[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
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Page
Hearing(s):
The Farm Credit System: Oversight and Overlook of the Current
Economic Climate............................................... 1
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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
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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
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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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DOCUMENTS SUBMITTED FOR THE RECORD
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QUESTIONS AND ANSWERS
MAY 19, 2016
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