require the institution to take corrective action.
        We also emphasize mission fulfillment. The System must
    serve all eligible creditworthy potential borrowers regardless
    of race or gender and regardless of the commodities they
    produce or the size of their operations. We want to make sure
    the System also serves small organizations and operations that
    produce organic and value-added foods for local markets.
        Mr. Chairman, this concludes my opening statement. Thank
    you, and I will be happy to answer any questions.
        [The prepared statement of Mr. Spearman can be found on
    page 73 in the appendix.]
        Chairman Roberts. Mr. Tonsager.

       STATEMENT OF HON. DALLAS P. TONSAGER, MEMBER, FARM CREDIT
        ADMINISTRATION BOARD, AND CHAIRMAN, FARM CREDIT SYSTEM
             INSURANCE CORPORATION BOARD, McLEAN, VIRGINIA

        Mr. Tonsager. Chairman Roberts, Ranking Member Stabenow,
    and members of the committee, thank you for the opportunity to
    testify today.
        I am pleased to now be serving a second term on the Board
    of the Farm Credit Administration with my distinguished
    colleagues, Chairman Spearman and Board Member Hall. I have
    previously served on the FCA Board from 2004 to 2009.
        At the outset, I want the committee to know of my absolute
    commitment to the continued safety and soundness of the Farm
    Credit System as we navigate through the downward cycle in the
    agricultural economy. Rural America and the Farm Credit System
    are important to me, both in my role as an FCA Board member and
    in my personal connection to farming and rural America, as I
    was raised on a farm in South Dakota and was engaged in farming
    for over 40 years.
        The Farm Credit System, which is cooperatively owned by
    farmers and ranchers, was well positioned to persist through
    the 2008 financial crisis. In fact, the System's capital and
    liquidity positions, risk profile, stress testing capacity, and
    lending practices in the agriculture sector have all
    significantly strengthened over the last eight years.
        With the challenges now facing the agricultural economy,
    FCA's oversight role and the Farm Credit System's purpose to be
    there for agricultural producers and rural communities in bad
    times as well as good times are more critical than ever. I
    lived through the difficult years in agriculture in the 1980s
    and well understand the importance of the Farm Credit System to
    farmers and ranchers in such times. I have great confidence in
    the FCA's ability to ensure that the Farm Credit System
    institutions remain a source of sound, adequate, and
    constructive credit to those farmers and ranchers struggling to
    keep their ag operations going and remain in their rural
    communities.
        In addition to my duties as a Farm Credit Administration
    Board member, I serve as Chairman of the Farm Credit System
    Insurance Corporation along with my colleagues on the FCA
    Board. Congress created the Insurance Corporation to ensure the
    timely payment of principal and interest on the debt issued by
    the Farm Credit System banks. Congress also gave the Insurance
    Corporation the responsibility to provide assistance to
    troubled Farm Credit System institutions and to act as a
    conservator or a receiver for failed System institutions.
        By law, the Insurance Fund must maintain a secure base
    amount equivalent to two percent of the adjusted insured
    obligations of the System banks, and there is currently $4.1
    billion in the Insurance Fund, an amount that is marginally
    under the base amount. This fund acts as a safety net for the
    farmer- and rancher-owners of the Farm Credit System in
    addition to the protections afforded by the joint and several
    liabilities agreements of the System banks.
        That concludes my opening statement. Thank you to the
    committee, and I look forward to your questions.
        [The prepared statement of Mr. Tonsager can be found on
    page 98 in the appendix.]
        Chairman Roberts. Mr. Hall.

        STATEMENT OF HON. JEFFERY S. HALL, MEMBER, FARM CREDIT
                 ADMINISTRATION BOARD, McLEAN, VIRGINIA

        Mr. Hall. Thank you, Mr. Chairman, Ranking Member Stabenow,
    and members of the committee. My name is Jeff Hall, and it was
    just a little over a year ago I sat before this committee, and
    I appreciate your confidence in me in appointing me and I
    appreciate the chance to come back today as a Board member of
    the Farm Credit Administration.
        The Farm Credit Administration is an independent arm's
    length regulator of the Farm Credit System and Farmer Mac. Our
    agency examines System institutions for safety and soundness
    and compliance with laws and regulations. FCA exercises
    increased oversight with institutions at a higher risk.
        The Farm Credit System was created to provide a permanent,
    reliable source of credit to U.S. agriculture. When Congress
    enacted the Federal Farm Loan Act in 1916, credit was not
    always available and affordable in some rural areas. Many
    lenders avoided farm loans due to the inherent production and
    price risk of agriculture.
        The foundation of the Farm Credit System is its cooperative
    structure. Agriculture has changed in many ways and will
    continue to change, but the guiding principles of the
    cooperative model continue to stand the test of time. Member
    ownership and governance are key ingredients of the System's
    success.
        As Chairman Spearman has reported, the Farm Credit System
    is safe and sound. The health of the System today is due in no
    small part to the actions of this committee. During the
    agricultural credit crisis of the 1980s, Congress made some
    very important changes to the Farm Credit System that gave it
    the opportunity to emerge stronger and better able to serve
    rural America and meet its mission.
        As you well know, farm income is projected to decline for
    the third consecutive year. Virtually all sectors of commodity
    prices are lower than any time in the last five years. Farm
    debt continues to increase, and many farmers and ag businesses
    have been forced to draw from the equity they had built.
    Fortunately, agriculture has entered this down cycle from a
    position of strength, with historically low interest rates
    helping to hold down debt levels.
        There are challenges ahead and the Farm Credit System is
    well situated to remain a reliable source of credit.
        Chairman Roberts told me as I sat at this table a little
    over a year ago to get outside of Washington and go meet people
    in the System. I have prioritized my travel to meet with
    borrowers, association boards, and employees who are dealing
    with these challenges on a daily basis. Also in my visits, I
    learn about the consequences of the rules and the regulations
    imposed by the Farm Credit Administration. My visits have
    helped me greatly in my role as a Board member. Without the
    input from the regulated community, my job would be much more
    difficult. I like to say, we will not always agree, but I will
    always listen.
        At our March Board meeting, the Farm Credit Administration
    Board approved a new capital rule which will require the System
    to hold on to more and higher quality capital. By raising the
    capital requirements, farmers' investment in their associations
    is better protected from impairment.
        The Farm Credit Administration Board also adopted guidance
    to the System on the use of similar entity lending activity. I
    understand that reputation risk is a valid concern and adopting
    this guidance will increase the examination and reporting
    requirements. It gives FCA an added tool to monitor similar
    entity lending activity. It also gives us an indication whether
    additional guidance from this Board is necessary.
        Both the capital rule and the similar entity guidance are
    good examples of the additional focus on internal controls.
    From the beginning of my term, Chairman Spearman has made
    internal controls a stated priority.
        Modern agriculture and the financial service industry are
    more complex than ever. The Farm Credit Administration and the
    System will continue to strengthen the internal controls in
    order to maintain your confidence and carry on the legacy of
    service to American agriculture and rural communities.
        Thank you again for inviting me to testify. There are many
    challenges that face the System. Having been a Federal Land
    Bank borrower in the 1980s, I can say with confidence that the
    System is much better and much stronger than it was 30 years
    ago. I do not consider myself an advocate for the Farm Credit
    System. I do consider it my responsibility to ensure a safe and
    sound source of credit to eligible borrowers and owners of this
    cooperative. When the System is safe and strong, the agency is
    doing its job as a regulator, and the benefits of a dependable,
    competitive source of credit will help bring prosperity to
    rural America.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Hall can be found on page 70
    in the appendix.]
        Chairman Roberts. Thank you all again for appearing today
    before our committee and for your statements.
        Mr. Spearman, the reports I cited in my opening statement
    by the Kansas City Fed and Kansas State University paint a very
    bleak economic picture for farmers all throughout the country.
    I do not like saying that and you probably do not like agreeing
    to it.
        Now, I served in Congress in the 1980s, during the last
    farm crisis, the big one, and I am confident that nobody--
    nobody--wants to see a repeat of those tough times. Today, what
    are the conditions of the farm economy and how do they differ
    from those present 35 years ago? I am hopeful they show we are
    not headed for another crisis. Even more importantly, what
    safeguards are in place to ensure our farmers are protected in
    the event we do see two, three, four, five more years--I hope
    not, but if that is the case--of low commodity prices?
        Mr. Spearman. Mr. Chairman, thank you for that question.
    The Farm Credit System, as the three of us all stated, is well
    capitalized at this time. It is well positioned to withstand
    the possible downturns in the agriculture economy that are
    looming.
        The capital position is very strong. There is 16 percent
    capital, with $48 billion or so, roughly, in capital. The asset
    positions are strong in the System. The managements that are
    currently at the institutions are, I do not want to say a lot
    better, but they are kind of more informed, I think, today than
    they were back in the 1980s. The earnings are--were very well
    in the System, as you can see from our financial statements,
    and liquidity ratios are over the top. In fact, they are more
    than twice what the regulations require of 90 days.
        I think that the System is well positioned, again, to
    withstand any downturns. Of course, there could possibly be
    some black swans out there that we are not aware of, but we
    have systems in place at the agency to keep us abreast of what
    those might be, and as an agency, we will take measures that
    will end up protecting the System more. Thank you.
        Chairman Roberts. I appreciate that, Mr. Spearman.
        Mr. Tonsager, your role as Chairman of the Farm Credit
    System Insurance Corporation is to ensure proper maintenance of
    the Farm Credit Insurance Fund in order to safeguard the timely
    payment of principal and interest on the debt issued by the
    System banks. This funding comes from a collection of premiums
    from System banks.
        As you noted in your written testimony, in 2013, when times
    were pretty good, the Farm Credit System Insurance Corporation
    and the Federal Financing Bank entered into a $10 billion line
    of credit agreement. Please explain what financial conditions
    within the Farm Credit System prompted this decision when we
    were in a much better situation, and what authority exists
    allowing the Insurance Corporation to take out this line of
    credit.
        Mr. Tonsager. The line of credit can only be used in times
    of economic emergency for the United States in general, not for
    agriculture specifically. It is a liquidity line designed to
    ensure the flow of capital to the Farm Credit System should
    there be an event similar to 2008 that might occur again. We
    simply cannot use it unless the Federal Financing Bank agrees
    with us, that it cannot be used in the event that the System
    fails to fund, or properly manage itself. It can only be used
    in those economic emergency occasions.
        Similar lines of credit are available to the FDIC and to
    the National Credit Union Administration. The agency at that
    time felt it prudent, after watching what occurred in the 2008
    time frame, to make this line of credit available and to have
    it there to assist us should there be a liquidity event within
    the markets.
        Chairman Roberts. Well, that was not only prudent, but you
    were a prophet, these rather bleak times we are in. I
    appreciate that.
        Let me ask a question of the full panel, so anybody is
    welcome to answer. Do not be bashful. One of the main
    criticisms we hear about the Farm Credit Administration is that
    FCA's oversight of System lenders' loans is not thorough
    enough, that loans are being approved that fall outside the
    System's charter or scope. How do you respond to that
    criticism, and furthermore, how does the Farm Credit
    Administration execute its regulatory duties to ensure that
    System members are able to serve farmers, but in a way that
    complies with the statute? Feel free.
        Mr. Spearman. Mr. Chairman, what you may be referring to
    there is the similar entity lending process that the System is
    involved in. This was a practice that was included in the Act
    in 1992 as a risk mitigator. There are--one of the primary
    criteria for participating in that program is that they be
    ineligible loans that are functionally similar. There are
    limits on what the participation that these institutions can
    involve themselves in these type of loans, and the agency
    drafted and approved a bookletter to provide guidelines for the
    System to actually update their procedures and get more
    approval from the Board on any of these loans that are entered
    into. The bookletter also addressed the possible reputational
    risk with involving themselves in these type loans.
        Chairman Roberts. I appreciate that.
        Mr. Hall, in your testimony, you talked about a capital
    rule recently approved by the Farm Credit Administration Board
    this past March, just a couple of weeks ago. Can you expand a
    little further on this rule, the rationale for approving it,
    and explain what you hope it will accomplish.
        Mr. Hall. The primary goal is to make the System more
    comparable to other banking institutions. The money comes from
    Wall Street, and when you have common terms and common factors
    that people on Wall Street look at buying paper, or buying the
    System's paper, this comparability was an important step. It is
    a program that I think the agency has been involved in for
    about three or four years, proposing rules, and in March, the
    Board approved the adoption of that rule.
        Chairman Roberts. I appreciate that.
        Senator Stabenow.
        Senator Stabenow. Thank you very much, Mr. Chairman, and
    again, thank you, to all of you.
        I wonder if you might just expand a little bit, because I
    am sure we are going to hear more about similar entity
    authority and some of the high profile cases that there have
    been concerns raised about, if you could expand a little bit
    more on steps that you have taken to address that, and again,
    how this mitigates risk from your perspective. Any of you are
    welcome to answer that, so Mr. Spearman.
        Mr. Spearman. Okay. I will start, Senator. Thank you. As I
    mentioned previously, some of the steps that have been taken
    have been to raise or heighten awareness that these type loans
    may create some controversy. There is--the Act does permit
    these type loans as a risk mitigator, and the way that it does
    is that the System is a monoline lender. They have to be there
    for agriculture in good times and bad.
        The guidelines that we put out in our bookletter are that
    the Board needs to be more involved in these type loans and
    that there--the policies and procedures are examined by our
    examiners to make sure that they have been updated and that
    there is--the institutions are keenly aware that these are
    controversial type loans.
        Senator Stabenow. Would anyone else like to respond? Yes.
        Mr. Tonsager. Yes, if I could. Thank you, Senator. I would
    just like to mention that Congress over the years has provided
    several elements within the Farm Credit Act that require banks
    and the Farm Credit System to work together, and this is one of
    those elements. For every dollar that is invested in a similar
    entity loan, there is a dollar from a private banker. These
    loans cannot be done without a private banker involved with it,
    and there has to be at least a 50 percent involvement by
    another party other than the Farm Credit System.
        I believe there has been, there is some misunderstanding
    about these kinds of loans. They have been authorized for many,
    many years. They include, for CoBank's perspective, utility
    loans, communication loans, and other types of loans. You not
    only broaden the capacity of the System by having these loans,
    you strengthen the relationship with bankers in this particular
    area and other areas of the System. There is literally billions
    and billions of dollars done together with the banking
    community each year and thousands and thousands of transactions
    between the Farm Credit System and banking.
        Senator Stabenow. Thank you.
        Mr. Hall, did you want to add anything?
        Mr. Hall. The only thing I would add is the reason behind
    the similar entity lending back in the 1990s was to allow the
    institutions to broaden their base of risk. They are
    functionally similar. They are not eligible loans, so I think
    that is where some of the confusion comes in. But, I think that
    we have monitored as an agency similar lending activity. We
    have asked for additional oversight and we will continue to
    monitor as an agency to make sure it is proper and appropriate.
        Senator Stabenow. Thank you.
        Changing a little bit to a different area of concern in
    terms of risk in agriculture, and that is the decline in the
    total number of farms, which is certainly something that we are
    all concerned about. According to the USDA, from 2014 to 2015,
    the United States lost more than 18,000 farms and over one
    million acres of farmland. The trend in the average age of the
    American farmer, as in all of our areas in the economy, the
    average age is 58 years old. I wonder if you might speak to and
    describe some of the work that your institutions are doing to
    support new and beginning farmers, which are very, very
    important, obviously, to all of us. Mr. Spearman.
        Mr. Spearman. Thank you, Senator, for that question. Yes.
    The YBS program that you alluded to was a program that was
    added to the Act in the early 1980s and it was added with the
    purpose of providing a vehicle to bring more young, beginning,
    and small farmers into the agricultural sector.
        Some of the provisions that are provided under that Act is
    that there could be lesser interest rates charged in the
    underwriting process. Education is provided for those folks who
    are not very familiar with some of the operations of
    agriculture. We have passed a bookletter that encouraged
    farmers who borrow from the System to be more involved with the
    youth aspect of farming. The lenders are--the bookletter
    addresses the fact that the System institutions who lend the
    money actually survey their territories and make sure that they
    are addressing underserved folks within the territories.
        Senator Stabenow. Thank you.
        Would anyone else like to respond to the role that you have
    with new and beginning farmers? Yes, Mr. Tonsager.
        Mr. Tonsager. I think it has been, for the Systems mission,
    it is a significant success story to look at the data that has
    been accumulated regarding the growth in those loans in those
    areas, and I think the System has taken this very seriously, in
    my discussions with them, the requirement to do this, and they
    have taken it to heart and actually aggressively pursued this
    program.
        They each have their own individual programs designed for
    their region. We examine for them to execute those programs.
    The report is given to us each year, and we, in turn, report to
    Congress each year about the results of that effort.
        Senator Stabenow. Great.
        Mr. Hall, did you want to add anything?
        Mr. Hall. Just one comment. Based on my previous experience
    working with the Farm Service Agency, I note there are a lot of
    partnerships between the System and the Farm Service Agency on
    guaranteed programs that are available. I know the System is
    very active in working with other partners and making sure that
    this population is served.
        Senator Stabenow. Thank you, Mr. Chairman.
        Chairman Roberts. Senator Tillis.
        Senator Tillis. Thank you, Mr. Chairman.
        First, I am from North Carolina. We have a highly
    diversified farming community and some farmers are doing pretty
    well right now, but others are struggling. I just want to echo
    that we need to be careful. If this downturn in prices
    continues, we could see a greater number of farmers harmed over
    time and we need to make sure we are working to get things back
    on track.
        Second, I want to talk about some of the future risks to
    farmers and the agricultural sector. It may seem odd asking
    this panel about GMOs, but is the Farm Credit Administration
    looking ahead and seeing how the different fixes for GMO
    labeling will affect farmers? If we do not fix this labeling
    issue, then people like Kellogg's and Campbell's, and a number
    of other major producers of food, are going to start
    reformulating. Over the course of the next few years, sugar
    beets will end being an input to most sugar in favor of
    sugarcane. Over 90 percent of all the corn grown in the United
    States is a product of GMO. I do not know what Campbell's is
    going to do to replace that in their soups.
        The same refomulatory dilemma that sugar and corn present
    will happen, to a certain extent, with white potatoes. In 2014
    53 percent of all the sweet potatoes grown in the United States
    were grown in North Carolina. Roughly seventy percent of the
    exports were from North Carolina. None of them are GMO. I
    assume that Campbell's will decide to replace white potatoes
    with sweet potatoes. It would be good for North Carolina, not
    necessarily good for the white potato growing states.
        The point that I am making is this labeling issue
    represents a major risk in terms of demand in the near future.
    Has FCA looked at this in terms of your portfolios to analyze
    what it means if a labeling law completely shuts demand down
    for certain commodities, say, sugar beets?
        Mr. Spearman. Senator, a very good question. What we do as
    a safety and soundness regulator is to try and examine all
    risks. We do have economists on staff who report to us
    regularly----
        Senator Tillis. Have these economists done analysis on the
    particular policy and if Congress does not act, what the near,
    intermediate, and long-term effects will be on some of these
    commodity producers?
        Mr. Spearman. Well, they analyze all risks within the
    System, some known and some unknown to others----
        Senator Tillis. Would it be possible for my staff to get in
    touch with you to see to what extent they recognize the impact
    reformulation by Campbell's and Kellogg's and the major food
    producers will have on the farm economy? These food companies
    will increase demand that will exceed our own capacity, say,
    for sugar, corn, soybeans. If these commodities that are grown
    in the United States are not available, they will source them
    from other parts of the world. They will find other sourcing
    inputs, and it seems to me that will have a devastating impact
    on commodity prices. Unless economists have taken that analysis
    into account, recognizing this reformulating starting right
    now, it will start on steroids in July and August if nothing is
    done regarding this labeling issue. It is not one of these
    five-or ten-year market disruptions. This is probably a one-or
    two-year market disruption.
        I would be very interested in getting any analysis on how
    ingredient reformulation would affect the portfolio of farmers
    who are in the crosshairs of these target commodities. There is
    no question in my mind that the major food producers, those who
    put cans and boxes on the shelves, are going to reformulate to
    the maximum extent that they can. When you are talking about
    commodities that are in the 90th percentile in terms of GMO
    products--safe products, I might add, at least according to the
    FDA, the Department of Agriculture, and the EPA--what are
    farmers going to do? Who are they going to sell to? If they do
    sell, with the demand being down, to what extent does this
    affect a portfolio, a financial portfolio in terms of farmers
    ability to pay their bills?
        I do not expect you to answer that question now. You
    probably did not expect to get this question, and frankly, when
    I came into the room, I did not expect to ask the question.
        [Laughter.]
        Senator Tillis. But, this is an example of risks that are
    dependent upon Congressional action or inaction, and I think it
    is something that you need to look at, because this labeling
    issue is a potential looming crisis for some of the farmers out
    there.
        I will follow up with questions to the agency so that we
    can get specific information on how this could be destabilizing
    to the sugar beet growing states, the corn growing states, the
    potato growing states, the soybean growing states. I mean, it
    is an equal opportunity disrupter and I think we need to get
    some financial analysis behind it.
        Thank you. Thank you, Mr. Chairman.
        Chairman Roberts. Let me say before I recognize Senator
    Bennet, on behalf of the Ranking Member, our distinguished
    Ranking Member, that the responsibility and requirement that
    Mr. Tillis just raised with regards to agriculture
    biotechnology, note the difference. As opposed to GMO, it is
    just called agriculture biotechnology, ABT. It is a good
    question, and it is a challenge that the Farm Credit System
    ought to be thinking about, as well as every lender that we
    have at our disposal within the world of agriculture.
        That responsibility is right here in this committee, and
    also right in the Senate of the United States. The House has
    acted. We will act. The distinguished Ranking Member and myself
    and staff have been working overtime to try to come to an
    agreement that we could bring to the floor where we could get
    60 votes.
        But, I think Mr. Tillis' admonition is a very good one,
    more especially to everybody in the farm lending field.
    Reformulation is a pretty fancy Senate word for we are not
    going to buy what you are selling, and that is happening today,
    as we speak, with the sugar beet producers. We know that we
    must act. Everybody on this committee knows we must act. I want
    you to know that, but I also want you to know that Mr. Tillis
    has raised a very, very important point.
        Senator Tillis. Yes. Mr. Chairman, if I may, it is just
    that we need to put a face on who is affected by this policy,
    and it is farmers. It is farmers that have got crops in the
    ground now. They have got plans to put crops in the ground next
    year. The big businesses will find out what they can buy to
    avoid what I think is ill advised policy, and the first
    evidence of this is in Vermont. They will be able to make the
    change because they have the resources and the reach to do it.
    The farmers do not.
        Thank you, Mr. Chairman.
        Chairman Roberts. Senator Bennet.
        Senator Bennet. Thank you, Mr. Chairman. Thanks for holding
    this important hearing, and I wish you and the Ranking Member
    well in your negotiation. Time is not on our side.
        I want to thank the witnesses for being here today and for
    your prudent oversight of the FCA. Mr. Chairman, you said that
    the mission of the FCA is to serve farmers and ranchers in good
    times and in bad times. As has been said, farmers and ranchers
    across the country are facing real financial hardships spurred
    by low commodity prices. Producers are bringing in less
    revenue, but their overall costs of farming have increased year
    over year and are forecasted to increase next year, as well. On
    top of that, persistent drought conditions have added extra
    volatility, which makes it clear to me that farmers need all
    available options when it comes to lending, and the Farm Credit
    System was designed to mitigate against these fluctuations and
    the risk posed by farming and ranching.
        I wonder whether you could describe the role of the Farm
    Credit System, particularly in tough economic times, what role
    it plays in rural communities facing these economic hardships,
    and I would be happy to hear anybody on the panel address them.
        Mr. Tonsager. Sure. Thank you, Senator. I think that the
    obligation was made clear to us in the 1980s, in the struggling
    time we had back at that time, that there needed to be a level
    of strength and commitment, and in rural America, these are
    farmer-owned cooperatives. These farmer board members are
    extremely committed to their communities, and that is number
    one, that basic governance that occurs within that.
        I think the System has an obligation to make sure the
    System remains safe and sound, that it is a reliable lender
    through that time, but it also has an obligation to make sure
    to work closely with producers, and I think they have developed
    pretty good strengths in their loan officers and how they work
    with clients and how they make sure they get the best
    opportunity for financing. I think that the financial strength
    of the System and the capacity of the System in their lending
    and working with producers is going to make a lot of
    difference.
        In the 1980s, we saw a lot of producers that simply could
    not get the credit they needed at the time, or they were
    overextended credit, and so their income was replaced by credit
    and they lost ground. I think one of the critical elements of
    this is how loan officers, both in the Farm Credit System and
    the private sector, work with those individual producers and
    help them recognize the circumstances they are in, fund them if
    they possibly can, or help work with them if it becomes too
    challenging. It is a tough, tough thing that happened that
    time. We lost thousands of producers, and many of them were
    fundamentally personally harmed in the process of doing that.
        Additionally, I would like to add that there are borrower
    rights involved in this. The law requires that the Farm Credit
    System provide rights to borrowers in the event they are
    foreclosed on or acted upon. By law, a process must be followed
    with individual producers when the time comes to make decisions
    about their credit.
        Senator Bennet. Thank you for that thorough answer. Is it
    thorough enough?
        I will ask a second question, then. Last year, Colorado
    producers exported more than $1.8 billion in farm goods to
    countries around the world. Some Farm Credit institutions like
    CoBank, which is headquartered in Colorado, are engaged in
    export financing to support producers as they look to markets
    abroad. Could you talk a little bit about the sort of growth
    that we are seeing in export financing for ag in this country.
        Mr. Hall. I think part of the change we have seen is
    previous USDA programs like GSM programs have been replaced or
    substituted with other private credit funding, and I think the
    ability for CoBank, in particular, to step up and add that kind
    of financing option helps improve the export market. Obviously,
    when you are dealing with billions of dollars, you are going to
    have to have some line of credit to be able to participate in
    the international markets.
        Senator Bennet. It is becoming increasingly an important
    part of our rural economy, these exports. Eighty percent of the
    wheat that is grown in Colorado is exported from Colorado. Our
    dairy is exported, as well, and we are looking to open up these
    new markets and this can help.
        Thank you, Mr. Chairman.
        Chairman Roberts. I want to remind members that we will
    soon have three votes. We are going to keep the hearing going
    by alternating who holds the gavel. I appreciate everybody's
    help and patience.
        Senator Ernst.
        Senator Ernst. Thank you, Mr. Chairman.
        Thank you, gentlemen, for joining us here this morning. I
    would like to talk about different groups that might be given
    funding through the FCS, groups like veterans or other minority
    groups. Are there certain areas that maybe you target or would
    like to see more participation, whether it is women farmers or
    ranchers? If you could delve into that a little bit, maybe talk
    if you have some of those programs where you are looking at
    veterans or others that want to get into farming, ranching, any
    opportunities that we might be able to express to our
    constituents.
        Mr. Spearman. Thank you, Senator. The YBS program provides
    an excellent entre for nontraditional agriculture. That
    program, it was structured for young, beginning, and small, but
    also we have expanded it to some degree with our rule, our
    diversity and inclusion rule that we passed a couple years ago,
    where we requested that the mandated institutions look at their
    system, look at their--the area that they operate in, their
    district, and because the mission of the System is to serve all
    qualified creditworthy folks. The System is doing that, and we
    are examining for it and we are definitely seeing a lot more
    improvement, at least since I have been on the Board,
    particularly in veterans areas. Also, thank you for your
    service.
        Senator Ernst. No, thank you. No, I appreciate that. Any
    other thoughts or examples?
        Mr. Tonsager. I would like to say the FCA Board has been
    learning itself. We traveled together to Pine Ridge Indian
    Reservation last year to explore the challenges of lending in
    Indian country and got a great experience from that visit.
        Senator Ernst. Very good.
        Yes, Mr. Hall.
        Mr. Hall. I would just add, I visited Texas just a few
    months ago and visited with a young producer who was a veteran,
    did not have much agriculture experience, but has become very
    successful as a borrower in the Farm Credit System. He was
    complimentary of the support that he receives and the other
    educational programs that are available.
        I will also mention another example closer to home, from
    Kentucky, a young lady who used to be an employee of the Farm
    Credit System. She and her husband are involved in locally
    grown, community supported agriculture----
        Senator Ernst. Oh, good.
        Mr. Hall. --and recently recognized as one of the farm
    women of the year, and I know that they are System borrowers.
    There are great examples out there, but I will say there is
    always more that we can do.
        Senator Ernst. Very good. Well, I appreciate your work with
    both veterans and others that might have challenges getting
    into farming. I think it is really important that the
    opportunity exists out there for them, so thank you for doing
    that.
        Senator Tillis had brought up an interesting perspective
    with ABTs, or GMOs, whatever the term might be that we decide
    to use for different types of commodities. But, that does
    create a wrinkle that is out there. Whether you are facing
    challenges with legislation, whether you are facing challenges
    with drought or other natural disasters, which you really
    cannot plan for or predict, but with the outlook of the ag
    economy over the next several years, what are the steps that
    you can take within the Credit System to prepare for that?
    Maybe you could explain how that works.
        Mr. Spearman. Well, Senator, as a safety and soundness
    regulator, as I mentioned previously, we try to examine and
    anticipate all risks that may happen. In fact, our examinations
    are risk based. We try to look at what problems that might be
    on the horizon and we try to develop rules and regulations that
    would help us to do a better job to make sure that the System
    remains safe and sound.
        Senator Ernst. Okay. Are you able to adapt quickly in those
    situations if the rules are going through the Board, reacting
    to the situation on the ground, whether it might be a drought
    or other crisis that you might see?
        Mr. Spearman. Well, I think ``quickly'' may be kind of
    relative. Not fast enough for me, personally, but we do spend
    time with it and we do try to plan and try to see if we can
    help the System do a better job in helping distressed areas.
        Senator Ernst. Very good. Well, thank you, gentlemen. My
    time is expiring. Back to the Ranking Member. Thank you.
        Senator Stabenow. [Presiding.] Thank you very much.
        Senator Casey.
        Senator Casey. Thanks very much.
        I want to thank you for your testimony. Chairman Spearman,
    I wanted to commend you on the answer that you gave about
    beginning and small--young and small farmers and the work you
    are doing there.
        I wanted to also raise, though, a question about some of
    the new risks or new challenges that you face. I know we have a
    lot of evidence that, in light of what happened in the 1980s
    and the difficulties then, that you can learn lessons from that
    that you can apply. I would have to assume, and correct me if I
    am wrong, though, that because of technological innovations and
    both the technology-based financial and ag system we have now,
    that some of those lessons may not apply because the technology
    and other strategies have changed.
        In light of that, if that is true, in light of that, how do
    you assess some of the risks you are going to face going
    forward that might be more based on the limits of the
    technology or based upon other challenges as opposed to the old
    1980s problems that were encountered then?
        Mr. Spearman. Well, Senator, as I mentioned previously, our
    examinations are risk based. Our examiners make a determination
    as to where the greatest exposures might be and our resources
    are pretty much concentrated in that area.
        You bring up a very interesting point there about
    technology. Cyber kinds of threats now are very apparent in
    almost all sectors of our economy. One part of our examination
    is to spend time in the IT area with the institutions that are
    being examined, and if issues are found, corrective action is
    mandated.
        Senator Casey. Well, I hope if, when you encounter those,
    that you bring them to our attention and ask for resources
    where appropriate.
        I also wanted to raise a question regarding when you assess
    that credit stress level in the System's loan portfolio is
    within, well within risk, within the risk bearing capacity, in
    light of that, but also when you reference declining protein
    and dairy product and grain prices driving a decline in
    profitability, I guess it follows from that that you will
    experience maybe moderate loan growth. If you could just
    pinpoint just for 2017, as best you can, what is your outlook
    just in terms of 2017 and loan repayments.
        Mr. Spearman. Well, Senator, one of the points that we look
    at when we make determinations for where to focus our efforts
    in our examinations is what is going to be anticipated in the
    allowance of doubtful accounts for the entities that are being
    examined, and we also look at, because of payback abilities
    there that could have a deleterious effect on an institution
    there. If we see an area of stress in that area, then we would
    indicate to the institution that they may want to look at their
    underwriting standards there because there may be something
    there that they are overlooking when they make a loan.
        Senator Casey. I appreciate that, and I will have some
    questions for the record for the witnesses in the interest of
    time. Thanks very much.
        Senator Stabenow. Senator Brown.
        Senator Brown. Thank you, Madam Chair, and Senator Roberts,
    also.
        Mr. Tonsager, if you would answer this, and then if others
    want to follow up. The farm economy continues to evolve, and we
    have heard discussion, obviously, about prices in the months
    and years ahead. Touch for us on how Farm Credit is equipped to
    withstand a possible higher delinquency rate on loans while
    ensuring continued access to credit for rural America. What is
    the state of the insurance fund? How much capital? Is there
    sufficient capital in the system? Share your thoughts about
    that, if you would, Mr. Tonsager.
        Mr. Tonsager. Well, if I could start with, I think there
    were lessons learned in the 1980s. Coming out of the 1970s,
    many farmers were very highly leveraged, so there were programs
    that allowed them to borrow a lot of money. After that, the
    crisis of the 1980s, the amount of debt leveraged was
    dramatically reduced. I think the System did a pretty decent
    job, as did most lenders, about not over-leveraging credit to
    current borrowers, and I think that is a big difference coming
    into the current circumstances we are in.
        Capital-wise, there are about $50 billion worth of capital
    in the Farm Credit System and about $250 billion worth of
    loans. The total leverage comes to about 16 percent, which is a
    very strong position to be in overall for the position of the
    System.
        Again, as I mentioned earlier, I think the ability of
    working with people on how they borrow money and how they work
    through their challenges is fundamentally different than it was
    previously. There is a lot of relationship lending done where
    that engagement is part of that.
        I think it is incumbent on the agency to be very diligent
    and to closely watch the situation evolve. As Chairman Spearman
    said, the payment rate is excellent still--the debt is being
    repaid. We have very low need for allowances for losses at this
    point. But, that can change quickly as we go into these coming
    years, and so it is necessary to look for that. I think it is
    going to be a balancing act for the agency on how hard we press
    the System to work with producers, whether we stress the safety
    and soundness of the System or the safety and soundness of
    producers. I think we have to keep learning. We have to
    diligently watch the situation evolve and watch what the System
    does in working with producers.
        Senator Brown. Thank you. I think, obviously, if we learned
    anything from 2008, it is the importance of capital, and that
    is Fannie and Freddie and it is Farm Credit and it is the
    nation's major financial institutions.
        Let me shift, and for all three of you to answer this, if
    you would. There has been increasing interest in my state,
    especially in the city I live in, Cleveland, in locally grown
    food. In places like Senator Stabenow's Detroit and in my large
    urban areas, it is an increasingly viable use for land. Do you
    see Farm Credit institutions involved in these areas? What do
    we do to ensure that these non-traditional farmers have access
    to credit?
        Mr. Spearman. That is a very good question, Senator. That
    is particularly an interest of mine. In fact, I initially met
    Senator Stabenow up in Detroit once when I was at a convention
    there for locally grown and urban agriculture issues that were
    being discussed.
        The entre into urban agriculture, the way that I look at it
    is that you are expanding the pie. I think it could help the
    System grow by getting more directly involved with the urban
    agriculture. As my colleague mentioned there, he visited a
    place in Texas, and I also went to a place in Texas where I saw
    a young farmer who started out in his backyard with a little
    garden and now, through the help of the System, he has 200
    acres and he is involved in the CSA program, and one of his
    major customers is Whole Foods.
        Getting out and seeing what is actually happening out in
    the field is something that I hold near and dear and I would
    like to see more of it.
        Senator Brown. Mr. Tonsager or Mr. Hall, any additional
    thoughts on that? Thank you, Chairman Spearman.
        Mr. Hall. I would just add a couple of comments. One of the
    things that the FCA has required is for individual institutions
    to include this in their regular business planning and we
    examine to that. In addition to that, many of the institutions
    actually have local food coordinators where they work with
    people within the system to help support the local producers.
        Senator Brown. Okay. Mr. Tonsager, anything to add?
        Mr. Tonsager. Yes. I think we are very much focused on the
    producer side of this. USDA, the Marketing Service, Rural
    Development, and other agencies, they offer a lot of resources
    to the co-ops or the groups that want to establish niche or
    emerging markets. I think the System is working closely with
    them to help make sure there is a flow of product.
        Senator Brown. Understand--and, obviously, you are more
    rural oriented than urban oriented--my city of Cleveland had a
    population the year I was born of about 950,000. Today, it is
    under 400,000, and there are lots of opportunities, maybe--I
    guess it is the right word--but opportunities for rural
    agriculture that people are really taking advantage of. There
    are a lot of kind of trendy new restaurants that want to source
    locally and can really matter. I just ask all three of you to
    always be aware of that. It is a relatively small part of your
    portfolio, but a crucial area for a lot of the things that you
    all three believe in, so thank you.
        Senator Grassley. [Presiding.] I guess I am the only one at
    the table now.
        [Laughter.]
        Senator Grassley. First of all, even though Chairman
    Roberts is not here, I think it is very good for all of us to
    say it is a very appropriate oversight hearing to have, and
    particularly with regulators to be effectively enforcing our
    rules and regulations that are designed to preserve an
    important System for agriculture. Particularly, this hearing is
    appropriate because of the price of, maybe I should not say all
    agriculture products, but at least in Iowa where we are such a
    corn and bean state, with the production of those being way
    below the cost of production. We count on people like you
    keeping the System very sound.
        I will ask any one of you that want to answer this, but I
    do not expect all of you to have to get in, how detailed are
    the audits of the Farm Credit Administration performed? By
    that, I mean does the Farm Credit Administration randomly pick
    different loan portfolios and examine them line by line to see
    if what is being reported matches up with the actual risk, or
    are the audits more at the 30,000-foot level in the nature of
    looking at totals and final projections?
        Mr. Spearman. A very good question, Senator, for a
    regulator. I would say off the top of my head, it is all three.
    The primary focus of the examinations is risk-based, though, to
    see where could the System be at more jeopardy of not remaining
    safe and sound. Each institution is examined once every 18
    months--a report is issued once every 18 months, but the
    examinations can be ongoing all year. The one bank where we see
    the most risk is examined once a year. These reports are issued
    once a year on that institution. That is pretty much the
    approach that we take in our examination.
        Senator Grassley. You wanted to say something.
        Mr. Tonsager. If you do not mind, I would like to add to
    it. The examiners are extremely well trained; years of training
    are involved. The data comes from each institution all the
    time, so we have an ongoing look at the System's progress. Each
    institution, by statute, must be done every 18 months at a
    minimum. We have sat down and gone through with an examiner
    demonstrating what they go through in the examination process.
    It is extremely thorough. Each examiner reports to the boards
    of directors of each institution privately at the end of the
    examination to make sure the boards of directors are well aware
    of what has occurred in the examination. It is a very, very
    thorough process.
        Senator Grassley. Well, then, would it be--I gave two
    alternatives. Would it be assumed that your answer to my
    question that you randomly pick different loan portfolios and
    examine line by line to see if what is being reported matches
    up with actual risk, is that----
        Mr. Tonsager. Yes. It is----
        Senator Grassley. Is that the way it is done?
        Mr. Tonsager. Well, it is not random, it is planned.
        Senator Grassley. Okay. Now, my second question is, has the
    Farm Credit Administration ever required an institution to
    divest a loan that was not appropriate to the mission of the
    Farm Credit System?
        Mr. Hall. Yes, sir, it has. There have been instances that
    the FCA has taken action, corrective action, and asked for an
    institution to actually divest. While we cannot give you
    specifics here, that has happened, yes, sir.
        Senator Grassley. Okay. My last question. Before I ask the
    question, I hope I am right. By law, Farm Credit lenders cannot
    take deposits. However, many advertise the ability of members
    to, quote, ``advanced conditional payment accounts.'' One of
    these accounts has an online advertisement that as of yesterday
    stated a person could, quote, ``earn interest without tying up
    your funds,'' end of quote. Quote again, another one, ``easy
    access. Your funds are always available to you. Go online and
    use the phone.'' And the last quote, ``complete liquidity,
    contrary to CDs,'' end of quote. Those are online
    advertisements.
        Could you explain to me how these accounts are any
    different from checking or savings accounts? These Farm Credit
    accounts seem to function exactly like checking and savings
    accounts based upon the way that they are being marketed.
        Mr. Spearman. Senator, these accounts are not checking
    accounts. They are--this particular procedure is allowed for
    under the Act and they are actually prepayment or draft
    accounts where borrowers from the System can put funds in to
    pay their loans down.
        Senator Grassley. Then you are telling me--I think you just
    told me that they are not like checking and savings accounts,
    even though the advertisements online seem to lead people to
    believe that.
        Mr. Spearman. I would have to kind of see the advertising,
    but, no, they are not checking accounts.
        Mr. Tonsager. Senator, they are not insured by the Federal
    Deposit Insurance Corporation. They are at risk. Those funds
    are simply accounts that allow producers with long-term credits
    to build up their repayments and have these funds still
    available to them.
        Senator Grassley. Mr. Chairman, I have asked the questions
    that I have to ask this panel. Just in case I do not get back,
    since we have got two more votes, just in case I do not get
    back for the other panel, I have a constituent, Mr. Verlin
    Barker here from Oelwein, Iowa, and I would like to have you
    ask him a couple of questions I was going to ask if I do not
    get back.
        Chairman Roberts. [Presiding.] I would be delighted.
        Senator Grassley. Thank you. Go ahead.
        Chairman Roberts. Thank you.
        Senator Klobuchar.
        Senator Klobuchar. Thank you very much, Chairman Roberts,
    and thank you to all of you.
        Mr. Tonsager, we know how important credit is to rural
    America including the loans, loan guarantees, other financial
    tools offered by the Farm Credit System, as well as commercial
    community and farm banks. We know that each of these lenders
    provides about 40 percent of all farm debt, whether it is
    financing for farm real estate or for farm production.
        Often, the Farm Credit System and our commercial and
    community banks work together on deals for the benefit of
    farmers, ranchers, and producers, and yet other times, Farm
    Credit banks provide loans that are non-agricultural loans. I
    have heard from a lot of our small banks from Minnesota that
    they believe there is an unfair advantage here because of how
    that is being handled. Could you explain what is happening and
    your view on this.
        Mr. Tonsager. Well, there are a couple of things to
    consider, I think. First, so, when the Farm Credit System is
    loaning to an individual producer, if that producer is a full-
    time farmer, the System can lend to him for all of his credit
    needs, including if he establishes other businesses. We have
    had some cases where farmers may choose to start another
    business of some kind and they are allowed by the statute to
    use the funds from the Farm Credit System for that purpose. It
    appears to some people as if Farm Credit is lending to those
    businesses without any link to agriculture. That is one key
    element, I think, that we run into from time to time about
    concern on that matter.
        Senator Klobuchar. Well, one thing that is always true in
    agriculture is that the price of commodities is changing and
    that is why we want to make sure that our end users and farm
    producers can safely use futures and options, and we have had
    some issues with this, as in rural America. It is also a reason
    why providing credit to the agricultural sector is complicated.
    About ten years ago, our grain elevator operators were facing
    some pretty big margin calls, as you know, and about two years
    ago, we saw price volatility in the swine market resulting in
    margin calls of about 300 to 350 million dollars.
        What role do the Farm Credit System banks play when there
    is volatility in commodity prices?
        Mr. Tonsager. I recall when that happened, and the System
    was able to help address that challenge for producers and was
    able to fund several billion dollars to meet the margin calls,
    primarily of grain elevators in that case, which were seeing a
    huge price increase--well, it would be less than ten years ago,
    I suppose--but it was seeing a huge price increase in a very
    large crop, so it was able to meet those needs.
        Senator Klobuchar. Mr. Hall, with experience in farming
    yourself, the same type of question. Do you think the Farm
    Credit System is prepared to handle the current volatility in
    agricultural markets, and how is the current market situation
    similar to those that occurred in 2007 and 2008, or how is it
    different?
        Mr. Hall. I think there are a lot of similarities and I
    think the system is prepared, and as examiners of the system,
    we want to make sure they are prepared as we go into periods of
    more volatility. I will go back even to the 1980s. I think one
    of the big differences between now and then is the cost of
    money. At that point, a lot of the farm income was going to pay
    off debt. I think farmers have paid down debt coming into this
    current period, and I think with lower interest rates, they are
    going to be able to work their way through it. I do not see a
    comparison to the 1980s, but I do see that there is volatility
    and bigger challenges for producers which present challenges to
    the System and us as examiners and regulators.
        Senator Klobuchar. Mr. Spearman, do you want to add
    anything about the volatility in the market and how you think
    Farm Credit is prepared to handle that?
        Mr. Spearman. Well, as my two colleagues have said, the
    System is well positioned, a strong capital position, strong
    liquidity position, strong earnings it is a lot different than
    what it was, I think. Back during the 1980s, there were issues
    with land, where property had been borrowed on and unfavorable
    underwriting standards that today cannot happen. There is--the
    underwriting standards are a lot more modern and a lot more
    favorable. There is a lot that is going on today there that
    just did not exist at that time.
        Senator Klobuchar. Back to you, Mr. Hall. I know in your
    testimony, you talk about reforms that have been made after the
    agricultural credit crisis of the 1980s and that those reforms
    came about because of that crisis. Do you think that there is a
    reason to make more reforms to the system now?
        Mr. Hall. At this point, I do not. It would not be our
    position as a regulatory agency to propose any reforms, but I
    do think that as a result of those things, things like
    restructuring of the system has made it much more efficient and
    better able to serve producer needs, and I think the similar
    entity lending was an important tool that this committee
    approved in order to diversify the portfolio of the System to
    help farmers, ultimately, by making sure that there is plenty
    of capital and credit available.
        Senator Klobuchar. All right. Thank you very much.
        Chairman Roberts. I thank the Senator for her questions.
        That concludes the first portion of our hearing this
    morning. Thank you, gentlemen, for appearing before our
    committee to discuss the state of credit in farm country and
    the role of the Farm Credit Administration in assuring our
    national Farm Credit System is both sound and operating within
    the bounds of the statute.
        To my fellow members, we would ask that any additional
    questions that you may have for the record be submitted to the
    committee clerk five business days from today, or by 5:00 next
    Thursday, May 26.
        We would now like to invite the second panel of witnesses
    to come to the table.
        [Pause.]
        Chairman Roberts. I would like to welcome all the members
    of the second panel. As you can see, we are in a process of
    having three votes on the floor of the Senate. I think to
    accommodate all members and to do this in a way that would be
    consistent with the time constraints that we have is that I am
    going to introduce--I am going to exercise executive privilege
    or Chairman privilege and introduce the gentleman from Kansas,
    and then if you would give your statement, and then by that
    time, perhaps the distinguished Ranking Member will be here or
    whomever. We may have to recess the committee until somebody
    comes back.
        But, at any rate, I am going to introduce Mr. Leonard
    Wolfe, and Leonard, then give your statement, and then,
    gentlemen, when you are introduced, if you could give your
    statement, we will let Senator Stabenow know what the order is.
        Mr. Wolfe, Leonard is the President and the CEO and
    Chairman of the Board of United Bank and Trust in Marysville,
    Kansas. I have to add, home of the famous black squirrel.
        [Laughter.]
        Chairman Roberts. I know that this is the home of the
    famous black squirrel because some gentleman dresses up as a
    black squirrel.
        Mr. Wolfe. It is not me.
        Chairman Roberts. I know that.
        [Laughter.]
        Chairman Roberts. But, he tapped me on my back and I turned
    around to discover a life-size black squirrel. I hope that the
    EPA and Fish and Game folks and Interior will not list him as
    being endangered.
        United Bank and Trust is a $600 million agricultural bank
    with 15 branches in nine northeast Kansas communities. Leonard
    is the past Chairman of the Kansas Bankers Association. He
    currently serves as Chairman of the American Bankers
    Association Agriculture Lending Task Force, no small task.
        A graduate of Southwestern College in Winfield, Kansas, Mr.
    Wolfe began his banking career in 1979, and first became
    President and CEO of a bank at the young age of 28.
        Leonard, I really appreciate your being here and
    representing our great state. Thank you again to the witnesses
    for appearing. Basically, we will rotate back and forth, so
    Leonard, why don't you proceed.

    STATEMENT OF LEONARD WOLFE, PRESIDENT, CHIEF EXECUTIVE OFFICER,
     AND CHAIRMAN OF THE BOARD, UNITED BANK AND TRUST, MARYSVILLE,
         KANSAS, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION

        Mr. Wolfe. Thank you, sir. Chairman Roberts, Ranking Member
    Stabenow, and members of the committee, my name is Leonard
    Wolfe. I am the President, CEO, Chairman of the Board for
    United Bank and Trust in Marysville, Kansas. We are the largest
    commercial agricultural lender in Kansas, second only to the
    Farm Credit System. I appreciate the opportunity to present the
    views of the ABA on credit conditions and availability in rural
    America.
        The topic of today's hearing is very timely. While farm and
    ranch incomes over the past five years have been some of the
    best in history, there is no question that the agriculture
    economy is slowing. Despite this, the banking industry is well
    positioned to meet the needs of U.S. farmers and ranchers.
    Interest rates continue to be near historic lows. And the banks
    have the people, capital, and liquidity to help America's
    farmers and ranchers manage through any turbulence in the
    economy. Importantly, with the farm bill in place, farmers,
    ranchers, and their bankers have certainty from Washington
    about future agricultural policy.
        In 2015, farm banks, defined as any bank with more than
    15.5 percent of their loans made to farmers or ranchers, now
    provide over $100 billion in total farm loans. Small farmers
    rely particularly on banks for funding. Farm banks hold $48
    billion in small farm loans, with $11.5 billion of that in
    micro small farm loans. Farm banks are healthy and continue to
    be forward looking, growing capital and increasing reserves.
    This provides flexibility to serve our nation's farmers and
    manage risk associated with any downturn in the agricultural
    sector.
        I would like to thank Congress and especially the
    Agricultural Committees for repealing the borrower term limits
    on USDA Farm Service Agency guaranteed loans in the last farm
    bill. Banks work closely with the USDA to make additional
    credit available by utilizing guaranteed farm loan programs.
        On the subject of USDA guaranteed farm loan programs, I
    believe that Congress needs to consider reforms to the
    programs, specifically to raise the cap on these loans due to
    the rising cost of agriculture along with the modernizing of
    the programs. The USDA Farm Service Agency guaranteed loans
    have allowed farmers to continue to access credit from banks
    like mine as they grow and assuring credit access for farmers
    across the country.
        We remain concerned, however, with one area of the
    agricultural credit market, the Farm Credit System. Over the
    years, the Farm Credit System has veered away from its intended
    mission and now represents an unwarranted risk to taxpayers. As
    a government-sponsored enterprise, it represents a risk to
    taxpayers in the same way that Fannie Mae and Freddie Mac do.
        The Farm Credit System was founded in 1916 to ensure that
    young, beginning, and small farmers and ranchers had access to
    credit. However, that is not its focus today. The Farm Credit
    System has grown into an enormous $304 billion System offering
    complex financial services. To put this into perspective, the
    Farm Credit System--if the Farm Credit System were a bank, it
    would be the ninth largest bank in the United States, and it is
    larger than 99.9 percent of the banks in this country.
        The Farm Credit System benefits from significant tax breaks
    valued at $1.3 billion in 2015, 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.
        It is shocking that nearly half of the entire Farm Credit
    System's portfolio is to individuals that each owe more than a
    million dollars. These are not young, beginning, and small
    farmers and ranchers. The System now primarily serves large
    established organizations that do not need subsidized credit.
    It is clear that the Farm Credit System has become too large
    and unfocused, using taxpayer dollars to subsidize large
    borrowers.
        We urge Congress to perform an autopsy on the system to
    ensure that its charter of helping young, beginning, and small
    farmers is being followed. If it is not, we urge Congress to
    remove the significant tax break provided to the System.
        Banks like mine are proud of the work we do to support our
    nation's farmers and ranchers. The agricultural community is a
    critical part of our economy and America's banks remain
    committed to serve it through good times and bad.
        Thank you, and I would be happy to answer any questions.
        [The prepared statement of Mr. Wolfe can be found on page
    103 in the appendix.]
        Chairman Roberts. Our next witness is Mr. Gus Barker,
    President and CEO of the Community Bank of Oelwein, Iowa.
        Mr. Barker. Thank you, Mr. Chairman.
        Chairman Roberts. Just a moment.
        Mr. Barker. Okay.
        Chairman Roberts. I have got to say some other----
        Mr. Barker. Oh, okay. Sorry.
        Chairman Roberts. --wonderful things on your behalf.
        Mr. Barker grew up on a small grain and livestock farm in
    northwest Iowa, always had the dream of taking over that
    operation. But with escalating costs and little capital, Mr.
    Barker was forced to begin his banking career in the 1970s and
    has served in senior management positions in community banks
    ever since. He now serves as an elected federal delegate for
    the northern half of Iowa for the Independent Community Bankers
    of America.
        Mr. Barker, thank you again for testifying and we welcome
    your statement.

      STATEMENT OF VERLIN ``GUS'' J. BARKER, PRESIDENT AND CHIEF
    EXECUTIVE OFFICER, COMMUNITY BANK OF OELWEIN, OELWEIN, IOWA, ON
         BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA

        Mr. Barker. Thank you, Mr. Chairman. As you stated, I am
    Gus Barker, President and CEO of Community Bank of Oelwein,
    Iowa. I thank you for the opportunity to testify on behalf of
    the ICBA, the Independent Community Bankers of America.
        Community Bank of Oelwein is a $112 million full-service
    bank employing exceptional bankers who work with our customers,
    providing them products they need while treating them like
    friends and family. Our success is measured by the
    relationships we build with customers and providing individuals
    with hands-on service. We are located in northeast Iowa,
    serving ag borrowers who produce corn, soybeans, and livestock.
        America's 6,400 community banks, located primarily in rural
    areas and in virtually every small town, do an outstanding job
    providing credit in good times and bad. Rural community banks
    provide more than one-half of all ag credit from the banking
    sector.
        Most farmers are, at best, breaking even right now, and
    then only if they have low debt levels and low carryover debt.
    Most threatened are the young, beginning, and small, or YBS
    farmers, particularly if they have high debt levels or if they
    have little to no additional financial backing. YBS and less
    financially secure farmers are the most at risk of exiting
    agriculture in the future.
        However, continuation of low farm prices will cause many
    farmers to exit, including those currently financially strong
    and larger farmers. We do urge Senators to discuss this with
    the banking regulators so they do not overreact to this
    situation. My written testimony also makes recommendations on
    USDA farm loan programs to keep our farmers in business.
        Regarding FCS, year-end 2015 FCS total assets were $304
    billion, an 86 percent increase from just ten years earlier of
    $163 billion. FCS gross loans of $236 billion represents a 92
    percent increase from a decade earlier. FCS net income last
    year was $4.7 billion, and the FCS effective tax rate is four
    percent. By comparison, my bank, a C Corp, is taxed at 34
    percent Federal and five percent state, almost 40 percent total
    tax, 35 percent more than the FCS.
        FCS has a huge advantage in pricing loans, enabling their
    cherry picking. FCS also grows their retained earnings greatly
    with this tax benefit. FCS has had tremendous growth over the
    last decade when FCS lobbied Congress and its regulator for
    expanded powers and inappropriately received many of those
    powers through their complicit regulator, the FCA.
        We also question FCA's obtaining the $10 billion line of
    credit at a time of record profits. FCS has an insurance fund
    supposedly to protect their lenders, but we note that their
    allowance for loan losses is only 54 basis points. By contrast,
    my bank's is 186 basis points. Perhaps if FCS had an adequate
    insurance fund and higher loan loss reserves, they would not
    need to dash to the Treasury for a $10 billion line of credit
    with no Congressional involvement, contrary to what was
    recommended by the Brookings Institution report. Why did FCA
    act in secret behind Congress's back and without meaningful
    public transparency?
        We have surveyed bankers in every geographical region on
    FCS issues in recent years. All bankers are alarmed by the
    FCS's cherry picking activities. FCS leverages tax and funding
    advantages as a government-sponsored enterprise, a GSE, to
    undercut loan rates on community banks' biggest and financially
    strongest customers and ignores the less creditworthy
    borrowers. Banks' larger, more stable borrowers are important
    to bank portfolios, allowing lending risks to be spread over
    both small and large operations, and losing the biggest and
    best borrowers elevates the risk in our banks' lending
    portfolios. This also diminishes banks' ability to serve
    agriculture and rural America. It lessens credit expertise
    available to the farmers. FCS below-market pricing lessens the
    credit choices for farm borrowers and lessens credit
    availability in rural America.
        The regulator, FCA, wants to allow FCS to broadly make non-
    farm loans. While FCS will continue to make farm loans, they
    want to also cherry pick the very best non-farm loans from bank
    portfolios, although not authorized by law. FCA's proposed
    mission-related investment regulation would allow FCS lenders
    to gain approval for broad non-farm lending programs labeled as
    investments. Loans for manufacturing, apartments, and office
    buildings would be eligible.
        FCA's lack of awareness of CoBank's $725 million Verizon
    loan is alarming. Verizon and Vodafone are located in New York
    City and London. This is not rural Iowa. It is not rural
    America. It is not authorized by statute. FCA's excuse--allowed
    under the similar entity provision of the Act. Not credible.
    That provision is not intended to allow enormous non-farm loans
    of hundreds of millions of dollars to the largest corporations
    in non-rural areas or in the world's largest cities.
        FCS cherry picks the very best loans. FCS seeks to lend
    aggressively for non-farm purposes. FCS and CoBank are loaning
    to very large non-farm corporations. These activities undermine
    community banks' ability to remain in business and serve rural
    communities and farmers. This diminishes the number of rural
    community banks. FCS's actions, therefore, threaten rural
    credit availability. They are worse than a race car that has
    veered off-track and we suggest reforms are needed.
        Thank you.
        [The prepared statement of Mr. Barker can be found on page
    56 in the appendix.]
        Chairman Roberts. I appreciate your statement, sir.
        Our next witness is Mr. Doug Stark of Omaha. Senator Sasse
    was scheduled to introduce you. We will save a little time, in
    that Senator Sasse usually repeats the Constitution of the
    United States before he asks a question.
        [Laughter.]
        Chairman Roberts. Mr. Stark is the President and CEO of
    Farm Credit Services of America and Frontier Farm Credit. Mr.
    Stark has been with the Farm Credit System for 35 years, having
    served in several capacities, beginning as an Assistant Loan
    Officer. During his career, Mr. Stark also worked for the Farm
    Credit Administration in Spokane, Washington, for two years as
    an examiner and supervisor.
        Mr. Stark, thank you for joining us today, and hopefully,
    we will turn to our distinguished Ranking Member for the next
    witness, but if not, I will try to do the best job possible.
    Please go ahead, sir, with your statement.

    STATEMENT OF DOUG STARK, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
       FARM CREDIT SERVICES OF AMERICA AND FRONTIER FARM CREDIT,
          OMAHA, NEBRASKA, ON BEHALF OF THE FARM CREDIT SYSTEM

        Mr. Stark. Okay. Thank you, Mr. Chairman, Ranking Member
    Stabenow and members of the committee. I appreciate the
    opportunity to testify on behalf of the Farm Credit System. My
    name is Doug Stark and I am President and CEO of Farm Credit
    Services of America and Frontier Farm Credit headquartered in
    Omaha, Nebraska, and Manhattan, Kansas, respectively.
        Mr. Chairman, Senator Stabenow, thank you very much for
    being original cosponsors of the Congressional resolution
    congratulating Farm Credit on its 100th anniversary. We are
    very proud that so many of your colleagues on this committee
    are also resolution cosponsors.
        We and our colleagues in the banking industry come before
    you today with good news. The commercial banking industry
    recently announced record profits, and the Farm Credit System
    is as financially strong as it has ever been. Given the
    challenges facing farmers and ranchers today and the
    extraordinary capital requirements of this industry, our
    nation's agricultural producers need the Farm Credit System and
    the commercial banking industry to be viable and strong.
        The Farm Credit System, as you have heard this morning, is
    made up of 78 individually and cooperatively owned and governed
    institutions. All have separate boards of directors elected by
    their customer owners. There are no federal funds or taxpayer
    dollars appropriated for the ongoing operations of the Farm
    Credit System.
        As a cooperative, net income in Farm Credit goes to one of
    two places. It is either retained within the institution to
    build financial strength to serve customers or it is paid out
    to customers in the form of patronage dividends. As one of our
    directors wrote in a letter to a fellow customer this year, and
    I quote, ``The board believes the cooperative lending system
    allows us to bring a unique and important value proposition to
    the market. We want stockholder capital to be held as close to
    the farm as possible,'' unquote. That is the beauty of the Farm
    Credit System that Congress had the foresight to create in
    1916. Farm Credit's cooperative business model is fundamentally
    different by design.
        A healthy Farm Credit System and a healthy commercial
    banking industry bring greater stability and competition to the
    credit market. If we lose business to commercial banks, and we
    do, that means the lending market is working for producers. If
    we partner with a commercial bank to meet the credit needs of
    an enterprise serving rural America, and we do, that means the
    lending market is working for those communities. If a local
    bank cannot take on the risk of a beginning operation and
    refers a young farmer to Farm Credit, and it happens, that
    means the lending market is working for producers.
        We know that competition makes all of us in lending work
    hard each day to be more efficient and customer-centric. We
    focus our time and energy on better serving producers versus
    asking for the elimination of competitors. There is room in the
    market for both commercial banks and Farm Credit. Producers
    need us both.
        At Farm Credit Associations, we have been proactive in
    helping customers prepare for the challenges of the current
    cycle. We have counseled around the importance of working
    capital and have restructured debt where appropriate. We are
    committed to working with our customers through tough times.
    Strong earnings have allowed Farm Credit to build equally
    strong capital levels to protect against deterioration in loan
    quality. We have sophisticated stress testing procedures and
    are thoroughly examined by a federal regulator and issue
    transparent audited financial statements. The Farm Credit
    System does not pose a risk to U.S. taxpayers. In fact, the
    System has never been stronger.
        I personally take particular pride in the support we
    provide to our young and beginning and small producers. It is
    an important part of what we do every day. While some would
    have you believe that it is the sole reason we exist, our
    mission as spelled out by Congress is to serve all of
    agriculture, large, small, young, and old. In 2015 alone, the
    Farm Credit System made more than 62,000 loans to young
    producers, 80,000 loans to beginning producers, and 150,000
    loans to small producers.
        Farm Credit's mission also extends to supporting rural
    communities by financing vital infrastructure, helping bring
    clean water to rural families, reliable energy to farms and
    rural towns, and modern high-speed telecommunications to
    connect rural America to the rest of the world.
        We also help finance entities that are similar to our
    directly eligible borrowers. As defined by Congress, these
    similar entity loans are always made in partnership with and at
    the invitation of commercial banks.
        In summary, I see farmers and ranchers working hard to
    adjust to the current decline in commodity prices and profits.
    They take enormous pride in what they do and many are trying to
    carve out a way for their sons and daughters to continue a
    family tradition. We are honored to serve agriculture
    producers, farmer-owned cooperatives, and rural infrastructure
    producers who own the Farm Credit System. They are the Farm
    Credit System.
        On behalf of our customer owners, we look forward to the
    next 100 years of serving rural communities and agriculture.
        Mr. Chairman, I have a variety of statements with me from
    groups representing producers, farmer-owned cooperatives, and
    others that reinforce the importance of Farm Credit's mission.
    I ask that those statements be made a part of the hearing
    record.
        [The following information can be found on pages 120
    through 169 in the appendix.]
        Senator Stabenow. Without objection.
        Mr. Stark. Thank you. I will be pleased to respond to your
    questions.
        [The prepared statement of Mr. Stark can be found on page
    84 in the appendix.]
        Senator Stabenow. Well, thank you very much, and I
    apologize for the back and forth today. I know you understand
    about the votes that are occurring and members having to try to
    be several places at once. But we very much appreciate all of
    your testimony and it is an important part of our deliberations
    going forward.
        I am pleased that I made it back in time to introduce Mr.
    Jed Welder, who, as I mentioned earlier, is taking time from a
    busy planting season to provide a producer perspective today.
    Mr. Welder served in both the U.S. Marine Corps and the U.S.
    Army and several tours in Afghanistan, Iraq, and Bosnia before
    returning to Greenville, Michigan, to start a farm with his
    wife, Milka, and two children, Daniella and Mirko. He is a
    proud alumnus of Central Michigan University, not far from
    where I grew up in Clare, and serves on the Inaugural Board of
    Directors for the Michigan Chapter of the Farmer Veteran
    Coalition.
        We thank you very much for joining us and look forward to
    your testimony.

      STATEMENT OF JED WELDER, OWNER, TRINITY FARMS, GREENVILLE,
                                MICHIGAN

        Mr. Welder. Thank you, Chairman Roberts and Ranking Member
    Stabenow, for the kind introduction, and thank you to all the
    members of the committee for this opportunity to testify today.
        I am the owner of Trinity Farms, a mid-size farm in
    Greenville, Michigan, where my family and I raise corn,
    soybeans, and recently began growing several acres of hops.
    Before returning home to Michigan to begin my career as a
    farmer, I had the honor of serving as an officer in the United
    States Army for more than a decade. My service included tours
    in Iraq, Afghanistan, and Bosnia, serving as an armor officer
    with some of the greatest men and women in the world.
        In 2008, my wife and I made the difficult decision to leave
    the Army after repeated deployments and an ever increasing
    operational tempo. We wanted to start both a family and a farm
    back in Michigan. We loved moving to the country and enjoyed
    the challenges of this new profession, but we quickly realized
    we needed both land and capital to be able to farm full time.
        Farmers are a close knit group. You cannot just Google how
    to do things. You actually ask mentors and experienced farmers
    in the area what has worked on their farms. When I asked older
    farmers in West Michigan about access to credit, they told me
    that years ago, I would have gone to a local bank and taken out
    an operating loan, but that banks do not do that anymore. Even
    a small farm requires hundreds of thousands of dollars in seed,
    fertilizer, and fuel each year to operate. My small farm uses
    older equipment, but even that cost more than a mortgage most
    local banks would handle.
        There was a GreenStone Farm Credit Services office in my
    county that was recommended by several farmers, so I prepared a
    business plan and walked through their door. They understood
    what I wanted to do and what I needed to run my operation. They
    made good, solid recommendations and over time became a trusted
    partner. As my business changed and grew, they grew with me.
        Today, I farm more than 800 acres of land and have been
    able to continue farming land my folks had farmed since the
    1960s. This summer, as I was building a grain drying and
    storage system, my loan officer came out to see the progress
    and talk about it with me. We constructed one of the first hop
    yards in our county. As we did, GreenStone walked through the
    yard to see what hops were. Their office is 20 minutes away.
    They know how the crops in our area look and what the prospects
    for harvest are because they are in the business of working
    with farmers.
        Last fall, an Army buddy contacted me because she wanted to
    buy land near my farm. She had talked to several banks, but she
    worked in Texas at the time and wanted to buy farmland near her
    family in Michigan. Every bank she talked to told her, ``We do
    not do that anymore.'' When I put her in contact with my
    GreenStone office, they told her, ``That is what we do.'' She
    ended up purchasing the land, and last Friday, my daughter and
    I planted that farm to corn. This fall, when we harvest that
    crop, this veteran will realize her dream of owning farmland
    even as my family expands its own operation.
        This is a challenging time for farmers like me across the
    country. Right now, we are planting corn and soybeans with
    prices very near break even. Many of us have second full-time
    jobs just to provide enough income to stay on the farm.
        There is an exciting revolution in precision agriculture
    and technology that will help us be more efficient, but at the
    same time, the costs of farming increase every year. Please
    understand, farmers, like veterans, are not victims. We are not
    looking for a free ride, just a fair deal. Having a lender that
    works with me, that knows my farm and the challenges I face is
    more important than ever.
        There is an old saying on the farm, ``If it ain't broke,
    don't fix it.'' The Farm Credit System is not broken. It is
    fulfilling its mission to serve farmers like me. Please do not
    break it now.
        I would like to leave you with some idea of how important
    this issue is to me. We are currently in the middle of planting
    season of our major crops. Michigan farmers have a very short
    window of time after the last frost to get our seeds planted
    for maximum yield. Families learn that there are no after-
    school activities, trips, or days off until the crops are in.
    That being said, when I had the opportunity to testify before
    this committee, I parked my equipment and came out here to
    appear before you today because this is important to my family
    and the families of all farmers.
        Thank you, and I would be happy to answer any questions you
    might have.
        [The prepared statement of Mr. Welder can be found on page
    101 in the appendix.]
        Senator Stabenow. Well, thank you very much again, and
    thank you to all of you.
        Let me start, Mr. Welder, if you could tell us a little bit
    more about how GreenStone Farm Credit has helped you both in
    looking to expand operations, even diversifying your farm. We
    talked earlier how hops is a growing new industry in Michigan,
    and I know across the country, but talk a little bit more about
    GreenStone Farm Credit and their role in helping you be able to
    do that.
        Mr. Welder. Yes, ma'am. GreenStone has provided some
    educational things and allowed producers to use their
    facilities for getting together for conferences. They have also
    provided--my local loan officer has provided input as we talked
    about expanding our business to doing custom work for other
    farmers. As we look to increase and purchase new equipment,
    they have worked with us and provided suggestions. When we
    traded in my 37-year-old combine two years ago and bought a
    slightly newer piece of equipment, that was something that we
    financed through GreenStone. They have been with us every step
    of the way.
        Michigan is on the cutting edge of a new crop with hops.
    Hops is something entirely new, so it was gratifying to me when
    they came out and actually walked through the yard and took a
    look and learned what they were and knew what the challenges
    were that we face with this new industry.
        Senator Stabenow. Thank you.
        I am wondering--let me ask you and then anyone else on the
    panel that wants to respond--because in 2014 in the farm bill,
    we created several new opportunities for veterans coming home
    to either go back to the farm or to go into farming, including
    support for the new and beginning farmer and rancher
    development programs. In 2015, the National Farmer Veteran
    Coalition received funds from the farm bill to expand
    agriculture production, development, business development
    skills, and so on.
        Mr. Welder, you are a board member of the Michigan Chapter
    of the Farmer Veteran Coalition. Can you describe some of the
    ways that the Coalition is working to support our military
    veterans in Michigan.
        Mr. Welder. Yes, ma'am. The Michigan Chapter of the Farmer
    Veterans Coalition is in its first year and it is very exciting
    what we are doing, working with veterans in all different areas
    of agriculture. I have got friends that I have developed
    through the Michigan Farmer Veteran Coalition that are raising
    grass-fed pigs, that are working in poultry, that are raising
    crops, that are raising row crops all across the state.
        The Farmer Veteran Coalition is working to provide grants
    as well as educational opportunities in both the Upper and
    Lower Peninsula. We just held, in cooperation with the NRCS, a
    soil conservation class. We have also had grant writing classes
    that we have held with veterans who want to become farmers.
    Some of the best friends and peers I have in agriculture now
    are through the Farmer Veteran Coalition.
        Senator Stabenow. Thank you.
        Would anybody else want to respond to any programs or
    initiatives or benefits, either working with veteran farmers or
    veterans anywhere working in the food system?
        Mr. Stark. Senator, I would just add simply that we have
    supported the efforts that you just described and were just
    described here, both financially and with our resources
    personally. As you may recall, last summer, the Farm Credit
    System helped sponsor here in Washington a Homegrown by Heroes
    event, so we are really trying to feature the products that are
    raised by our veterans and make them more visible to the
    general public so they can be featured and distributed and help
    them be successful. Thank you.
        Senator Stabenow. Great.
        Mr. Barker. Ranking Member Stabenow, I just want to add
    that we do not have special programs for our veterans because
    we have honored them our entire careers in the community
    banking industry, and that would include rate concessions, some
    terms that maybe would be unusual in a normal situation, to try
    and stimulate their success.
        I appreciate Mr. Welder's Farm Credit Office up there. He
    sounds just like a community banker that I know.
        [Laughter.]
        Senator Stabenow. All right. Well, let me ask, and again, I
    will start with Mr. Stark, of course, the 2014 farm bill made a
    number of reforms to the farm safety net. We strengthened and
    expanded crop insurance, particularly for specialty crops, and
    hops is one of those new specialty crops. I think as we expand,
    it will be interesting to see what other opportunities there
    are. Also to provide incentives for beginning farmers.
        When producers approach your institution for loans, how do
    you take these safety net programs into account, and how
    important are things like crop insurance, particularly for
    beginning farmers, when you are looking at potential borrowers?
        Mr. Stark. Yeah, that has been a key topic of focus of both
    this committee and of Congress here through these last couple
    years. We are very pleased to get a farm bill last year that
    included a strong crop insurance program, and I certainly think
    this is one thing that the banks and ourselves can agree upon.
    It is vitally important to the producers up there, and
    particularly the feature that has revenue coverage for many of
    these producers because that really is a critical issue we have
    out here.
        Most of the producers in the marketplace today carry some
    level of crop insurance. They make their own choices around
    that. Certainly, we take that into strong consideration, and
    especially so if they would decide not to consider it. In that
    case, we would require significant improvements in liquidity in
    order to continue their financing.
        For young producers, it is essential and we counsel them a
    lot regarding the level of coverage that they might carry and
    the risk that they have the capacity to undertake, primarily as
    a result of the fact that most of them do not have working
    capital if, in fact, something should happen to their crop
    production year.
        Thank you for your support of crop insurance and we would
    appreciate that continuing support as we go forward.
        Senator Stabenow. Well, I think as we have moved from
    subsidies to risk management through crop insurance as well as
    conservation practices and other risk management tools, I think
    it is really important that we keep a strong system. I am also
    anxious to see as we go forward how the opportunities we have
    created through fruit and vegetable growers, specialty crops,
    whole farm policy for small growers, small farmers and so on,
    how we can continue to expand those opportunities for small as
    well as large farms so that they have that risk management
    tool. I think that is really important.
        Let me ask----
        Mr. Wolfe. Senator, could I----
        Senator Stabenow. Yes, sir.
        Mr. Wolfe. Could I respond to that, as well?
        Senator Stabenow. Yes, please.
        Mr. Wolfe. Okay. The first panel was asked, what are some
    of the differences in going into a potential crisis, this farm
    crisis----
        Senator Stabenow. Right.
        Mr. Wolfe. --this time as compared to the 1980s. I became a
    banker in 1979. That was my first experience, was to experience
    the 1980s as an ag lender. But, that is one of the primary
    differences. I mean, there are some real differences. I think
    the producers are much higher capitalized and lower leveraged
    than they were going into the 1980s. The Farm Credit System is
    higher capitalized. The community banks are higher capitalized
    going into this.
        But one of the real fundamental differences is crop
    insurance. In the 1980s, probably less than five percent of all
    crops were insured in the United States. That number is
    reversed now and there is 95 percent that are and that makes a
    huge difference not only for our industry, but for the
    producers, to ensure that they will be around for the next
    season. We do thank you for that and it is a very critical part
    of what we do. Thank you.
        Senator Stabenow. Well, I appreciate that. As we go
    forward, and I hate to start talking about the next farm bill--
    I get a headache thinking about all the challenges we have----
        [Laughter.]
        Senator Stabenow. --but this is going to be a very
    important debate. We are going to need your voices here as we
    are talking about the increased importance of crop insurance as
    a critical risk management tool.
        Mr. Wolfe and Mr. Barker, I wonder if you might talk just a
    little bit more, and I apologize, I was not here for your
    testimony, but describe the work of your institutions to
    support the rural food and agriculture businesses, not just
    farmers, but more broadly, sort of rural communities, food
    industry, and so on. Could you talk a little bit more about
    that.
        Mr. Barker. Locally, we have a lot of growers in the
    farmers market category. Those markets are very popular in the
    State of Iowa in our area. We have converted many producers to
    organic production, and in doing so made those some trying
    times. They are not profitable at first. It takes several years
    to get to the level where they are sustainable as organic
    farmers.
        Some of the challenges that we face come from other states.
    I was involved in an egg production facility and the laws in
    California required that chickens needed more space in their
    cages. If they were familiar with agriculture, they would
    realize that the more space a chicken has, the more violent
    they get with each other and these laws are actually hurting
    those chickens. Also, it created a much more expensive
    operation. Those are some of the challenges we are facing now.
    We have had to loan more money to that facility to increase
    their buildings and their capacity to produce.
        Senator Stabenow. Thank you.
        Yes, Mr. Wolfe, did you want to respond?
        Mr. Wolfe. Yes, just quickly. We are located in north
    central, northeastern Kansas and we are in that transition
    between plains and good dark farm ground. We have wheat as a
    primary row crop in the western part of our trade area and that
    transitions to corn, soybeans. We also have a lot of dairies,
    hog operations, beef cattle. We are very diversified. We have
    been--well, we are the largest ag lender in Kansas. I mean,
    that is not all that large. It probably ranks number 50 in the
    United States. But, we do our part to take care of our local
    producers. We have been around for a long time and we relish
    the opportunity, even in the down times, to be there for our
    customers.
        Senator Stabenow. Thank you very much.
        I am going to step away to vote, and Senator Thune just
    came in. I am going to pass the entire power of the Senate
    Agriculture, Nutrition, and Forestry Committee.
        [Laughter.]
        Senator Stabenow. I am a little nervous about this, but I
    would be happy to pass it to the Senator from South Dakota.
        Senator Thune. [Presiding.] Well, thank you, Madam Chair.
        It is kind of a crazy day, and I would have liked to have
    been here to ask questions earlier of the previous panel, but
    we had the Administrator of the TSA up here to talk about wait
    lines at airports, so I was chairing that meeting. But, I
    appreciate the update today on what is going on in agriculture
    and particularly with regard to lending.
        I do want to include for the record, and since I am the
    only one here, I will say this will be included without
    objection----
        [Laughter.]
        Senator Thune. --a story from the Mitchell Daily Republic
    in which it talks about a study that looked at farm income. I
    know it has already been mentioned a couple of times today, but
    at least in my state, in 2015, we saw it drop by $100,000, on
    average, last year, which is a 77 percent decline in net profit
    in 2015 compared to the year before. It goes on and elaborates
    and gets down into the specifics and drills down into the
    numbers a little bit about what that means in terms of our
    economy.
        But, I think it just puts a fine point on how important it
    is that we are really focused on agriculture and making sure
    that we do everything we can to get our producers through what
    are some pretty difficult economic times and, hopefully, on to
    when we get a better price structure.
        [The information of Senator Thune can be found on page 53
    in the appendix.]
        Senator Thune. I know that we are planting in South Dakota,
    some of it is in, some of it is still going in, but we are
    hoping for a big crop. We need a big crop at the prices that we
    are dealing with today. But, I would be curious to know just
    from the lenders' standpoint, I know that, for example, Mr.
    Barker, you have got a smaller scale community bank with a
    portfolio of 35 percent agricultural loans. Could you talk a
    little bit about what your greatest challenge is today in terms
    of looking at the outlook for your agricultural borrowers.
        Mr. Barker. As far as our borrowers, our biggest challenge
    is the cash flow coming in. We are in times where most of our
    borrowers have equity to survive a year or two. Going forward,
    this equity is being used up with the low prices. With
    production roughly a dollar below cost of their sales prices on
    both corn and beans, it does not take long if they have any
    size at all for their equity to get used up.
        We are going to need the USDA programs. The USDA guaranteed
    Farm Loans and Rural Development Loans are very important and
    we ask the Senate to really beef up funding for the programs
    because we really will need guarantees going forward to keep
    producers in business. Patience by our regulators is a virtue.
    Many examiners were not around in the 1980s when we went
    through the last ag credit crisis. They are young and they are
    being told that this is perhaps a panic situation and patience
    will be a virtue in dealing with all of this.
        Senator Thune. I would direct this to you and others on the
    panel, as well, but do you believe that your banks and other
    ABA banks coordinate more closely with the USDA Farm Service
    Agency than does FCS to obtain guaranteed loans for some of
    those eligible borrowers?
        Mr. Barker. Well, from my personal experience, the banking
    community does. In fact, I have had a few local small borrowers
    come to us because their credit was shut off by the Farm Credit
    System. We have tried to look at getting a guarantee for those
    folks. But, our experience is that the loyalty has been to the
    larger borrowers by the Farm Credit Services and the smaller
    folks in our area, were not taken care of as well, because
    their farms require a lot of lender involvement. It is easier
    to book a $1 to $5 million loan than a YBS loan.
        Senator Thune. Do any of you have examples of how the Farm
    Credit System neglects young, beginning, and small farmers and
    ranchers in your area?
        Mr. Barker. Personally, I do not see the Farm Credit System
    serving YBS farms. I know they talk about that, but I have a
    report from 2014, which shows the numbers of those young,
    beginning, small farmers are quite stagnant. One of the
    footnotes I thought ironic was if they qualify under each of
    those categories, they can be counted under each of those
    categories, so I am not sure how the numbers make any sense. I
    know in theory, that FCA would like to count these numbers at
    the regional levels, but on the local level, I just do not see
    FCS lending to YBS farmers.
        [The following information can be found on page 173 in the
    appendix.]
        Senator Thune. Mr. Welder, you are a farm operator. When
    you are talking to other local farmers, have you noticed
    competition in ag lending driving down interest rates for
    borrowers? Have you seen any evidence of that?
        Mr. Welder. From my perspective in my very small operation,
    I have not seen that, Senator. We are getting competition from
    other large corporate farms that maybe have other lending
    resources. But at my level, no, not at all. The interest rates
    are staying pretty much constant for what we need to do for our
    operating loans, for our machinery loans.
        Senator Thune. From your perspective, to what extent do
    private banks, commercial banks, Farm Credit System, and FSA
    play a role in ensuring that credit exists for borrowers out
    there? How do you see that interaction working between the
    different entities?
        Mr. Welder. Again, I can only give a very micro perspective
    at my level, but the banks in my area do not deal with farmers
    as much other than checking and savings. The last farmer that
    had an operating loan with our very local Sidney Bank was my
    dad 20 years ago. At this point, because with 800 to 1,000
    acres he might be talking a quarter-million dollar loan for an
    operating loan, most of that will go through the Farm Credit
    System as opposed to going through a banking system.
        Senator Thune. Okay. Mr. Barker, would you say your bank is
    consistently more competitive with loan rates and loan
    availability to, particularly as we talked about earlier, some
    of the younger, smaller, newer borrowers?
        Mr. Barker. We compete as much as we can. I cannot compete
    with the Farm Credit System on large loans. They have a funding
    structure that is very enviable. For example, on a million
    dollar loan, if I charge five percent, that is $50,000 in
    interest annually. I pay my 40 percent tax bill out of that. I
    net $30,000. The Farm Credit System is largely tax exempt, and
    they need only charge three percent on that same loan to net
    the same. They also do not have to charge appraisal fees, which
    I have to do, and there are other local fees in some states
    that they do not pay.
        We try to stay competitive as much as we can and make use
    of anything we can as far as Federal Home Loan borrowings or
    deposits, but I just cannot seem to touch the whole array of
    benefits that the Farm Credit System has.
        Senator Thune. You indicate in your testimony that 14
    percent of your portfolio consists of loans ranging from $1,000
    to $249,000, which is 76 percent of your portfolio by total
    number of borrowers. Since many of these are likely young,
    beginning, and small farmers and ranchers, do you believe that
    your portfolio of borrowers, assuming that we have the present
    state of circumstances in agriculture for the next couple of
    years, is going to be negatively impacted, much more so than
    the larger scale type borrowers that you have in your
    portfolio?
        Mr. Barker. I think they will be hit harder quicker than
    the larger farmers, yes, because they have not had a chance to
    build up the equity that the larger farmers have.
        Mr. Wolfe. Senator, could I respond to that, just quickly?
        Senator Thune. Yes, Mr. Wolfe.
        Mr. Wolfe. Yeah. Mr. Welder brings up a great point,
    because his area is what I foresee if we continue to go down
    the same path that we are going, that the local banks cannot
    compete any longer, so they have given that market share away.
    They have given it away. They have quit competing. That is, I
    am afraid, where we are heading.
        Just to give you an example, Mr. Barker used a similar
    example in Iowa, but in my state, I pay 34 percent federal
    income tax and 4.38 percent state income tax. As Mr. Barker
    says, on a five percent loan, they can charge three-and-a-
    quarter and start out the same place we do. My point is that
    when we go down that path, is that Farm Credit is not passing--
    if I were a borrower of Farm Credit today, I would be angry
    that they are not passing that entire savings along to them,
    because they could have been fully taxed like a C Corp bank in
    America would be and they would still make more money than
    banks would the last two years. That is the point that I would
    like to make.
        Senator Thune. Okay, thanks.
        Mr. Stark, it looks like you want to----
        Mr. Stark. Thank you. I would be delighted to respond to
    those comments. It is really unfortunate and disappointing to
    hear the allegations against a system which so many farmer-
    owned customers support and feel so strongly about. One thing I
    can say when it boils all down to the bottom line is what has
    been laid out here this morning is irrespective of our business
    structures, when it gets down to the bottom line, the fact of
    the matter is we are just different business models, and that
    is clearly, as I mentioned in my opening remarks, that was
    intended.
        As a farmer-owned cooperative, we have a very different
    business structure. Frankly, community banks enjoy some of the
    same, or maybe I should say similar accesses and backing by the
    federal government that the Farm Credit System does in the
    forms of Federal Deposit Insurance, the access to the GSE
    through the Farmer Mac and the Federal Home Loan Bank. They
    have access to Subchapter S Corporations. I mean, we could
    compare and contrast our business models for hours here today.
        The bottom line is, when you look at it over the last 50
    years, community banks and commercial banks have 40 percent
    market share. We have 40 percent market share. By the testimony
    that was submitted here this morning, our colleague here, Mr.
    Barker, indicated they have over half of the farm loans in
    their community. If you look at the data they presented even in
    their own testimony, they grew 7.9 percent last year. We grew
    8.5 percent.
        When you look at the facts, there is no evidence to
    indicate that the pendulum has really swung in favor of the
    Farm Credit System. Thank you for the opportunity to comment.
        Senator Thune. I appreciate that. Thanks, Mr. Stark.
        Mr. Barker. Could I rebut that just a bit? Sorry, Mr.
    Stark. There are a lot of GSEs out there, but I do not have any
    of the GSEs that directly compete with me and try to steal my
    loans. When we are not allowed to make a $5 million real estate
    loan, for example, that is a big part of my loan portfolio that
    goes to the Farm Credit System, no matter what my bank may
    obtain in terms of small loans. There is just no way to
    compete. My rates to large farmers will be undercut no matter
    what rate I have quoted, and I am sure every community banker
    in the nation can say the same thing, that FCS rates just are
    not the same as those of the private sector.
        The young farmer that comes in that has a quote from the
    Farm Credit Services gets a rate that is higher. They might get
    a rate that is six or eight percent compared to the three
    percent rate FCS gives large farmers. Does that really mean
    that they are taking care of those YBS farmers? When I price a
    loan to a YBS farmer, it is the same whether they are a multi-
    million dollar farmer or they are a young farmer that is really
    struggling and trying to start their farm. We are going to help
    them no matter what. But we do not get market distorting
    competition from the other GSEs as we do from the FCS.
        Senator Thune. Mr. Chairman, I would just say, and I
    appreciate you having this hearing because I think it is an
    important one and it is an issue that we need to pay close
    attention to, particularly over the next couple of years,
    because I think in production agriculture, if we do not see
    some improvement in the prices of our commodities, we are going
    to have more and more stress and there is going to be a real
    need on behalf of the lending community to be able to work with
    borrowers and figure out ways to get them through.
        I am particularly concerned about the young, beginning, and
    small borrowers and what this means for them, people who
    perhaps are not as established or do not own their ground and
    are making cash rent payments, those sorts of things. It is
    going to be increasingly, I think, difficult given the current
    price structure, which I said I hope improves, but I think that
    availability of credit and being able to work with--and having
    all the various people who represent that community here today,
    I think, is really good, too, because it gives us an
    opportunity to explore a little bit more in detail what the
    various dynamics and who is lending to whom and where sort of
    the weak spots are.
        If there is anything this committee can do in the days and
    weeks and months ahead, I hope that you all will communicate
    that to us, as well, because we want to make sure that we are
    being as responsive as possible when it comes to availability
    of credit for agriculture.
        Mr. Chairman, I thank you, and I thank our panelists today
    for being here.
        Chairman Roberts. [Presiding.] Senator Thune, thank you for
    that excellent statement. I share your concern with new,
    young--what was the other group?
        Senator Thune. Small, beginning.
        Chairman Roberts. Oh, beginning. I am concerned about the
    older, established, and big producers who produce most of the
    food for this country as well as everybody else.
        There is another vote pending, I would tell the gentleman,
    very quickly, in about ten minutes here, so we are going to
    have to adjourn this hearing.
        I have a question for the three lenders on the panel. Your
    answer, of course, is if this does not occur, the question that
    I am asking, we will be writing the sequel to the Grapes of
    Wrath in farm country.
        When you are considering whether or not to issue a farm
    loan, how important is the role of the federal crop insurance
    program? Let us just go down the line. Mr. Barker.
        Mr. Barker. Yes, sir. It is extremely important. It is just
    absolutely critical to the survival of the farmers out there
    and their stability.
        Chairman Roberts. Mr. Stark.
        Mr. Stark. Well, we totally agree and we thank the
    committee and your support, Mr. Chairman, and what you have
    done to get the last farm bill through as well as the
    provisions of the crop insurance program. It is imperative for
    this industry as we go forward.
        Chairman Roberts. I thank you, sir.
        Mr. Welder.
        Mr. Welder. As a producer, I maintain crop insurance, as do
    most of my peers. It is an important role as we move from a
    subsidy-based to a more market-based to stay with that crop
    insurance and I thank you for your support, sir.
        Chairman Roberts. If you were in the service that was
    always faithful, Semper Fi----
        Mr. Welder. Oorah.
        Chairman Roberts. --and then chose to go Army Strong----
        Mr. Welder. Yes, sir.
        Chairman Roberts. --you could be strong, but I am not sure
    always faithful.
        [Laughter.]
        Chairman Roberts. Why on earth did you switch?
        Mr. Welder. Sir, I was offered an Army ROTC scholarship and
    I did not have money for college and they said I could jump out
    of perfectly good airplanes, so I took them up on it.
        Chairman Roberts. Well put.
        [Laughter.]
        Chairman Roberts. Leonard.
        Mr. Wolfe. Yes. I talked about this earlier, but a question
    was asked of the first panel, some of the major differences as
    we head into what potentially could be a downturn in ag and the
    differences compared to the 1980s. The primary difference in as
    far as the producer protection is crop insurance. In the 1980s,
    I saw statistics that said that less than five percent--I was
    there, you were there--less than five percent of all crops were
    insured at that time. Today, that number is reversed. It is now
    95 percent, and it is possible because of actions that this
    committee and you specifically have taken.
        I think that is going to be paramount going into any
    downturn, whether this is it or not. Our regulators have been
    predicting this for seven years, so if it finally happens, I
    think they are taking a certain level of glee from that. But,
    we are ready for it and crop insurance is one of the things
    that has prepared us for this if this does occur. Thank you.
        Chairman Roberts. I appreciate your answer. It is what it
    is. Every time--we are now doing our appropriation bills, which
    is a very good thing. We are going back to constitutionally
    Congressionally directed funding and that is a good thing, and
    we are doing it at a record pace. But when you open up the ag
    appropriation bill, we always have self-declared Secretaries of
    Agriculture wanting to change something and crop insurance is
    usually a target. Each one of you and every one of your
    organizations has a pretty loud megaphone and the value of crop
    insurance today means whether you make it or not, more
    especially with all of the climate change that we are
    experiencing.
        Let me just ask all of you, I note the somewhat differences
    of opinion with regards to what the Farm Credit System has at
    its disposal as opposed to what our community banks have, more
    especially with Dodd-Frank, which was not especially--Dodd-
    Frank was not supposed to touch you. It was a big mess.
    Obviously, it is--I do not know whether it is a touch or a
    massage or what it is, but it is not good.
        If, especially the three folks here that are representing
    our community banks, if there is one piece of legislation that
    could address your concerns, and that would probably fall to
    the Finance Committee--I happen to be on the Finance
    Committee--but what would that be? Let me start with you, Mr.
    Barker. I know that you want a whole series of things, but what
    is the one thing that we could do to make your life easier?
        Mr. Barker. Boy, that list is endless. Dodd-Frank is a huge
    thing for us right now and I think our topic here today is a
    really big concern for me locally and for all the community
    banks having the unlevel competion from the Farm Credit System.
    But, both of those topics are extremely important to us right
    now. Dodd-Frank and overregulation is causing a heavy burden on
    community banks, sorry.
        Chairman Roberts. Do not be sorry. I agree with you. Quite
    a few people would now agree with you.
        Mr. Stark, we are going to give you an opportunity, too. I
    do not want to leave you out.
        Mr. Stark. Yeah. I think, even though we are not subject to
    the same regulatory impact as the counterparts here under Dodd-
    Frank, the Farm Credit System does whatever it can to comply
    with the spirit of those laws because they, in most part, make
    good financial sense. The first panel talked about that
    specifically with regard to the credit, or the capital
    requirements, and the Farm Credit System and through the FCA
    has adopted the regulatory guidance under Basel III and
    implemented new capital requirements.
        Nonetheless, the answer to your question is a continuation
    of the crop insurance program would be first and foremost. As
    we are a farmer-owned cooperative, we are here on behalf of our
    farmer owners and that is first and foremost on their minds.
    Consistency and predictability around their businesses in this
    time of volatility is as critical as we could imagine, and that
    will do more than anything.
        The second would be trade. As you well know and we have
    talked about, that is a critical item for our producers, and
    depending on commodity, a majority of their, or a big majority
    of crops or a big percentage of crops in almost all our
    segments is traded overseas. U.S. production agriculture is
    extremely efficient and we need trade on behalf of our
    producers' customers.
        Chairman Roberts. I thank you for your comments on trade,
    more especially TTIP and TPP. Today, unfortunately--well, it
    has just been this way as long as I have had the privilege. All
    trade agreements are over-criticized. All trade agreements are
    oversold. But, they are absolutely essential and I thank you
    for that.
        Let us just keep going down the line. Mr. Welder.
        Mr. Welder. Senator, the one thing from my perspective
    would be certainty. Farmers do not like change and we certainly
    do not like change from Washington if we can help it. When we
    go to our local FSA office and ask about the farm bill or what
    is upcoming for crop insurance, generally, they have no idea.
    The more certainty we can have at my level for the farm bill
    and for crop insurance, the better off we are going to be.
        Chairman Roberts. Let me just interrupt by saying that we
    are not going to open up the farm bill, period. You will have
    that stability, whether you have preferences or not, more
    especially the ARC program, the PLC program, and more
    especially crop insurance. I am not saying that it's going to
    be an easy job, because there are always folks that want to do
    that. But providing consistency and stability, I think, is
    paramount.
        Leonard, what do you think?
        Mr. Wolfe. Well, since you cannot do anything about the
    weather, because that is the biggest variable in agriculture--
    --
        Chairman Roberts. I brought you the rain, man. What else do
    you want?
        Mr. Wolfe. You did, and now you need to make it stop.
        [Laughter.]
        Chairman Roberts. Okay.
        Mr. Wolfe. Dodd-Frank is just a monster hanging over
    community banks today. I mean, it is threatening our model. A
    lot of things threaten our model, but as Mr. Barker says,
    frankly, in my bank, the biggest threat to me, seriously, is
    Farm Credit. If we could somehow--Mr. Welder mentioned a fair
    deal. That is all he is looking for, is a fair deal. If we
    could just get to the point--and I am not talking--there is a
    real misconception that banks want to eliminate the Farm Credit
    System. No, that is not correct. That is not--I am not an
    advocate of that. We have to coexist. We have to find a way to
    do that.
        I think the--it is funny that you mention appropriations,
    because I have to take this opportunity to talk a little bit
    about last fall when we used a tax on banks to pay for the
    highway bill. We have something right here hanging in front of
    us that is a $1.3 billion tax preferential treatment that is
    given to Farm Credit that could be used to pay for this--some
    other critical elements of agriculture, which is crop
    insurance, things of that nature. This can be done a lot of
    different ways, but there is more than one way to do this.
    Rather than tax them, we could also eliminate taxes on all
    agricultural real estate loans, whether they are originated by
    banks, by individuals, by insurance companies, or even Farm
    Credit. Just you could level the playing field in that way.
        We all have different models. Even banks have much
    different models, as Mr. Stark points out. We recognize the
    difference between us and the Farm Credit, but there are a
    great deal of differences across the board, so thanks for the
    opportunity.
        Chairman Roberts. I want to thank all seven of our
    witnesses. My staff has informed me I have four minutes to
    skedaddle over there and make the final vote. But thank you for
    taking your time and your willingness to testify here. I know
    you are very busy people. The testimony provided is timely,
    very valuable for my fellow lawmakers to hear firsthand.
        To my colleagues who may not have heard it the first time,
    I would ask that any additional questions that they may have be
    submitted for the record, submitted to the committee clerk five
    business days from today, or by 5:00 p.m. next Thursday, May
    26.
        Now, Mr. Barker, I have to say that Senator Grassley, my
    senior colleague, basically his question was with regard to
    Dodd-Frank, and I think you have covered it.
        Mr. Barker. Yes, sir.
        Chairman Roberts. I want the record to show that I have
    asked the question----
        [Laughter.]
        Chairman Roberts. There was a very timely response, more
    especially from his constituent.
        With that, the committee stands adjourned. Thank you.
        [Whereupon, at 12:45 p.m., the committee was adjourned.]

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                                A P P E N D I X

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                             QUESTIONS AND ANSWERS

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