[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



                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                             SECOND SESSION


                              MAY 19, 2016


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


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


                         U.S. GOVERNMENT PUBLISHING OFFICE 

23-591 PDF                     WASHINGTON : 2018 


                     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


                            C O N T E N T S



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


                         Thursday, May 19, 2016

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

                                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


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  


                         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 


    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 
    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 
    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 
    Now, before we hear from our witnesses, I recognize our 
distinguished Ranking Member, Senator Stabenow, for any of her 
opening remarks.

                          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 
    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 
    Chairman Roberts. I would be delighted to have you do that. 
Why do you not just go right ahead.

                          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----
    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.
    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.


    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 
    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 
    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 
    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.


    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 
    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.


    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 
    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 
    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 
    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 
    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 
    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.
    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 
    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 
    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 
    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 
    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 
    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 
    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, 
    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 
    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.
    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 
    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 
    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.
    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.
    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.
    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.


    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 
    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 
    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 
    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.


    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 
    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.
    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.


    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 
    [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 
    [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 
    We thank you very much for joining us and look forward to 
your testimony.


    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.
    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 
    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----
    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 
    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 
    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 
    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.
    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 
    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 
    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 
    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 
    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 
    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.
    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.
    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 
    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 
    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.
    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 
    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 
    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----
    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.]


                            A P P E N D I X

                              MAY 19, 2016





                              MAY 19, 2016




                         QUESTIONS AND ANSWERS

                              MAY 19, 2016