[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]





                    REVIEW OF THE FARM CREDIT SYSTEM

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

                                HEARING

                               BEFORE THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 29, 2017

                               __________

                            Serial No. 115-4



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]





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                         agriculture.house.gov








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                        COMMITTEE ON AGRICULTURE

                  K. MICHAEL CONAWAY, Texas, Chairman

GLENN THOMPSON, Pennsylvania         COLLIN C. PETERSON, Minnesota, 
    Vice Chairman                    Ranking Minority Member
BOB GOODLATTE, Virginia,             FILEMON VELA, Texas, Vice Ranking 
FRANK D. LUCAS, Oklahoma             Minority Member
STEVE KING, Iowa                     DAVID SCOTT, Georgia
MIKE ROGERS, Alabama                 JIM COSTA, California
BOB GIBBS, Ohio                      TIMOTHY J. WALZ, Minnesota
AUSTIN SCOTT, Georgia                MARCIA L. FUDGE, Ohio
ERIC A. ``RICK'' CRAWFORD, Arkansas  JAMES P. McGOVERN, Massachusetts
SCOTT DesJARLAIS, Tennessee          MICHELLE LUJAN GRISHAM, New Mexico
VICKY HARTZLER, Missouri             ANN M. KUSTER, New Hampshire
JEFF DENHAM, California              RICHARD M. NOLAN, Minnesota
DOUG LaMALFA, California             CHERI BUSTOS, Illinois
RODNEY DAVIS, Illinois               SEAN PATRICK MALONEY, New York
TED S. YOHO, Florida                 STACEY E. PLASKETT, Virgin Islands
RICK W. ALLEN, Georgia               ALMA S. ADAMS, North Carolina
MIKE BOST, Illinois                  DWIGHT EVANS, Pennsylvania
DAVID ROUZER, North Carolina         AL LAWSON, Jr., Florida
RALPH LEE ABRAHAM, Louisiana         TOM O'HALLERAN, Arizona
TRENT KELLY, Mississippi             JIMMY PANETTA, California
JAMES COMER, Kentucky                DARREN SOTO, Florida
ROGER W. MARSHALL, Kansas            LISA BLUNT ROCHESTER, Delaware
DON BACON, Nebraska
JOHN J. FASO, New York
NEAL P. DUNN, Florida
JODEY C. ARRINGTON, Texas

                                 ______

                   Matthew S. Schertz, Staff Director

                 Anne Simmons, Minority Staff Director

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                             C O N T E N T S

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                                                                   Page
Adams, Hon. Alma S., a Representative in Congress from North 
  Carolina, prepared statement...................................     5
Conaway, Hon. K. Michael, a Representative in Congress from 
  Texas, opening statement.......................................     1
    Prepared statement...........................................     2
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, 
  prepared statement.............................................     5
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     3
Scott, Hon. David, a Representative in Congress from Georgia, 
  opening statement..............................................     4

                               Witnesses

Tonsager, Hon. Dallas P., Chairman and Chief Executive Officer, 
  Farm Credit Administration, McLean, VA.........................     5
    Prepared statement...........................................     7
    Supplementary material.......................................    69
    Submitted questions..........................................    80
Hall, Hon. Jeffery S., Member of the Board, Farm Credit 
  Administration, McLean, VA.....................................    12
Dodson, James F. ``Jimmy'', Chairman, Board of Directors, Farm 
  Credit Bank of Texas, Robstown, TX; on behalf of Farm Credit 
  System.........................................................    14
    Prepared statement...........................................    15
Stark, Douglas R., President and Chief Executive Officer, Farm 
  Credit Services of America/Frontier Farm Credit, Omaha, NE; on 
  behalf of Farm Credit System...................................    18
    Prepared statement...........................................    19
Halverson, Ph.D., Thomas, President and Chief Executive Officer, 
  CoBank, Denver, CO; on behalf of Farm Credit System............    29
    Prepared statement...........................................    31
    Submitted questions..........................................    83

                           Submitted Material

Johnson, Roger, President, National Farmers Union, submitted 
  letter.........................................................    70
American Bankers Association, submitted statement................    71
Independent Community Bankers of America, submitted statement....    77

 
                    REVIEW OF THE FARM CREDIT SYSTEM

                              ----------                              


                       WEDNESDAY, MARCH 29, 2017

                          House of Representatives,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 9:59 a.m., in Room 
1300 of the Longworth House Office Building, Hon. K. Michael 
Conaway [Chairman of the Committee] presiding.
    Members present: Representatives Conaway, Thompson, Lucas, 
King, Gibbs, Austin Scott of Georgia, Crawford, Hartzler, 
LaMalfa, Davis, Yoho, Allen, Bost, Rouzer, Abraham, Kelly, 
Comer, Marshall, Bacon, Faso, Dunn, Arrington, Peterson, David 
Scott of Georgia, Walz, Fudge, McGovern, Vela, Lujan Grisham, 
Kuster, Nolan, Bustos, Maloney, Adams, Evans, Lawson, 
O'Halleran, Panetta, Soto, and Blunt Rochester.
    Staff present: Caleb Crosswhite, Haley Graves, John Weber, 
Josh Maxwell, Stephanie Addison, Lisa Shelton, Liz Friedlander, 
Troy Phillips, Nicole Scott, and Carly Reedholm.

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE 
                     IN CONGRESS FROM TEXAS

    The Chairman. Good morning. This hearing of the Committee 
on Agriculture entitled, Review of the Farm Credit System, will 
come to order.
    Ralph, would you lead us in a quick prayer?
    Mr. Abraham. Pray with me, if you please.
    Father, we humbly ask for your knowledge, your guidance, 
your discernment, your wisdom, all those things that we lack on 
a daily basis, Lord, give it to us. We hope we will use it in a 
good and peaceful manner. We appreciate all the blessings that 
you bestow upon us every day. We ask these things in your name. 
Amen.
    The Chairman. Ralph, thank you.
    Good morning. Today's hearing is to review the Farm Credit 
System. Before I begin, I would like to let everyone know that 
our thoughts and prayers are with the Spearman family this 
morning. As many of you know, Ken Spearman passed away this 
week. Ken served as a Director and former Chair of the Farm 
Credit Administration for many years. He served in the office 
with honor and will be greatly missed. Our prayers and 
condolences are not only with the other Board members who knew 
him well, but his family also this morning.
    Today's hearing is entitled, Review of the Farm Credit 
System, but the objective is twofold.
    First, we hope to educate ourselves and the public on the 
history and purpose of the Farm Credit System institutions that 
provide vital credit to rural America. Since its inception over 
100 years ago, the Farm Credit System has never wavered in its 
mission of providing credit to our rural communities in good 
times and in bad.
    Second, we will review the health of the System. As farm 
incomes continue to decline, credit availability remains vital 
to producers. In our view, a diversified, well-capitalized 
System is a healthy Farm Credit System that can function and 
serve clients independently. Our Committee has an obligation to 
proactively review the System to ensure its soundness. And to 
help us do that, we have brought together a panel composed of 
two different parts. At one end, we are joined by the 
representatives of the Farm Credit Administration, the 
independent agency tasked with regulating the Farm Credit 
institutions to ensure they fulfill their mission and stay 
within the scope of that mission. But a review of the System 
would not be complete without hearing from the very 
institutions that provide credit. To offer that perspective, I 
am pleased to have witnesses who can provide us with the 
association perspective, including one who has a nationwide 
charter that provides credit to farmer-owned cooperatives and 
rural utilities across the country.
    Today, modern agriculture is far more complex that it was 
100 years ago. Our farmers compete in a volatile market, they 
have greater regulatory burdens and increased input costs. 
Still, they continue to advance through hard work and 
innovation.
    Innovation, however, often requires increased capital. It 
is essential that credit availability keep pace with the 
demands of modern producers. To meet the modern challenges of 
today's credit needs, Congress has taken steps over the years 
to ensure that the Farm Credit System is properly diversified 
and capitalized.
    Today, I believe that the Farm Credit System is 
fundamentally safe and sound and in a position to endure the 
challenges that it will inevitably face. Along with commercial 
and community banks, and USDA loan programs, I am confident 
that the Farm Credit System will play a pivotal role in meeting 
the credit needs of rural America for years to come.
    I look forward to your testimony and the discussion to 
follow.
    [The prepared statement of Mr. Conaway follows:]

  Prepared Statement of Hon. K. Michael Conaway, a Representative in 
                          Congress from Texas
    Good morning, and welcome to today's Committee hearing to review 
the Farm Credit System.
    But before we begin, I would like to let everyone know that our 
thoughts and prayers are with the Spearman family this morning. As many 
of you know, Mr. Ken Spearman passed away this week. Ken served as a 
Director and former Chair of the Farm Credit Administration for many 
years. He served in the office with honor and will be greatly missed.
    Today's hearing is entitled, Review of the Farm Credit System, but 
the objective is twofold.
    First, we hope to educate ourselves and the public on the history 
and purpose of the Farm Credit System institutions that provide vital 
credit to rural America. Since its inception over 100 years ago, the 
Farm Credit System has never wavered in its mission of providing credit 
to our rural communities in both good times and in bad.
    Second, we will review the health of the system. As farm incomes 
continue to decline, credit availability remains vital to producers, 
new and old. In our view, a diversified, well capitalized system is a 
healthy Farm Credit System that can function and service clients 
independently. Our Committee has an obligation to proactively review 
the System to ensure its soundness. And to help us do that, we have 
brought together a panel composed of two different parts. At one end, 
we are joined by representatives of the Farm Credit Administration, the 
independent agency tasked with regulating the Farm Credit institutions 
to ensure they fulfill their mission and stay within the scope of that 
mission.
    But a review of the System would not be complete without hearing 
from the very institutions that provide credit. To offer that 
perspective, I'm pleased to have witnesses who can provide us with the 
association perspective, including one who has a nationwide charter 
that provides credit to farmer-owned cooperatives and rural utilities 
across the country.
    Today, modern agriculture is far more complex that it was 100 years 
ago. Our farmers compete in a volatile world market, have greater 
regulatory burdens and increased input costs. Still, they continue to 
advance through hard work and innovation.
    Innovation, however, often requires increased capital. It is 
essential that credit availability keep pace with the demands of modern 
producers. To meet the modern challenges of today's credit needs, 
Congress has taken steps over the years to ensure that the Farm Credit 
System is properly diversified and capitalized.
    Today, I believe that the Farm Credit System is fundamentally safe 
and sound and in a position to endure the challenges that it will 
inevitably face. Along with commercial and community banks, and USDA 
loan programs, I am confident that the Farm Credit System will play a 
pivotal role in meeting the credit needs of rural America for years to 
come.
    I look forward to your testimony and the discussions to follow.
    With that, I yield to my Ranking Member, Mr. Peterson for any 
comments he may have.

    The Chairman. And with that, I yield to the Ranking Member, 
Mr. Peterson, for any comments he may have.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE 
                   IN CONGRESS FROM MINNESOTA

    Mr. Peterson. Well, thank you, Mr. Chairman, and welcome to 
today's witnesses.
    I want to echo the Chairman's comments on the passing of 
Ken Spearman. I worked with Ken for a number of years, and I 
was always impressed with his tremendous knowledge of 
agriculture, and always enjoyed our visits during his time as 
Chairman of the Farm Credit Administration. And my thoughts and 
prayers are with his family.
    I want to thank the Chairman for calling another hearing to 
allow us to hear from the Farm Credit System and its regulator 
today. There is no question that access to credit is necessary 
for farmers to stay in business, but access to capital is also 
necessary for ag businesses and rural communities.
    This hearing is a good opportunity for us to get a better 
understanding of the current credit situation as we look to the 
potential changes in the next farm bill. And that is both in 
the commodity and rural development titles.
    Now, we have also seen a budget submission that seems to 
overlook the continuing infrastructure needs in rural America, 
from basic drinking water to the state of our hospital 
facilities that rural areas deserve. I have been pleased to see 
commercial banks and Farm Credit institutions team up in my 
district to help ensure that first-class health care is 
available closer to home. There have been two small hospitals 
financed with a combination of Farm Credit and the banks in my 
area, that wouldn't have happened otherwise.
    Again, Mr. Chairman, access to credit is vital for America. 
I look forward to working with you and other Members of the 
Committee to ensure that our rural communities and ag producers 
have access to that credit from both the Farm Credit System and 
from commercial banks.
    And with that, I would yield back.
    The Chairman. I thank the gentleman.
    And I would like to recognize David Scott for a couple of 
comments on Mr. Spearman. David.

  OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN 
                     CONGRESS FROM GEORGIA

    Mr. David Scott of Georgia. Thank you very much, Mr. 
Chairman.
    Last evening, we all received the unfortunate news of the 
passing of Mr. Kenneth Spearman, a man who came along at the 
right time, was in the right place, was doing the right thing.
    The great philosopher, Aristotle, was once asked, 
``Aristotle, what does it take to be a great man?'' And 
Aristotle said, ``In order to be a great man, you must first of 
all know thyself.'' Well, Ken Spearman not only knew who he 
was, he also knew whose he was; that he was truly a child of 
God.
    Ken Spearman became the absolute first African American 
Chairman of the Farm Credit Administration, a history-making 
achievement of soaring magnitude, but that achievement did not 
come easy. Ken Spearman was a man truly of great prominence, 
great intelligence, who showed remarkable endurance over the 
various challenges in life, the various hardships. Life is not 
an easy road if you are a high-achiever. He had mountains and 
valleys, but he overcame whatever obstacles there were to let 
his light shine, to become a world leader in agricultural 
financing, farming, and credit.
    Ken and I became good friends. He would often stop by the 
office whenever he was up at the Capitol. I looked forward to 
our visits. He encouraged me in so many ways. He and I shared a 
very similar commitment in helping the beginning farmer knowing 
the obstacles they faced. He was really dedicated to helping 
beginning farmers. And he had a special interest in helping get 
young people into farming, and especially young African 
Americans into farming. And he was a great source of 
encouragement to me 2 or 3 years ago when we began to enlist 
the help of our 1890s African American colleges to get 
scholarships for youngsters, to graduate and go into 
agribusiness careers.
    He was a magnificent storyteller. And Ken Spearman's name 
will forever be held in the highest esteem as a history-making 
pioneer in the world of agriculture, finance, and Farm Credit. 
And he was a fighter, strong, with unwavering courage, and yet 
he was a humble man, and he understood the true meaning of 
implicit love, especially for his wife, Maria, his children, 
Michelle, Rochelle, and Ken, and of course, his untiring love 
for the United States of America, and his unparalleled love in 
the trust, in his confidence in All Mighty God.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, David. I appreciate that.
    The chair would request other Members submit their opening 
statements for the record so our witnesses may begin their 
testimony, and to ensure there is ample time for questions.
    [The prepared statements of Mr. Lucas and Ms. Adams 
follow:]

Prepared Statement of Hon. Frank D. Lucas, a Representative in Congress 
                             from Oklahoma
    Mr. Chairman, in the spirit of today's hearing I'd like to 
recognize one of the institutions created in the aftermath of the farm 
crisis of the 1980's, the Federal Agricultural Mortgage Corporation, 
also known as Farmer Mac. This institution has continued to fulfill 
its' Congressional mission, as directed by this Committee, for nearly 
30 years. Farmer Mac continues to work with agricultural lenders across 
the nation to provide the capital and liquidity that is essential to 
the success of America's farmers, ranchers, and rural electric 
consumers. As we continue to discuss the future of rural America, let 
us never forget the great benefit that a safe and healthy secondary 
market provides to both agriculture and rural America.
                                 ______
                                 
Prepared Statement of Hon. Alma S. Adams, a Representative in Congress 
                          from North Carolina
    Thank you Mr. Chairman, and thank you to FCA Chairman Tonsager and 
President Halverson of CoBank for being here.
    My office has a great relationship with Carolina Farm Credit in the 
12th District of North Carolina which I represent. They provide loans 
to several farms and agribusinesses in Mecklenburg County.
    Through their corporate mission fund, in 2015 Carolina Farm Credit 
also awarded a grant to North Carolina A&T for the university's 
extension project at Cove Creek Gardens in Greensboro.

    The Chairman. I would like to welcome our witnesses this 
morning. We have the Honorable Dallas P. Tonsager, Chairman of 
the Board, CEO, Farm Credit Administration, here in Virginia; 
the Honorable Jeffery Hall, Member of the Board, Farm Credit 
Administration, McLean, Virginia; Mr. Jimmy Dodson, Chairman, 
Farm Credit Bank of Texas Board of Directors, from Robstown, 
Texas; Mr. Doug Stark, who is President and Chief Executive 
Officer of the Farm Credit Services of America, Omaha, 
Nebraska; and Dr. Tom Halverson, President and CEO of CoBank, 
Denver, Colorado.
    Mr. Tonsager, you are recognized for 5 minutes, at your 
pleasure.

   STATEMENT OF HON. DALLAS P. TONSAGER, CHAIRMAN AND CHIEF 
                 EXECUTIVE OFFICER, FARM CREDIT
                   ADMINISTRATION, McLEAN, VA

    Mr. Tonsager. Thank you, Chairman Conaway, Ranking Member 
Peterson, and Members of the Committee, it is a privilege to 
appear before you today to report on the Farm Credit System. I 
have a written statement to submit for the record.
    President Obama appointed me to the FCA Board in March of 
2015. Last fall, the President designated me FCA Board Chairman 
and CEO. I have the pleasure of serving on the Board with Jeff 
Hall, who is here today. I would also like to mention my former 
colleague, Ken Spearman, who passed away on Monday.
    Since 2009, Ken has served on the Boards of the FCA and the 
Farm Credit System Insurance Corporation. He also served terms 
as Chairman for both organizations. Ken was well loved at the 
agency, and our hearts and prayers are with the Spearman family 
as we all grieve his loss.
    FCA is an independent Federal agency that regulates and 
examines the banks, associations, and related entities of the 
Farm Credit System, including the Federal Agricultural Mortgage 
Corporation, or Farmer Mac. Our responsibility is to ensure 
that the System meets its Congressional mission to provide a 
dependable source of competitive credit for agriculture and 
rural America in good times and in bad.
    FCA is not an appropriated agency. We are funded primarily 
through assessments paid by System institutions. Congress 
oversees our administrative expenses and sets an annual cap on 
them.
    The Farm Credit System, which was established in 1916, is 
the nation's oldest government-sponsored enterprise. It is a 
nationwide network of borrower-owned cooperative financial 
institutions and affiliated service organizations. Currently, 
the System includes four banks and 73 direct lending 
associations. The banks provide loan funds to the associations, 
which in turn make loans to farmers, ranchers, and other 
eligible borrowers.
    Under the Farm Credit Act, the System has the authority, 
subject to certain conditions, to make the following types of 
loans: ag real estate, ag production and equipment, aquatic 
production loans, loans to ag processing facilities and farm-
related businesses, agricultural cooperative loans, rural home 
mortgages, ag export and import loans, rural utility loans, and 
loans to farmers and ranchers for other credit needs.
    Also under the Similar Entity Authority, the System may 
participate with other lenders to make loans to those who are 
not eligible to directly borrow from the System, but whose 
activities are functionally similar to those of eligible 
borrowers. Through this participation, the System diversifies 
its portfolio, reducing the risks associated with serving a 
single industry.
    Farm Credit banks and associations cannot take deposits. 
The Systems obtain loan funds by selling securities on the 
national and international money markets. The securities are 
not guaranteed by the Federal Government. For more than 100 
years, the System has helped our nation's agricultural 
producers provide abundant, affordable food and fiber to people 
at home and around the world. Currently, the System supplies 41 
percent of the nation's Farm Credit.
    I am pleased to report that the System's banks and 
associations are fundamentally safe and sound. In 2016, the 
System reported modest loan growth, solid earnings, and higher 
capital levels. But as a regulator of the System, we do have 
some concerns. In the farm economy, debt-to-asset levels are 
rising, while net farm income is declining. Interest rates, 
while still low, have begun to rise. And crop prices are 
expected to remain weak through the Fiscal Year of 2017. These 
factors are causing the value of Midwest farmland to slip. 
Prices in the protein and dairy sectors are also weak. As a 
result, the credit quality of the System's long portfolio has 
declined slightly.
    To help the System and its borrowers weather this downturn 
in the farm economy, we are monitoring conditions closely and 
examining institutions for concentration and collateral risk. 
We are also encouraging the System to do everything it can 
within the bounds of safety and soundness to help borrowers in 
difficulty, particularly young, beginning, and small producers 
for whom this downturn is especially difficult. We want the 
System to help ensure the best possible outcome for every 
borrower. This involves being proactive, identifying borrowers 
who are just beginning to struggle, and helping them develop 
strategies to increase their income and preserve their capital.
    As the regulator of the Farm Credit System, we will work 
hard to ensure that the System continues to meet the credit 
needs of our farmers and ranchers, even in challenging times 
like this.
    I thank you and I look forward to answering your questions.
    [The prepared statement of Mr. Tonsager follows:]

   Prepared Statement of Hon. Dallas P. Tonsager, Chairman and Chief 
       Executive Officer, Farm Credit Administration, McLean, VA
Introduction
    Chairman Conaway, Ranking Member Peterson, and Members of the 
Committee, I am Dallas P. Tonsager, Board Chairman and CEO of the Farm 
Credit Administration. On behalf of my colleagues on the FCA board, 
Jeffery S. Hall of Kentucky and Kenneth A. Spearman of California, and 
all the dedicated men and women of the agency, I am pleased to provide 
this testimony.
    FCA is an independent agency responsible for examining and 
regulating the banks, associations, and related entities of the Farm 
Credit System (FCS or System), including the Federal Agricultural 
Mortgage Corporation (Farmer Mac).
    The FCS is a government-sponsored enterprise (GSE) created by 
Congress in 1916 to provide American agriculture with a dependable 
source of credit. The System's banks and associations form a nationwide 
network of cooperatively organized lending institutions that are owned 
and controlled by their borrowers, serving all 50 states and Puerto 
Rico.
FCA Mission
    As directed by Congress, FCA's mission is to ensure a safe, sound, 
and dependable source of credit and related services for all 
creditworthy and eligible persons in agriculture and rural America. We 
accomplish this mission in two important ways.
    First, we protect the safety and soundness of the FCS by examining 
and supervising all FCS institutions, including Farmer Mac, and we 
ensure that they comply with applicable laws and regulations. Our 
examinations and oversight strategies focus on an institution's 
financial condition and any material existing or potential risk, as 
well as on the ability of its board and management to direct its 
operations. We also evaluate each institution's compliance with laws 
and regulations to ensure that it serves all eligible borrowers, 
including young, beginning, and small farmers and ranchers. If a System 
institution violates a law or regulation or operates in an unsafe or 
unsound manner, we use our supervisory and enforcement authorities to 
take appropriate corrective action.
    Second, we develop policies and regulations that govern how System 
institutions conduct their business and interact with customers. Our 
policies and regulations protect the System's safety and soundness; 
implement the Farm Credit Act; provide minimum requirements for 
lending, related services, investments, capital, and mission; and 
ensure adequate financial disclosure and governance. We approve the 
corporate charter changes of System institutions, System debt issuance, 
and other financial and operational matters.
    Through the oversight and leadership of the House and Senate 
Agriculture Committees, many important reforms were made to the Farm 
Credit Administration and the FCS as a result of the agricultural 
credit crisis of the 1980s. This included restructuring FCA as an 
independent arm's-length regulator with formal enforcement powers, 
providing borrower rights to System borrowers with distressed loans, 
and establishing the Farm Credit Insurance Fund to protect System 
investors.
    Since then, the Farm Credit System has restored its financial 
health and the public trust. Using our authority as an arm's-length 
regulator, we have contributed to the System's success by ensuring that 
System institutions adhered to safety and soundness standards. The 
Insurance Fund also helped to restore investor confidence.
    Both the System and FCA learned much during the crisis of the 
1980s, and those lessons helped build a much stronger Farm Credit 
System, as well as a stronger regulator. We will continue to focus on 
ensuring that the System remains safe and sound by promulgating 
regulations, providing appropriate guidance, and maintaining strong and 
proactive examination and supervisory programs.
    With the dynamics and risks in the agricultural and financial 
sectors today, we recognize that FCS institutions must have the 
appropriate culture, governance, policies, procedures, and management 
controls to effectively identify and manage risks. Today the System is 
a dependable provider of credit to agriculture and rural America as 
intended by Congress.
Farm Credit System Mission
    According to the Farm Credit Act of 1971, Congress created the 
System to improve ``the income and well-being of American farmers and 
ranchers by furnishing sound, adequate, and constructive credit and 
closely related services to them, their cooperatives, and to selected 
farm-related businesses necessary for efficient farm operations.''
    In fulfilling this mission, the System provides credit and other 
services to agricultural producers, aquatic producers or harvesters, 
and farmer-owned cooperatives. It also makes loans for agricultural 
processing and marketing activities, rural housing, farm-related 
businesses, rural utilities, and foreign and domestic companies 
involved in international agricultural trade. In addition, the System 
provides funding and discounting services to certain ``other financing 
institutions'' and forms partnerships with commercial banks to provide 
credit to agriculture and rural America through participations and 
syndications.
    As a regulator, we pay careful attention to the System's 
Congressional mandate to serve the needs of young, beginning, and small 
farmers and ranchers. By offering competitive interest rates, flexible 
underwriting standards, and their expertise in the agricultural 
industry, System institutions make it possible for more people to enter 
farming and to stay in it. This is good for producers, as well as for 
the rural communities in which they live.
    The System has successfully fulfilled its mission for more than 100 
years. It adds value to agriculture and rural America at all times, but 
it really proves its worth in difficult times. In early 2008, when 
commodity prices soared, operators of grain elevators could not find 
the financing they needed to operate, so System institutions stepped in 
to meet that need. If the System had not been there, those operators 
would have faced a financial crisis.
    This was a classic example of a GSE doing exactly what Congress 
intended it to do. And I'm confident that the System will again prove 
its value by meeting the credit needs of farmers and ranchers during 
the current downturn in the farm economy.
The Farm Economy and Agricultural Credit
    After years of historic highs, farm income reached a peak in 2013, 
and it has been dropping every year since then. USDA expects this trend 
to continue in 2017, falling another nine percent to $62.3 billion. 
That would be just \1/2\ of the $123.7 billion in net farm income 
recorded for 2013.
    Crop and livestock sales and cash production expenses are expected 
to stay flat this year. At the same time, government payments, which 
rose 20 percent in 2016, are expected to fall four percent.
    As a result of the growing stress in the farm economy, many farmers 
and ranchers are now having difficulty covering their costs, and this 
is beginning to reduce the quality of agricultural loans. While farm 
lenders, including the Farm Service Agency, continue to report that 
overall loan quality remains good, many loan performance indicators are 
now weaker.
    Non-accrual rates for System farm mortgages stood at 0.76 percent 
as of September 30, 2016, up from 0.69 percent a year earlier. And non-
accrual rates for farm production loans were at 1.04 percent, up from 
0.80 percent a year earlier.
    Federal Reserve Bank surveys of commercial bankers in the fourth 
quarter of 2016 also suggest a worsening credit climate. According to 
the surveys, repayment rates on agricultural production loans have 
declined, and the number of renewals and extensions has increased.
    Although lenders expect an increase in loan delinquencies in 2017, 
they do not expect a large increase in problematic loans. With 
expectations for tight profit margins to continue through 2017, more 
farmers are likely to rebalance their farm balance sheets or change 
their operating structures to lower their production costs.
    The condition of the farm economy also depends in part on interest 
rate policy. Currently, interest rates on farm loans remain 
historically low, but an improving economy and labor market is 
prompting the Federal Reserve to make incremental interest rate 
increases. The average interest rate on all System loans held nearly 
steady at about four percent during 2016.
Condition of the FCS
    Despite conditions in the farm economy, the FCS remains 
fundamentally safe and sound and is well positioned to manage this 
downturn. The depth and duration of market weakness is unknown, but it 
will continue to present challenges for the System until markets 
rebound.
    While the current credit stress level in the System's loan 
portfolio is well within its risk-bearing capacity, asset quality is 
expected to decline modestly in 2017 from relatively strong levels in 
2016. Moderate loan growth, adequate capital, and reliable access to 
debt capital markets are supporting the overall condition of the FCS.
    The System continues to grow at a moderate pace. As of September 
30, 2016, gross loans totaled $242.1 billion, up $15.3 billion or 6.7 
percent from September 30, 2015. Real estate mortgage lending was up 
$9.5 billion or 9.2 percent as demand for cropland continued in 2016. 
Overall, real estate mortgage loans represent 46.7 percent of the 
System's loan portfolio. Production and intermediate-term lending 
increased by $0.2 billion or 0.3 percent from the year before, and 
agribusiness lending increased by $2.6 billion or 7.7 percent.
    The System also continues to enhance its capital base, which 
strengthens its financial position as low or negative farm returns 
increase financial stress on borrowers. As of September 30, 2016, 
System total capital equaled $52.4 billion, up from $48.9 billion the 
year before. The System's total capital-to-assets ratio was 16.7 
percent as compared with 16.8 percent a year earlier. Moreover, 82 
percent of total capital is in the form of earned surplus.
    The increase in total capital is due in large part to the System's 
strong earnings performance. For the first 9 months of calendar year 
2016, the System reported net income of $3.6 billion compared with $3.5 
billion for the same period the previous year.
    Credit quality in the System's loan portfolio continues to be 
strong. Relative to total capital, non-performing assets represented 
3.9 percent as of September 30, 2016. For historical comparison, non-
performing assets represented 11.6 percent of capital at year-end 2010.
    The System continues to have reliable access to the debt capital 
markets. Investor demand for all System debt products has been 
positive, allowing the System to continue to issue debt on a wide 
maturity spectrum at very competitive rates. Risk spreads and pricing 
on System debt securities remained favorable relative to corresponding 
U.S. Treasuries.
    Another factor that makes System debt attractive to investors is 
the Farm Credit Insurance Fund, which has a balance of over $4.4 
billion. Administered by the Farm Credit System Insurance Corporation, 
this fund protects investors in System-wide consolidated debt 
obligations. System banks also maintain liquidity reserves to ensure 
they can withstand market disruptions. As of September 30, 2016, the 
System's liquidity position equaled 177 days, significantly above the 
90 day regulatory minimum required for each FCS bank.
    As required by law, System borrowers own stock or participation 
certificates in System institutions. The FCS had approximately 1.3 
million loans and 513,000 stockholders in 2016. Of these stockholders, 
86 percent were farmers or cooperatives with voting stock. The 
remaining 14 percent were nonvoting stockholders, including rural 
homeowners and other financing institutions that borrow from the 
System. USDA's latest data (as of December 31, 2015) show that the 
System's market share of farm debt was 41 percent, compared with 43 
percent for commercial banks.
Examination Programs for FCS Banks and Associations
    To help ensure the safety and soundness of FCS institutions, FCA 
uses examination and supervision processes to address material and 
emerging risks at the institution level and across the System. We base 
our examination and supervision strategies on institution size, 
existing and prospective risk exposure, and the scope and nature of 
each institution's business model.
    We monitor agricultural, financial, and economic risks that may 
affect groups of institutions or the entire System. Given the 
increasing complexity and risk in the System and human capital 
challenges at FCA, we continue to implement initiatives to improve 
operations, increase examination effectiveness, and enhance staff 
expertise in key examination areas.
    The frequency and depth of examination activities vary based on 
risk, but each institution is examined at least once every 18 months 
and receives a summary of examination activities and a report on its 
overall condition. FCS institutions are required to have effective loan 
underwriting and loan administration processes to properly manage 
assets and liabilities, to establish high standards for governance, and 
to provide transparent disclosures to shareholders.
    Our examination and supervision program promotes accountability in 
FCS institutions by working to ensure institutions identify and manage 
risks. Currently, we are closely watching real estate values because 
lower grain prices and a rise in long-term interest rates are pushing 
land prices down in certain sections of the country. When necessary, we 
use our enforcement powers to require institutions to change their 
policies and practices to correct unsafe or unsound conditions or 
violations of law or regulations.
    To assess the safety and soundness of each FCS institution, we use 
our Financial Institution Rating System (FIRS). This system provides a 
framework of ratings to help examiners evaluate significant financial, 
asset quality, and management factors. FIRS ratings range from 1 for a 
sound institution to 5 for an institution that is likely to fail.
    As the chart below indicates, the System remains financially strong 
overall. Institutions are well capitalized, and the FCS does not pose 
material risk to investors in FCS debt, the Farm Credit System 
Insurance Corporation, or to FCS institution stockholders.
    Although the System's condition and performance remain satisfactory 
overall, several institutions are experiencing enough stress to require 
special supervision. Factors causing the stress include weaknesses in 
the nation's economy and credit markets and a rapidly changing risk 
environment in certain agricultural segments. Also, in some cases, 
System institutions experience stress because their management fails to 
respond effectively to these risks and operational challenges.
    As of December 31, 2016, three System institutions were operating 
under a higher level of FCA supervisory oversight. While these 
institutions do not materially affect the System's consolidated 
performance, they require significantly greater time and agency 
resources to examine and oversee. No FCS institutions were under formal 
enforcement actions, in conservatorship, or in receivership.
Farm Credit System Financial Institution Rating System (FIRS)
Composite Ratings


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


          Source: FCA's FIRS Ratings Database.
          Note: This chart reflects ratings for only the System's banks 
        and direct-lending associations; it does not include ratings 
        for the System's service corporations, Farmer Mac, or the 
        Federal Farm Credit Banks Funding Corporation. Also, the 
        numbers in the bars indicate the number of institutions by FIRS 
        rating.
Federal Agricultural Mortgage Corporation
    Congress established Farmer Mac in 1988 to create a secondary 
market for agricultural real estate and rural housing mortgage loans. 
Farmer Mac has authority to create and guarantee securities and other 
secondary market products that are backed by agricultural real estate 
mortgages and rural home loans, USDA-guaranteed farm and rural 
development loans, and rural utility cooperative loans.
    Farmer Mac is committed to enhancing the availability of reasonably 
priced credit to agriculture and rural America through its secondary 
market activities. Under specific circumstances defined by statute, 
Farmer Mac may issue obligations to the U.S. Treasury Department, not 
to exceed $1.5 billion, to fulfill the guarantee obligations on Farmer 
Mac guaranteed securities.
    As measured using generally accepted accounting principles (GAAP), 
net income in FY 2016 (ended September 30) was up 12.8 percent from FY 
2015 to $53.7 million. The increase was due primarily to unusual costs 
in the prior year associated with the redemption of $250 million of 
Farmer Mac II preferred stock. That redemption resulted in an $8.1 
million one-time, after-tax loss recorded in the first quarter of FY 
2015. Despite a slight drop in net effective spread in FY 2016, 
earnings were up because of higher program loan volume, as well as 
higher guarantee and commitment fees.
    As of September 30, 2016, Farmer Mac's core capital totaled $587.1 
million, which exceeded its statutory requirement of $474.8 million by 
$112.3 million. The total portfolio of loans, guarantees, and 
commitments grew 10.4 percent to $17.2 billion.
Regulatory and Corporate Activities
    Regulatory Activities--Congress has given the FCA board statutory 
authority to establish policy, prescribe regulations, and issue 
guidance to ensure that FCS institutions comply with the law and 
operate in a safe and sound manner. We are committed to developing 
balanced, flexible, and legally sound regulations. Current regulatory 
and policy projects include the following:

   Revising regulations on eligibility and creditworthiness of 
        FCS institution. investments.

   Clarifying and strengthening standards-of-conduct 
        regulations.

   Clarifying or changing the amortization limits for 
        agricultural credit associations and production credit 
        associations.

   Revising regulations on eligibility and creditworthiness of 
        Farmer Mac investments.

   Revising the criteria in the regulations for reinstating 
        non-accrual loans.

   Reviewing stress testing done by System institutions.

   Reviewing cybersecurity requirements for System 
        institutions.

   Clarifying the disclosure and servicing requirements in the 
        borrower rights regulations.

   Evaluating regulations to reduce regulatory burden.

    Corporate Activities--Because of mergers, the number of FCS 
institutions has declined over the years, but their size and complexity 
have increased, placing greater demands on both examination staff 
resources and expertise. Generally, these mergers have resulted in more 
cost-efficient and better-capitalized institutions with broader, more 
diversified asset bases, both by geography and commodity. As of January 
1, 2017, the System had 73 direct-lender associations, four banks, five 
service corporations, and two special-purpose entities. Since December 
31, 2010, these System institutions have increased their staff by 
approximately 2,100 employees to 14,140 at December 31, 2016.
Serving Young, Beginning, and Small Farmers and Ranchers
    As part of their mission to serve all eligible, creditworthy 
borrowers, System institutions are required to develop programs and 
make special efforts to serve young, beginning, and small (YBS) farmers 
and ranchers.
    In 2015, the pace of new lending to YBS farmers generally exceeded 
the pace of overall System lending to farmers. The number of loans made 
in 2015 to young, beginning, and small farmers increased by 5.1 
percent, 7.5 percent, and 6.7 percent, respectively, from 2014.
    Since the total number of farm loans made by the System was up by 
only 3.7 percent, the share of total System farm loans made to all 
three YBS categories rose from that of 2014. These results are 
encouraging given the high costs of starting a farm, the declining 
number of people entering agriculture, and the rising average age of 
farmers.
    To help YBS farmers qualify for credit in 2015, FCS associations 
offered differentiated loan underwriting standards for YBS borrowers or 
made exceptions to their regular standards. More than \1/3\ of 
associations provided concessionary loan fees, and more than \1/2\ 
offered lower interest rate programs for YBS borrowers. Many 
associations partnered with state and Federal programs to provide 
interest rate reductions, guarantees, or loan participations for YBS 
borrowers.
Working with Financially Stressed Borrowers
    Risk is an inherent part of agriculture, and the causes of risk are 
many: bad weather, changes in government programs, international trade 
issues, high interest rates, etc. These risks can sometimes make it 
difficult for borrowers to repay loans.
    To provide some protection from these risks, the Farm Credit Act 
gives System borrowers certain rights when they apply for loans and 
when they have trouble repaying loans. For example, the [A]ct requires 
FCS institutions to notify borrowers of the right to seek restructuring 
of loans before the institutions begin foreclosure. When a System 
institution acquires agricultural property through liquidation, the 
Farm Credit Act also provides borrowers the first opportunity to buy or 
lease back their former properties.
    FCA enforces the borrower rights provisions of the Farm Credit Act 
and examines institutions to make sure they are complying with these 
provisions. We also receive and review complaints from borrowers who 
believe their rights have been denied.
    This year, because of the additional stress in the farm economy, we 
are emphasizing the need for System institutions to do everything they 
can within the bounds of safety and soundness to help borrowers in 
difficulty. We encourage them to seek the best possible outcome for 
every borrower.
    System institutions can use their vast agricultural, financial, and 
business expertise to help borrowers develop strategies to weather the 
storm. We are encouraging System institutions to monitor their 
portfolios carefully for early signs of borrower stress. When they 
identify struggling borrowers, we urge the institutions to reach out to 
them before their situations become dire--while they still have 
options. In doing so, System institutions can successfully fulfill 
their Congressional mission of meeting the credit needs of our farmers 
and ranchers even in challenging times like these.
Conclusion
    We at FCA remain vigilant in our efforts to ensure that the Farm 
Credit System and Farmer Mac remain financially sound and focused on 
serving agriculture and rural America. While we are proud of our record 
and accomplishments, we remain committed to excellence, effectiveness, 
and cost efficiency, and we will remain focused on our mission of 
ensuring a safe, sound, and dependable source of credit for agriculture 
and rural America. This concludes my statement. On behalf of my 
colleagues on the FCA board and at the agency, I thank you for the 
opportunity to share this information.

    The Chairman. Thank you, Dallas.
    Mr. Hall.

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

    Mr. Hall. Thank you, Mr. Chairman, Ranking Member Peterson, 
Members of the Committee. I appreciate the opportunity to be 
here, and especially appreciate the comments for our former 
colleague, Mr. Spearman. It was an honor to serve with him. He 
was a man I respected both personally and professionally. And 
my thoughts and prayers go to Maria, his wife, and their 
family.
    The Farm Credit Administration continuously monitors the 
financial conditions of the agriculture economy and the impact 
on the Farm Credit System. The financial strength of the 
borrowing base is what matters most to the financial strength 
of the System.
    The Farm Credit Administration's role as a safety and 
soundness regulator gives us the responsibility to ensure the 
System meets its Congressional mission to provide a dependable 
source of credit for agriculture and rural America. We fully 
understand that financial conditions are not static, and credit 
risks are intensifying. These risks are magnified when you look 
at certain geographic areas, certain farm enterprises, and 
individual farm operations. Looking forward, factors like 
interest rates, land values, and persistence of these lower 
commodity prices during this down cycle are very critical to 
the credit markets, and even more critical to the farmer 
borrower. While the System is well positioned to provide credit 
through an extended agricultural downturn, there are borrowers 
that will need extra assistance. The unique feature of the Farm 
Credit Act is the requirement to extend borrower rights to all 
direct borrowers. The Act provides System borrowers the right 
to restructure distressed loans. Borrowers also have the right 
of a secondary review if they receive an adverse decision.
    In addition to protecting borrowers from extremes in the 
agricultural economy, in 1987 Congress sought to protect 
taxpayers from exposure to future credit crises. Congress 
created the Farm Credit Insurance Corporation to ensure the 
timely payment of principle and interest on insured Farm Credit 
System debt and obligations held by investors. There has not 
been a default on System debt in the 30 year history of this 
fund.
    FCA's mission is to ensure a safe, sound, and dependable 
source of credit and related services for agriculture and rural 
America. We do this in two ways. First, by creating regulations 
and guidance for System institutions to follow; and second, by 
examining System institutions for compliance with the Farm 
Credit Act, FCA regulations, and safe and sound banking 
practices. By statute, our Office of Examination reviews 
associations and banks at least every 18 months. Each 
institution is scored based on key financial and management 
factors. If a System institution is found to be in violation of 
a law or a regulation, or its operations are deemed to be 
unsafe and unsound, FCA will issue and enforce corrective 
action. FCA also reports to Congress on the financial condition 
and performance of the Farm Credit System.
    Additionally, FCA will evaluate compliance with mission-
related regulations and guidance by evaluating the 
administration of programs to provide competitive credit to 
meet the needs of young, beginning, and small farmers. FCA also 
encourages and supports System involvement in local food 
initiatives, urban agriculture, farmer veteran programs, and 
other activities that support the goals of diversity and 
inclusion.
    As an arms-length regulator, FCA stresses the importance of 
effective internal controls for every institution. Every year 
the Office of Examination issues an operating plan which guides 
the examination staff and notifies the System where there will 
be added emphasis. There is special added emphasis on Board 
governance.
    Management is probably the most important element in an 
institution's operation. Management must have a thorough 
understanding of how their decisions will affect the financial 
soundness of the institution, the entire Farm Credit System, 
and also consider any risk to the System's overall reputation. 
Since the System operates as a cooperative with institution 
governance directed by member-elected Boards, there is added 
responsibility and expectations placed on the institution's 
leadership.
    So in conclusion, here are some key priorities for FCA as 
we move forward. First, is to ensure the safety and soundness 
of the Farm Credit System. Second, monitor stress at producer 
level, making sure that borrower rights are always fully 
exercised, and watch for added stress in groups that are 
particularly vulnerable. We view our current regulations for 
effectiveness and the need for any new regulations.
    I thank you for the opportunity to be here this morning, 
and will be glad to answer any questions. Thank you, Mr. 
Chairman.
    The Chairman. Thank you. Thank you, Mr. Hall.
    Jimmy, 5 minutes.

  STATEMENT OF JAMES F. ``JIMMY'' DODSON, CHAIRMAN, BOARD OF 
 DIRECTORS, FARM CREDIT BANK OF TEXAS, ROBSTOWN, TX; ON BEHALF 
                     OF FARM CREDIT SYSTEM

    Mr. Dodson. Chairman Conaway and Members of the Committee, 
I want to thank you for the opportunity to testify on behalf of 
Farm Credit this morning.
    My name is Jimmy Dodson and I am Chairman of the Board of 
the Farm Credit Bank of Texas. More importantly, I am a third 
generation farmer, raising cotton, corn, and grain sorghum, and 
also a little wheat and hay, on our family farm near Corpus 
Christi, Texas, down on the coast.
    Thank you, Mr. Chairman, Ranking Member Peterson, 
Congressman Scott, and Congressman Scott. Last year you all 
were the original cosponsors of the Congressional resolution 
congratulating Farm Credit on its 100th anniversary of support 
for rural communities and agriculture. We are very proud that 
so many of your other colleagues here on this Committee also 
cosponsored that resolution, and we are grateful for the 
Committee's support.
    As has been mentioned here already today, Farm Credit is a 
federation of cooperatives owned and governed by their own 
customers. That means that farmers and ranchers who are their 
customer-owners elect directors from the ranks that make 
decisions about the strategic direction of their organizations.
    Farm Credit has a specific mission assigned to us by 
Congress more than 100 years ago, and refined to ensure that 
farmers like me and rural communities like mine have a 
reliable, consistent source of financing, irrespective of 
cycles in the economy or the vagaries of the financial markets.
    As I put together my farm operating plan for this year, I 
knew, just like thousands of other farmers knew around the 
nation, that Farm Credit had the financial strength and strong 
desire to finance that plan and to help me succeed. My Farm 
Credit story is typical of the men and women who serve on Farm 
Credit Boards. My father began his farm in 1937 in the middle 
of the Great Depression. His timing wasn't very good. In the 
1950s, when I came along in 1953, the drought was terrible and 
my dad needed credit in the worst way, but his banker couldn't 
make him a loan because his bank decided to withdraw from the 
ag risk that was so great during that great drought. My dad's 
friends told him to try the local Farm Credit Association, then 
known as Coastal Bend PCA, or Production Credit Association. 
Farm Credit made my dad that loan, Dad made a crop, and our 
farm was saved. His relationship with Farm Credit deepened as 
he expanded his operation over the years.
    When I graduated from college I was glad to partner with my 
dad, and began farming in 1974. Farm Credit gave me the loan 
that helped me get started. Our operation has grown and become 
more capital and technology-dependent, and my Farm Credit 
lender has broadened their experience and improved its loan 
diversification to be even more dependable for me.
    There are thousands of other stories like mine in Farm 
Credit. They are the reason Farm Credit makes extraordinary 
efforts to serve young, beginning, and small farmers. They are 
the reason that Farm Credit works hard to find successful 
outcomes for producers, no matter what their size, even during 
the toughest times.
    Farm Credit's mission is as vital today as it has ever 
been. For the past few years, accomplishing that mission has 
been more difficult as farmers like me are facing a long run of 
low prices for the products that we grow. We know that credit 
alone can't fix chronic low prices, but farmers need a lender 
that understands this cycle and can help them understand 
options as they plan for their future. Farm Credit is that 
lender.
    The current cycle in agriculture makes this Committee's 
work on the next farm bill so crucial. We need a strong farm 
bill to provide a safety net against sustained market 
downturns. We pledge our support for this Committee's efforts 
to pass a strong farm bill next year.
    Farm Credit's mission extends well beyond the farmgate. Our 
mission includes financing for farmer-owned co-ops and other 
businesses that farmers depend on to succeed. We finance U.S. 
agricultural exports and make home loans for families in very 
rural settings.
    Farm Credit finances rural electric co-ops, rural water 
systems, and rural telecommunications and broadband providers. 
These loans improve the quality of life in our rural 
communities, providing clean drinking water, broadband for our 
schools, and reliable energy for rural families and businesses.
    Farm Credit is financially sound and poses no threat to the 
Federal Treasury. We do not use federally appropriated funds. 
We are not guaranteed by the Federal Government. We are 
privately owned by our customers.
    Farm Credit is leaning into this downturn in ag prices. We 
expected this cycle would come, and we built financial strength 
to meet it and fulfill the mission this Committee has given us. 
We will do our part to help our customers through this 
difficult time.
    We are grateful for the opportunity to testify today, and 
grateful for this Committee's support for Farm Credit, its 
mission, and for agriculture. I am happy to answer your 
questions.
    [The prepared statement of Mr. Dodson follows:]

  Prepared Statement of James F. ``Jimmy'' Dodson, Chairman, Board of
 Directors, Farm Credit Bank of Texas, Robstown, TX; on Behalf of Farm 
                             Credit System
    Chairman Conaway and Members of the Committee, it is an honor for 
me to be here today. Thank you for the opportunity to testify on behalf 
of Farm Credit.
    My name is Jimmy Dodson and I am the Chairman of the Board of 
Directors of the Farm Credit Bank of Texas. More importantly, I am a 
third-generation farmer, raising cotton, corn, wheat, hay, and grain 
sorghum on our family farm near Corpus Christi, Texas. My colleagues 
and I are here today to provide the Committee with a clear view into 
how Farm Credit is organized, the breadth of its activities, and its 
financial strength. But, most importantly of all, we are here today to 
talk to you about Farm Credit's vital mission to support rural 
communities and agriculture and how we are accomplishing that mission 
in the face of some pretty difficult times in agriculture.
    Please let me start by saying thank you. Mr. Chairman, Ranking 
Member Peterson, Congressman Scott and Congressman Scott, last year the 
four of you were the original cosponsors of the Congressional 
resolution congratulating Farm Credit on its 100th anniversary of 
support for rural communities and agriculture. We are very proud that 
so many of your colleagues on this Committee also cosponsored that 
resolution. We are grateful for the Committee's support as we begin the 
next 100 years of fulfilling our mission.
    It is planting season in south Texas right now and we are working 
long days and nights on the farm, but I was willing to break away to 
testify because Farm Credit is important to me and many other American 
farmers and rural Americans. We have a good story to tell.
    Farm Credit is different from other financial institutions in two 
essential ways. First, we are a cooperative, owned and governed by our 
customers. This ownership and governance structure means that farmers 
and ranchers who are our member-borrowers elect directors from their 
ranks who make the decisions about the strategic direction of the 
organization. Farm Credit's primary motivation is to help make its 
customers successful. From strategic decisions about product offerings, 
to building financial soundness, to evaluating organizational 
leadership and structural options, our boards of directors start with 
one simple question: ``Is it good for our customer-owners?'' When our 
organizations succeed financially, the profits go to improve services, 
build capacity, and to patronage dividends for our borrowers!
    Our board at Farm Credit Bank of Texas is typical of Farm Credit 
leadership, with all seven members having agricultural backgrounds and 
six having day-to-day leadership of farms and ranches. In addition to 
me, our Vice Chair Lester Little grows corn, milo, hay, and wheat in 
Lavaca County, Texas. Brad Bean is a dairy farmer in Gilsburg, 
Mississippi. Ralph ``Buddy'' Cortese is a rancher in Fort Sumner, New 
Mexico. Linda Floerke raises cattle and hay in Lampasas County, Texas. 
Betty Flores, one of our two appointed outside directors, was mayor of 
Laredo, Texas, serves on the board of the Texas Agricultural 
Cooperative Council, and is a partner in a ranching/real estate 
operation. Phil Guthrie, our other appointed outside director, is 
rooted in his family farm in Louisiana although he does not actively 
manage that operation today. They serve because they believe in Farm 
Credit's mission. They understand that our mission is as vital today as 
it was 100 years ago and they want to see that mission continue for 
generations to come.
    The second reason Farm Credit is different is that we have a 
specific mission, assigned to us by Congress more than 100 years ago, 
to ensure that farmers like me and rural communities like mine have a 
reliable, consistent source of financing irrespective of cycles in the 
economy or vagaries of the financial markets. As I put together my farm 
operating plan for this year, I knew--just like thousands of other 
farmers around the nation know--that Farm Credit had the financial 
strength and strong desire to finance that plan and to help me succeed.
    My Farm Credit story is typical of the men and women who serve on 
Farm Credit boards. It began for our family in 1953, even though our 
Texas farming roots were planted in 1867, when my grandfather moved to 
east Texas with his family. When he was thirty, he moved to Corpus 
Christi and bought 80 acres. With hard work, he raised his family and 
kept the farm going, and his youngest son--my father--began his farm in 
1937 in the middle of the Great Depression. As you might imagine, Dad's 
timing wasn't the best and his farm struggled, but he persevered. He 
and Mom had three children had several good years in the 1940's.
    The year I was born, 1953, things got worse. The 1950s drought was 
terrible and Dad needed credit in the worst way, but his banker would 
not make him a loan. It wasn't personal--the bank had decided to lessen 
their exposure to farm lending as the drought deepened. Dad's friends 
told him to try the local Farm Credit institution, then-known as 
Coastal Bend Production Credit Association. Farm Credit was created to 
provide liquidity to credit in agriculture to help creditworthy farmers 
like my dad, and unlike that banker, the local Farm Credit loan officer 
knew something about farming. He made Dad a loan, Dad made a crop, and 
our farm was saved. His relationship with Farm Credit deepened as he 
expanded his operation. One of my earliest memories is of going along 
with Dad to the local Farm Credit office to make his payments and to 
set up annual operating loans. I can still remember eating peppermints 
given to me by Mrs. Rader, who worked in the front office.
    A few months before I graduated from college, my father was offered 
an opportunity to buy out a neighbor's operation, but he couldn't 
handle the extra land by himself. I was glad to partner with him and 
began farming in 1974. Farm Credit gave me the loan that helped me get 
started. Our operation has grown and become more capital and 
technology-dependent, and my Farm Credit lender has broadened its 
expertise and improved loan diversification to be even more dependable 
for me. My children are part owners with my wife Barbara and me, and I 
have a younger partner now as well. All of them have a relationship 
with Farm Credit. Farm Credit makes a priority of helping young and 
beginning farmers.
    Knowing this story, you can understand why I was glad for an 
opportunity to serve on the board of my local Farm Credit association 
back in 1982. I understood at a personal level what Farm Credit meant 
to farmers in my area and wanted to help make sure that it was ready 
for the needs of future generations of farmers.
    There are thousands of other stories like mine in Farm Credit. They 
are the reason Farm Credit makes extraordinary efforts to serve young 
and beginning farmers. They are the reason that Farm Credit works hard 
to find successful outcomes for producers--even during the toughest of 
times. Seeing what Farm Credit is accomplishing for people in 
agriculture and rural America is gratifying. The time I've spent 
serving Farm Credit has been worthwhile--it's been a growing 
relationship that has spanned all of my 64 years.
    Farm Credit's mission is as vital today as it's ever been. Farm 
Credit supports rural communities and agriculture with reliable, 
consistent credit and financial services, today and tomorrow. Farm 
Credit's mission is to help these areas grow and thrive by financing 
critical infrastructure and communication services and providing 
farmers and agribusinesses with the capital they need to make their 
businesses successful. Because a steady flow of credit means more jobs 
and economic growth, Farm Credit is also helping ensure the vibrancy of 
communities throughout rural America.
    For the past few years, accomplishing that mission has been more 
difficult as farmers like me are facing a long run of low prices for 
the products we grow. For many grain farmers, this is the fourth year 
in a row with prices below break-even. For cotton farmers like me, this 
will be the fifth year of tough prices, and producers are struggling. 
We know that credit can't be a fix for chronic low prices, but farmers 
need a lender that understands this cycle and can help them understand 
options as they make plans for the future. Farm Credit is that lender.
    The current cycle in agriculture makes this Committee's work on the 
next farm bill crucial. We need a strong farm bill to provide a safety 
net against sustained market downturns. American farmers are the most 
efficient in the world, but they cannot compete against foreign 
governments when they manipulate prices and limit market access. The 
Federal Crop Insurance Program remains a critical part of that safety 
net. We pledge our support for this Committee's efforts to pass a 
strong farm bill next year. Thank you for your hard work!
    Farm Credit's mission extends well beyond the farmgate. Our mission 
includes financing for farmer-owned cooperatives and other 
agribusinesses that farmers depend on to succeed. Farm Credit finances 
over $5 billion in exports of U.S. agricultural products. We make more 
than $7 billion in loans for families to buy homes in very rural areas.
    Rural infrastructure is also a critical part of Farm Credit's 
mission. Tom Halverson will describe our infrastructure efforts in 
detail in a few moments but I want to make a point that the 
infrastructure needs in rural America are unique. Farm Credit finances 
nearly $28 billion in rural infrastructure, including rural electric 
co-ops, rural water systems, and rural telecommunications and broadband 
providers. These loans improve the quality of life in our rural 
communities, providing clean drinking water, broadband for our schools, 
and reliable energy for rural families and businesses.
    As my colleagues will tell you in a few moments, Farm Credit is 
institutionally strong and financially sound and poses no threat to the 
Federal treasury. We do not use federally appropriated funds. We are 
not guaranteed by the Federal Government. We are privately owned by our 
customers and fund our operations by issuing debt in the capital 
markets.
    We pay the full cost of our Federal regulation by the Farm Credit 
Administration, which has the full range of examination and enforcement 
authorities attributable to all independent Federal financial 
regulatory agencies. We pay the full costs of an insurance fund that 
guarantees timely payment of the debt securities we issue to fund our 
loans.
    Our financial strength, our cooperative ownership, and our mission 
are all reasons that Farm Credit is leaning in to this downturn in 
agricultural prices. We expected this cycle would come and we built 
financial strength to meet it and fulfill the mission this Committee 
has given us. We will do our part to help our customers through this 
difficult time. When farmers are successful, especially in spite of 
trials, all Americans benefit. Affordable, abundant, and safe food and 
fiber helps every one of our citizens, and proportionally those on 
fixed and low income benefit the most. What a blessing! What a great 
result of people and policy working together!
    We are grateful for the opportunity to testify today and grateful 
for this Committee's support for Farm Credit and its mission. I am 
happy to answer your questions.

    The Chairman. Thanks, Mr. Dodson.
    Mr. Stark, 5 minutes.

 STATEMENT OF DOUGLAS R. STARK, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, FARM CREDIT SERVICES OF AMERICA/FRONTIER FARM CREDIT, 
           OMAHA, NE; ON BEHALF OF FARM CREDIT SYSTEM

    Mr. Stark. Mr. Chairman, Ranking Member Peterson, and 
Members of the Committee, thank you for the opportunity to 
testify today on behalf of Farm Credit System.
    My name is Doug Stark, and I am President and CEO of Farm 
Credit Services of America, and also have the privilege of 
serving as President and CEO of Frontier Farm Credit, 
headquartered in Omaha, Nebraska, and Manhattan, Kansas, 
respectively.
    As has been mentioned here this morning, the Farm Credit 
System is made up of 77 individually and cooperatively owned 
and governed institutions. All have separate Boards of 
Directors, elected by customers that use their services. There 
are no Federal funds or taxpayer dollars appropriated for the 
ongoing operations of the Farm Credit System.
    Unlike most of our competitors, as a cooperative our net 
income goes to one of two places; it is either retained within 
the institution to build financial strength to serve those 
customers, or it is paid out to customers in the form of 
patronage dividends. The cooperative lending system allows us 
to bring a unique and important value proposition to the 
market. Sharing profits with our customers and holding capital 
of stockholders as close to the farm as possible, 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. Given the 
challenges farmers and ranchers are facing 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 
commercial banking industry recently announced another year of 
record profits, and the Farm Credit System is as financially 
strong as it has ever been. A healthy Farm Credit System and a 
healthy commercial banking industry bring greater stability and 
competition to the credit market. This is especially important 
during challenging times when commodity prices decline, our 
Farm Credit team members speak with genuine pride about finding 
ways to counsel and provide constructive credit for producers.
    We also share in our customers' heartaches. I have stood 
beside a rancher on a hillside in South Dakota, looking out on 
the hundreds of cattle they lost in an early snowstorm. In 
moments like that, words fail. It is easy to celebrate when our 
returns are bountiful. It is during times of adversity that our 
character and mission have the brightest opportunity to shine.
    While the farm economy is presented with challenges, we are 
very pleased to report that credit availability is not a 
problem. The farm finance environment remains fiercely 
competitive, and the various participants, including commercial 
banks, insurance companies, and the Farm Credit System all 
leverage their unique value propositions to attract customers 
and win business. The Farm Credit System offers a unique value 
to all producers simply by its competitive presence in the 
market. This competition keeps rates low and service high for 
farmers and ranchers.
    Farm Credit wins many customers, but we also lose business 
every week to others offering similar products. The competition 
is robust but fair.
    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 restructured debt, where appropriate. We have 
already met with thousands of customers, reducing their fixed 
costs by re-amortizing land payments over longer terms, as well 
as locking in fixed rates to eliminate rising interest rate 
risk, and have advanced against real estate equity to restore 
working capital and risk-bearing ability. We are committed to 
working with our customers to meet their individual needs.
    We have worked hard to build efficient lending institutions 
that have resulted in strong earnings, allowing Farm Credit to 
build strong capital levels and protect against loan 
deterioration and credit quality. We have sophisticated stress 
testing procedures, and are thoroughly examined by a Federal 
regulator, and issue transparent audited financial statements. 
Let me emphasize, the Farm Credit System does not pose a risk 
to U.S. taxpayers, and, in fact, the System has never been 
financially stronger.
    I take particular pride in the support we provide to our 
young, beginning, and small producers. It is an important part 
of what we do every day. Many Farm Credit Associations, 
including ours, offer special lending programs focused on young 
and beginning producers. It is heartwarming to hear their 
stories at our summer conference as they describe getting their 
start in production agriculture, and as they describe 
benefitting from our expertise and assistance.
    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 these agriculture 
producers, farmer-owned cooperatives, and rural infrastructure 
providers who own the Farm Credit System. They are the Farm 
Credit System.
    Thank you for the opportunity to testify today. I will be 
pleased to respond to your questions.
    [The prepared statement of Mr. Stark follows:]

 Prepared Statement of Douglas R. Stark, President and Chief Executive
 Officer, Farm Credit Services of America/Frontier Farm Credit, Omaha, 
                  NE; on Behalf of Farm Credit System
    Mr. Chairman, Ranking Member Peterson, and Members of the 
Committee, thank you for the opportunity to testify today on behalf of 
the Farm Credit System. My name is Doug Stark and I am President and 
CEO of Farm Credit Services of America and Frontier Farm Credit, 
headquartered in Omaha, Nebraska, and Manhattan, Kansas, respectively.
    Farm Credit Services of America and Frontier Farm Credit are part 
of the nationwide Farm Credit System. My testimony today will provide 
some background on the Farm Credit System, an overview of current 
credit conditions, and comments on the diverse ways that we in Farm 
Credit are fulfilling our mission to support rural communities and 
agriculture.
    The Committee's hearing today is timely. After years of strong 
performance, the agricultural economy now finds itself in very 
challenging times. Last month, the Committee heard testimony from 
Federal Reserve Bank of Kansas City economist Nathan Kauffman, who 
described the outlook for the U.S. farm economy as ``subdued,'' with 
producers realizing a modest increase in financial stress over the past 
year. We agree.
U.S. Farm Debt-to-Asset Ratio


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    Commodity prices have fallen while the cost of raising crops has 
remained high. Many row crop farmers found profits elusive the past 3 
years and are projecting barely break-even or losses for the 2017 crop 
year. Cotton farmers are even harder hit, with many now facing multiple 
years of losses. Forecasters see little chance of a quick commodity 
price rebound barring unexpected changes in commodity demand, supply, 
or both.
    Fortunately, the industry balance sheet was mostly strong entering 
this cycle after several years of favorable profits in agriculture. 
While we have seen debt-to-asset ratios increase slightly in the past 3 
years, they remain nearly even with the 30 year average and far below 
the levels seen in the mid-1980s. The trend, however, is concerning.
    Depending on geography and land type, the impact of the downturn on 
farmland values has been mixed. As farmland values rose sharply in the 
past decade, particularly in grain production areas, farmers and 
lenders both became increasingly conservative in leveraging real estate 
assets. Farmers bought increasingly high-cost ground but largely were 
using cash generated from higher commodity prices and borrowing less on 
a percentage basis. For the most part, Farm Credit lenders and 
commercial banks were unwilling to loan much more than 50 to 60 percent 
of farmland values in areas where prices had jumped most aggressively. 
Some even put hard caps on the dollar amount loaned per acre.
2016 Cropland Value by State
Dollars Per Acre and Percent Change from 2015

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



          USDA-NASS, August 5, 2015.

    Crop input prices, including cash rent, have not yet fallen in step 
with commodity price declines, squeezing profitability at the 
individual farm level. While we anticipate adjustments will come, it 
remains difficult to accurately predict timing. Perhaps the best news 
for farmers is that interest rates remain historically low and are 
often at fixed versus variable rates, another key difference compared 
to the downturn in the 1980s. While forecasters predict slightly rising 
rates over the coming months, those small increases start from an 
extremely low level. Debt costs are expected to remain low by 
historical standards.
    Similar to the producers we serve, Farm Credit built financial 
strength in anticipation of this challenging economic cycle. We have 
been fulfilling our mission for more than 100 years and have deep 
experience in the inevitable cycles of agriculture. Like most in 
agriculture, we could not predict with accuracy when this cycle would 
begin or end. But we knew it was coming, and our institutions prepared 
for it. We built capital. We loaned conservatively. Today, Farm Credit 
is financially the strongest it has ever been and is prepared to use 
that strength to support our customers and fulfill our mission.
    We continue to see modest loan growth in both our agricultural and 
rural infrastructure loan portfolios. The credit quality of our loan 
portfolio remains high as our members continue to meet their 
obligations. Credit quality in Farm Credit loan portfolios hit all-time 
highs during the years of high commodity prices but has now fallen back 
down to historical averages. While we anticipate some deterioration in 
our loan quality as this cycle continues, we are committed to working 
with our customers.
    Our philosophy on credit today is this: we know our customers well, 
understand and respond to their needs, and work cooperatively with them 
to analyze and structure our transactions to give them the best chance 
to succeed.
    We have been working for some time to help our customer-owners plan 
for the current environment. Many of our institutions, including my 
own, have allocated more resources specifically to work with producers 
most impacted by lower commodity prices. We are proactively reaching 
out and helping our customers understand their financial position so 
they can work through business plans and make good decisions that, 
hopefully, lead to the most positive outcome for them. We are 
restructuring debt to spread out payments and are providing other loan 
structuring options when necessary and appropriate. We are working to 
make sure that our members have the best information to help them 
manage costs and strengthen their risk-bearing capacity.
    As price forecasts stay low, most producers' only option is to very 
closely manage the cost structure of their operations. We are seeing 
many producers eliminate non-essential expenses, scale back expansion 
plans, and delay new equipment purchases. This is also a time when 
supporting key tools such as crop insurance, the current farm bill, the 
renewable fuels standard, and promoting strong export markets has never 
been more important to maintaining the viability of the industry. 
Passage of a strong farm bill next year is essential.
    Farm Credit is committed to remaining reliable and supportive of 
rural communities and agriculture, just as we have for the last 100 
years. That means we are staying abreast of industry cycles, 
identifying risks, and consulting with our customers about them. We 
know we must be patient and allow time for adjustments, while 
potentially exploring enhanced controls on terms, collateral, and 
conditions as appropriate. We continue to have a positive long-term 
outlook for U.S. agriculture, with the knowledge that Farm Credit's 
financial strength and expertise position us well to support our 
customer-owners through industry cycles.
    We understand that being dependable does not mean that we can save 
every operation. It does not mean that we are able to ignore good 
credit judgment or make credit decisions that are not constructive for 
the customer-owner or us as a lender. It does not mean that we will 
undertake undue risk or make all of the adjustments. We and our 
customer-owners will both need to make adjustments--and we are working 
hard to take those steps together.
    One important part of Farm Credit's ability to support our members 
is through our regulator, the Farm Credit Administration (FCA). We are 
fortunate that our independent Federal regulator has deep knowledge of 
agriculture and considerable experience in the inevitable business 
cycles our members face. Their ability to look holistically at a 
customer's operation and understand an individual customer's risk-
bearing capacity and equity position will, in many cases, determine 
whether we can continue with that customer. If the FCA is overly 
restrictive in its approach, it might tie our hands as we work to help 
members through this cycle. We are optimistic about the FCA's continued 
good judgment.
Financial Strength to Fulfill Our Mission
    Farm Credit supports rural communities and agriculture with 
reliable, consistent credit and financial services, today and tomorrow. 
Fulfilling that mission, especially during downturns in the 
agricultural economy, takes extraordinary financial strength--strength 
that Farm Credit has built over decades. After all, we have been 
supporting farmers and ranchers for more than 100 years and understand 
the inevitable cycles in agriculture.
    Farm Credit remains very strong financially and continues to 
experience moderate loan growth. Strong earnings across the past decade 
allowed Farm Credit to build capital levels to protect against 
deterioration in loan quality that might result from the downturn in 
the agricultural economy. 



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    The first line of defense against an economic downturn for any 
financial institution is earnings, and Farm Credit earnings have been 
strong for many years. Farm Credit generated $4.85 billion in combined 
net income during 2016. Farm Credit institutions are customer-owned 
cooperatives. The net income they generate can be used in only two 
ways: retained within a Farm Credit institution as capital to build 
financial strength that ensures continued lending, OR passed to 
customer-owners by way of cooperative dividends, which effectively 
lowers the cost of borrowing for our customers.
    At the end of 2016, Farm Credit's more than $52 billion in capital 
represented almost 16.4 percent of its total assets--more than double 
the minimum required by law. This strength means that Farm Credit can 
support its customers in difficult times and help keep American 
farmers, ranchers, and rural communities strong.
    This financial strength also means that the investors who continue 
to make their capital available to farmers, ranchers, and rural America 
through Farm Credit feel secure that they will be repaid. That 
confidence is mirrored in the high ratings Farm Credit has earned from 
the credit rating agencies.
Risk Mitigation Through Diversification
    With our defined mission of supporting rural communities and 
agriculture, Farm Credit does not enter and exit agricultural lending 
as farm profitability strengthens or weakens. Instead, we are committed 
to supporting these vital industries in good times and bad, regardless 
of economic cycle. Diversification is one of the keys to our financial 
strength through the many cycles of rural lending. By diversifying the 
industries we serve, the size of loans we make, the areas of the 
country we serve, and the rural infrastructure upon which it all 
depends, Farm Credit is able to minimize risk and counter the innately 
cyclical nature of many of the industries we serve.
Farm Credit System Loan Portfolio
(At 12/13/16)



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    The largest segment of our portfolio consists of loans to cash 
grain producers and represents just 17 percent of the total. The next 
largest segment is the cattle industry at nine percent of the overall 
portfolio. Even within our agricultural loan portfolio, Farm Credit 
benefits from significant industry diversification with several 
industry segments that are countercyclical to each other--
infrastructure helps to balance agriculture, livestock often balances 
out with grain, and specialty crops balance more conventional 
plantings.
    Similarly, since Farm Credit lends in all 50 states and Puerto 
Rico, the geographic diversification of our portfolio minimizes the 
overall potential impact of local agricultural events and helps us 
effectively manage risk. California is home to Farm Credit's greatest 
geographic concentration but represents just ten percent of the loan 
portfolio. Texas is next with just under seven percent and all other 
states have about five percent or less.
    Farm Credit also diversifies its portfolio by making loans of all 
sizes, many of which are considered small. Of the more than 552,000 
borrowers Farm Credit supports, 77 percent have loans of less than 
$250,000 and 88 percent have loans of less than $500,000.
    The chart [below] demonstrates the diversity in size of borrowings 
from Farm Credit. Our loans range from a few thousand dollars to get a 
beginning farmer started to the millions of dollars necessary to 
finance rural electric cooperatives and farmer-owned cooperatives all 
across the country.

                                            Farm Credit Loans By Size
                                               (As of 12/31/2016)
----------------------------------------------------------------------------------------------------------------
  Loans Size Range ($    Amount  Outstanding       % of Portfolio                              % of Portfolio
      thousands)             ($ millions)             (volume)          No. of Borrowers         (borrowers)
----------------------------------------------------------------------------------------------------------------
           $1-$249                  32,925                     13               425,256                    77
         $250-$499                  21,146                      9                60,331                    11
          $500-999                  24,404                     10                34,917                     6
     $1,000-$4,999                  53,102                     21                27,450                     5
    $5,000-$24,999                  37,255                     15                 3,774                    <1
   $25,000-$99,999                  32,749                     13                   702                    <1
 $100,000-$249,999                  21,970                      9                   148                    <1
     Over $250,000                  25,217                     10                    60                    <1
                       -----------------------------------------------------------------------------------------
  Total...............             248,768                    100               552,638                   100
----------------------------------------------------------------------------------------------------------------

    Farm Credit makes extraordinary efforts to support young, 
beginning, and small (YBS) farmers and ranchers. Unlike commercial 
banks, Farm Credit institutions are required to report specifically on 
their YBS lending activities. Each year, the Farm Credit Administration 
compiles data on Farm Credit YBS lending and reports it to Congress.
    Based on reports from the Federal Farm Credit Banks Funding 
Corporation and the Farm Credit Administration:

   Farm Credit made more than 64,000 loans to young producers 
        (under age 36) in 2016 for a total of $9.3 billion. Those are 
        actual new loans originated in 2016. When Farm Credit first 
        began reporting this specific information in 2001, new loan 
        levels were at 33,000 loans to young producers for $3.1 
        billion.

   Farm Credit made more than 81,000 loans to beginning 
        producers (10 years or less experience) for $12.7 billion in 
        2016. This is double the number and triple the dollar amount of 
        beginning farmer loans made in 2001 when Farm Credit made 
        37,000 loans for $4.2 billion to beginning farmers.

   Farm Credit institutions made more than 155,000 loans to 
        small producers (less than $250,000 in annual sales) for $12.2 
        billion in 2016, a substantial increase from the 114,000 loans 
        for $7.6 billion made in 2001.

    To put Farm Credit's lending to small farmers and ranchers into 
perspective, at year-end 2016 Farm Credit had more than one million 
loans of all kinds outstanding, and slightly more than 500,000 of those 
loans outstanding were to small farmers and ranchers.
    The numbers above cannot be combined. A single loan to a 25 year 
old rancher in her third year of ranching with annual sales of $100,000 
could be counted in the young, beginning, and small categories. We 
report this way for two reasons: our regulator requires it and, more 
importantly, it is the most accurate portrayal of who we serve.
    Farm Credit institutions go beyond just providing loans to YBS 
farmers, in many cases offering special incentives, education, and 
other support to these producers. Farm Credit organizations nationwide 
provide training and host seminars on topics such as intergenerational 
transfer of family farms, risk management techniques, and establishing 
and maintaining effective business plans.
    We engage across the spectrum with those entering agriculture, 
whether they are focused on conventional, organic, sustainable, local 
food-related operations, direct-to-retail, or other emerging business 
models.
Farm Credit's Mission to Support Rural Communities and Agriculture
    Farm Credit supports rural communities and agriculture with 
reliable, consistent credit and financial services, today and tomorrow. 
Farm Credit's mission is to help these areas grow and thrive by 
financing vital infrastructure and communication services and providing 
farmers and agribusinesses with the capital they need to make their 
businesses successful. Because a steady flow of credit means more jobs 
and economic growth, Farm Credit helps ensure the vibrancy of 
communities throughout rural America.
Farm Credit System Gross Loans Outstanding By Type
($ Billions)




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    Farm Credit is a nationwide network of 77 borrower-owned lending 
institutions that all share a critical mission assigned to them by 
Congress. These independent, privately owned institutions include four 
wholesale banks and 73 direct lending local associations, all of which 
are cooperatively owned by their customers: farmers, ranchers, farmer-
owned cooperatives and other agribusinesses, rural utilities, and 
others in rural America.
    Farm Credit is well-known for its 100 year old mission providing 
financing to all types of U.S. farmers and ranchers. In addition, Farm 
Credit's agricultural mission includes financing aquatic producers, 
many agribusinesses, and U.S. agricultural exports. A constant supply 
of credit to all of these areas has helped make agriculture one of the 
driving engines for the U.S. economy and enables our nation's 
agricultural producers to feed the world.
    Farm Credit's mission beyond agriculture is just as important. 
Rural home buyers face obstacles unknown in more urban settings, and 
Farm Credit provides loans tailored to these unique circumstances. Farm 
Credit also provides financing for companies that provide vital 
infrastructure to rural communities in the U.S., helping to bring clean 
water to rural families, reliable energy to farms and rural towns, and 
modern, high speed telecommunications that connect rural America to the 
rest of the world. Modern infrastructure makes rural communities 
competitive, provides jobs, and helps improve the quality of life for 
rural families.
    All the loans Farm Credit makes directly support our mission and 
are authorized under the Farm Credit Act of 1971, as amended. While 
Congress sets Farm Credit's mission, Congress does not appropriate any 
dollars for Farm Credit System operations. There is no Federal funding 
for Farm Credit. Instead, the four Farm Credit System banks together 
own the Federal Farm Credit Banks Funding Corporation that markets to 
the investing public the debt securities that are used to fund the 
lending operations of all Farm Credit institutions. Detailed 
information about the Farm Credit System's specific financial results 
and about Farm Credit System debt securities is available on the 
Funding Corporation's website at www.farmcreditfunding.com.
    Unlike commercial banks, Farm Credit institutions cannot fund their 
loan-making activities through secured deposits guaranteed by the 
Federal Deposit Insurance Corporation and backed by the full faith and 
credit of the U.S. Government. Instead, we rely on the investment 
community, which consistently recognizes the value and stability of our 
Farm Credit System-issued debt securities. Farm Credit System debt 
securities are not explicitly guaranteed by the U.S. Government. Rural 
communities and agriculture are at the heart of what we do. With each 
loan we make, we're committed to showing how it supports our mission. 
Whether it's helping a company find the capital to invest in a small 
rural town's electrical infrastructure or high speed Internet, our 
loans help support rural communities as well as the agriculture that 
exists alongside them.
    Farming and rural life have changed dramatically since the Farm 
Credit System was established 100 years ago. As a result, Farm Credit 
is constantly evaluating our programs to ensure that we are able to 
serve the full breadth of capital needs for rural communities and 
agriculture. As U.S. agricultural producers gear up to feed a planet of 
nine billion people by the year 2050, a significant amount of capital 
will be needed to make sure our agriculture industry and the 
infrastructure that supports it are up to the task.
    That is why Farm Credit helped organize the Rebuild Rural coalition 
of more than 200 organizations representing agricultural producers, 
rural businesses, rural communities, and rural families to advocate for 
aggressive efforts to meet the unique infrastructure needs of rural 
communities and agriculture.
    Those of us in rural communities have seen our infrastructure 
deteriorate, jeopardizing jobs, our agricultural competitiveness, and 
the health of rural families. Past infrastructure initiatives often 
focused on urban and suburban infrastructure while not adequately 
addressing the unique needs of rural communities.
    American agriculture truly feeds the world and creates millions of 
jobs for U.S. workers. Our nation's ability to produce food and fiber 
and transport it efficiently across the globe is a critical factor in 
U.S. competitiveness internationally. Infrastructure that supports 
rural communities and links them to global markets has helped make the 
U.S. the unquestioned leader in agricultural production. Our 
deteriorating infrastructure threatens that leadership position.
    Transportation infrastructure improvement is the most obvious need 
in rural communities, but not the only one. Highways, bridges, 
railways, locks and dams, harbors, and port facilities all need major 
investment if we are to continue efficiently transporting our 
agricultural products to market. In addition, critical needs exist in 
providing clean water for rural families, expanding broadband to 
connect rural communities to the outside world, and enhancing the 
ability to supply affordable, reliable, and secure power for the rural 
economy.
    The scope of the investment needed is staggering. Clearly the 
Federal Government must continue to play an important role in providing 
funding and those Federal investments should increase. However, Federal 
resources likely cannot fill the need entirely. Creative solutions that 
pair Federal investment with state/local government investment and 
private sources of capital hold promise for raising a portion of the 
funds necessary to accomplish the job.
    Farm Credit's mission encompasses the breadth of rural America and 
agriculture: young and beginning farmers and alternative business 
models; traditional production operations and established 
agribusinesses; rural homeowners; and essential rural infrastructure 
providers. We exist to provide reliable access to credit to help rural 
communities thrive. As the Farm Credit Act makes clear, our 
responsibility is to meet the needs of a wide range of rural 
enterprises and agricultural producers that have a basis for credit.
Collaboration, Participation, and Competition
    Working in collaboration with, as well as competing with other 
lenders, Farm Credit exists to ensure borrowers not only have access to 
a sufficient amount of capital but also a choice in lenders. Despite 
what the banking lobby would have you believe, commercial bankers work 
with Farm Credit regularly in ways that serve all parties well--
including, and most importantly, the borrower. Banks invite Farm Credit 
to participate in loans to ensure sufficient credit in the marketplace 
and to diversify their own risk. Farm Credit lenders invite commercial 
banks into loans as well.
    Bankers are not only our allies on the business side, many are our 
customers. As the former head of Schwertner State Bank and the current 
operator of a successful cattle operation, Texas businessman Jim 
Schwertner has been a long-time Farm Credit customer. Jim financed his 
farm business with Capital Farm Credit and its predecessor Farm Credit 
organizations from the very beginning.
    Here's what Jim has to say about Farm Credit: ``Farm Credit 
understands agriculture. They understand the volatility of the markets, 
and they're willing to adapt and change as the industry changes. 
They've always been there for us, and we know that as long as we keep 
them posted on our operation, they'll stick with us. That's important 
in an industry that requires more and more capital. Today, we need to 
be very efficient, and having a banker who will respond with a moment's 
notice is key.''
    Similar entity loan participations are an important way that 
commercial banks and Farm Credit partner to serve customers. Similar 
entity transactions support Farm Credit's mission by providing valuable 
diversification that helps ensure Farm Credit can support its core 
customers through good times and bad. The authority is especially 
important in the current environment as falling commodity prices are 
impacting the incomes of many of the farmers, ranchers, and 
agribusinesses we serve.
    My colleague [Dr.] Halverson will discuss Farm Credit's similar 
entity loan participation activity in detail in his testimony.
More Efforts to Fulfill Farm Credit's Mission
    In the 2002 Farm Bill, Congress authorized the formation of Rural 
Business Investment Companies (RBIC) and made clear that Farm Credit 
institutions could create and invest in these entities to further the 
goal of making available subordinate debt and equity capital for rural 
entrepreneurs. The final regulations went into place in 2013, allowing 
our institutions to utilize this authority. Each RBIC operates similar 
to a private equity investment fund, where a professional investment 
fund manager raises capital from a group of investors and then invests 
that money in a variety of private businesses. Under the RBIC 
structure, the fund is licensed by USDA but no taxpayer funds are 
utilized.
    Farm Credit institutions committed to invest $150 million of their 
members' equity in the Advantage Capital Agribusiness Partners, L.P. 
investment fund. To date, $54.4 million of that capital has been 
deployed as subordinate debt and equity investments in later-stage, 
small businesses involved in agriculture, processing and marketing of 
agricultural products, farm supply, input suppliers, and branded food 
products. Since the first investment in February 2015, the fund has put 
capital to work in ten companies with operations around the U.S.
    The fund also has made investments in companies such as Hortau 
Corp., a California-based provider of precision irrigation management 
systems. During the recent extended period of drought in California, 
Hortau worked to provide innovative tools designed to help agricultural 
producers manage water shortages. Through investments like these, the 
Farm Credit-supported RBIC will continue to provide investment dollars 
to exciting agriculture-related businesses that are vital to rural 
communities' ongoing economic strength, providing jobs and making rural 
communities an appealing place to live and work.
    Farm Credit is also proud of our partnership with the Farmer 
Veteran Coalition (FVC) to serve veterans involved in agriculture. 
Using a grant from Farm Credit, FVC launched a program to allow farmers 
who are veterans to use a special label to allow consumers to support 
veterans as they purchase products. With partnership and funding from 
Farm Credit, FVC broadened the Homegrown by Heroes labeling program 
from a single-state initiative to a nationwide program.
    Farm Credit has a long legacy of partnership with organizations 
like the National 4-H Council and FFA, whose important work helps 
ensure a strong future for rural communities and agriculture. Our 
financial support of National 4-H Council currently provides for 
scholarships that afford young people from historically black land-
grant universities and Tribal colleges the opportunity to attend 
Citizenship Washington Focus, a summer program on civic engagement. 
Hundreds of students attend a weeklong educational program to receive 
education and collaboratively develop a community action plan to 
implement back at home. Students also spend an entire day visiting 
Congressional offices on Capitol Hill. In 2015, students from five of 
the land-grant universities were able to attend the Congressional 
hearing recognizing the 125th anniversary of the land grant system. 
Through this partnership, Farm Credit is able to educate students from 
rural communities who otherwise would not have the opportunity to learn 
about the legislative process.
    Farm Credit and FFA partner on several programs including New 
Century Farmer, an annual conference where students develop their 
careers in production agriculture through practical experience and 
entrepreneurial leadership training. The FFA Washington Leadership 
Conference, a summer program that brings thousands of FFA students to 
Washington, D.C. to learn about the legislative and advocacy process, 
is another program we proudly support. Finally, our funding of FFA's 
broadly attended annual convention goes to supporting diversity and 
inclusion and alumni development initiatives.
    Farm Credit has been a long-time supporter of Annie's Project, an 
educational program dedicated to strengthening women's roles in the 
modern farm enterprise. Farm Credit provides grants and expertise to 
support course development and online resources, bring together Annie's 
Project educators for professional development programs, and expand the 
program's reach into more communities. To date more than 12,000 farm 
women have completed Annie's Project courses in 33 states.
    Because Farm Credit employees live and work in the rural 
communities they serve, Farm Credit's commitment to organizations like 
FVC, 4-H, FFA, and Annie's Project extends far beyond just a financial 
contribution. Each year Farm Credit employees dedicate thousands of 
volunteer hours toward making these and other local agriculture events 
and programs a success.
    The future of rural communities and agriculture is dependent upon 
making rural America a desirable place to live. Because of Farm 
Credit's capital strength, institutions are also making investments 
that support the quality of life in rural communities such as bonds 
issued to support critical care hospitals, nursing facilities, housing 
for the elderly, and schools. These investments demonstrate the 
commitment of our customer-owners to making their hometowns a place in 
which the next generation will choose to live and work.
Regulatory Oversight by the Farm Credit Administration
    All Farm Credit System institutions are regulated by the Farm 
Credit Administration (FCA). The FCA is an arm's-length, independent 
financial safety and soundness regulator. Its three Board members are 
nominated by the President and confirmed by the Senate. The FCA has 
oversight and enforcement powers similar to other Federal financial 
regulators to ensure that Farm Credit institutions operate in a safe 
and sound manner. Farm Credit System institutions pay the full cost of 
FCA oversight.
    FCA examines each Farm Credit institution at least once every 18 
months and, in many cases, each year. These exams are comprehensive, 
consistent with commercial bank examinations, and exam results are 
reviewed directly with an institution's board of directors. As one who 
is on the receiving end of yearly examinations, I can assure you that 
FCA is thoroughly doing its job.
    The Farm Credit System's mission, ownership structure, and 
authorizing legislation are unique among financial institutions. As a 
result, it is critically important that Farm Credit's safety and 
soundness regulator fully understands our mission and what it takes to 
be successful in accomplishing that mission. As in any regulatory 
oversight relationship, we disagree with FCA from time to time on a 
wide range of topics but have full confidence in the Agency's 
competence and professionalism. Investors in Farm Credit debt 
securities take great comfort from FCA's oversight effort and Farm 
Credit institutions benefit from strong safety and soundness oversight 
by the Agency.
    Though FCA assesses Farm Credit institutions to cover the full 
costs of their regulatory efforts, Congress, through the annual 
appropriations process, sets a limit on the overall amount FCA can 
assess. The appropriations language typically includes a provision to 
allow FCA to assess more than the limit should the specific need arise 
for more funding. For 2016, Congress set the amount FCA can assess Farm 
Credit institutions for their regulation at $65.6 million.
Self-Financed Insurance Fund to Protect Investors
    The Farm Credit System Insurance Corporation (FCSIC), another 
independent Federal regulatory agency, was created in 1988 to protect 
investors in Farm Credit System debt securities. There are no Federal 
appropriations to support FCSIC. Instead, Farm Credit institutions pay 
premiums each year to pay for FCSIC operations and to create the Farm 
Credit System Insurance Fund (the Fund). The Fund exists to protect 
investors in System debt securities against loss in the event a Farm 
Credit institution defaults.
    There is no taxpayer backstop for the Fund. The Farm Credit System 
does not have a guaranteed line of credit from the U.S. Treasury or the 
Federal Reserve. However, FCSIC has an agreement with the Federal 
Financing Bank (FFB), a Federal instrumentality subject to the 
supervision and direction of the U.S. Treasury, pursuant to which the 
FFB would advance funds to FCSIC.
    Under its existing statutory authority, the FCSIC may use these 
funds to provide assistance to Farm Credit Banks in exigent market 
circumstances that threaten the banks' ability to pay maturing debt 
obligations. Importantly, the FFB line of credit is not available in 
the event that the Farm Credit System makes bad loans or other mistakes 
under its control. Instead, the FFB line of credit is only available if 
general funding market conditions prohibit Farm Credit from its normal 
funding mechanisms.
    In this circumstance, the agreement provides for advances of up to 
$10 billion and terminates on September 30, 2017, unless otherwise 
renewed. The decision whether to seek funds from the FFB is at FCSIC's 
discretion, and each funding obligation of the Federal Financing Bank 
is subject to various terms and conditions. As a result, there can be 
no assurance that funding would be available if needed by the Farm 
Credit System.
    The Farm Credit Act sets the funding goal for the Fund at two 
percent of the aggregate outstanding insured obligations of the System. 
FCSIC also has the authority to examine Farm Credit institutions and 
would act as the conservator or receiver of a System institution should 
one fail. The Fund is invested only in U.S. government guaranteed 
securities and had assets of $4.45 billion as of December 31, 2016.
Conclusion
    We are grateful for the opportunity to testify today and update the 
Committee on Farm Credit's ongoing efforts to fulfill the mission with 
which you have charged us. We welcome the Committee's interest in and 
oversight of our activities. Currently, we face a challenging economic 
environment and stand ready to confirm our commitment to continuing to 
fulfill our mission of financing our country's rural communities and 
agriculture.
    We especially appreciate the opportunity to provide an accurate 
portrayal of Farm Credit and its mission that stands in sharp contrast 
to the misleading information routinely peddled by lobbyists for the 
commercial banking industry who seek to gain advantage by trying to 
damage Farm Credit's reputation. If successful, their efforts would 
weaken competition for rural loans to the detriment of those who need 
them. Their message makes clear their view that banker profits are more 
important than the success of farmers and rural families.
    We have no desire to fight with the commercial bank lobby. No good 
can come of it. No customer will be served and no community will be 
improved as a result of political bickering between commercial banks 
and Farm Credit. Not long ago, then-American Bankers Association chief 
Frank Keating called for the elimination of Farm Credit. Just a year 
ago, the Independent Community Bankers Association of America joined in 
the commercial bankers' chorus to kill Farm Credit. We urge them to 
stop taking self-interested positions that would, by any rational 
analysis, do harm to agriculture and rural communities.
    As more than 50 farm, commodity, and rural organizations said last 
year in a letter to Congress, ``the Farm Credit System and commercial 
banks play critical roles in ensuring that farmers, ranchers, and other 
rural Americans have access to constructive, competitive credit on an 
ongoing basis.. We need all the resources that can be made available to 
sustain agriculture and rural America now and in the future.''
    While the market today has its challenges, we remain optimistic. 
Farmers, ranchers, and rural Americans remain enterprising, 
entrepreneurial, and committed to their way of life. We pledge to 
continue fulfilling our mission and working in the best interest of 
U.S. farmers and ranchers, agribusinesses, rural home buyers, and 
companies that provide vital infrastructure services to rural America. 
We look forward to the next 100 years of Farm Credit.
    I will be pleased to respond to your questions.

    The Chairman. Thank you, Mr. Stark.
    Dr. Halverson, 5 minutes.

   STATEMENT OF THOMAS HALVERSON, Ph.D., PRESIDENT AND CHIEF 
           EXECUTIVE OFFICER, CoBank, DENVER, CO; ON
                  BEHALF OF FARM CREDIT SYSTEM

    Dr. Halverson. Thank you. Good morning, Chairman Conaway, 
Ranking Member Peterson, Members of the Committee. Thanks for 
the opportunity to testify today on behalf of the vital role 
that the Farm Credit System plays in supporting rural America.
    My name is Tom Halverson, I am the President and CEO of 
CoBank. I had the opportunity to spend some of my formative 
years in my parents' hometown of Eagle Grove, Iowa, which sits 
squarely in Mr. King's district in north central Iowa. Many of 
my family still live there. Several of them have been lifetime 
farmers.
    Now, sadly, when I go to visit them or talk to them, I am 
finding that I am unqualified to get behind the wheel of any of 
their sophisticated farm machinery and implements. Being a 
banker, I discovered, is actually easier than being a modern 
farmer.
    CoBank is unique in the Farm Credit System. We serve 
farmer-owned co-ops, agribusinesses, and rural infrastructure 
providers, rather than individual farmers. Given the importance 
of these customers to production agricultures and to rural 
communities, CoBank is an integral part of the Farm Credit 
System. We are also the funding bank for 23 farmer-owned Farm 
Credit associations, lending themselves to more than 70,000 
farmers and ranchers all around the country. We are also a 
cooperative owned by our customers. Our Board of Directors is 
comprised predominantly of men and women from agricultural co-
ops, rural infrastructure companies, and from Farm Credit 
associations. Many are also farmers and ranchers in their own 
right.
    CoBank's customer-owners are in capital-intensive 
industries. They need reliable access to credit, regardless of 
market conditions. We have focused on building financial 
strength to ensure our reliability for our customers. Our 
earnings are used to build bank capital and to fund patronage 
dividends distributed to our customer-owners. Our capital 
levels are well above regulatory minimums, and we practice a 
strong credit underwriting culture. Most importantly, we have 
deep expertise and experience in our customers' industries.
    Farm Credit's key value proposition is dependability, and 
we stand by our customers in good times and difficult times. 
That includes conditions like today, when downward pressure on 
commodity prices impact farmers, ranchers, and co-ops. We are 
monitoring credit quality carefully, and working closely with 
our customers to ensure their access to credit that is required 
to manage successfully through these difficult times.
    High commodity prices can also be challenging, just as low 
prices can be. In 2007 and 2008, a spike in global prices for 
corn, soybeans, and wheat stressed farmer-owned grain elevators 
throughout the Midwest, the majority of which were CoBank 
customers. Our customers requested emergency increases to 
credit facilities to fund grain purchases and margin calls. And 
without this financing, liquidity shortages could have put them 
out of business. CoBank doubled its credit to the grain 
industry, increasing by nearly $8 billion in less than a year. 
Farm Credit support proved essential at a critical time for our 
customers.
    Equally important, CoBank has a $20 billion loan portfolio 
with rural infrastructure providers, including electric 
cooperatives, water companies, and communication providers; the 
backbone of the U.S. rural economy. Our mission is to provide 
them the credit that they need.
    We also support the mission of Farm Credit in many other 
ways, including an ambitious corporate social responsibility 
program. Our Board of Directors targets one percent of net 
income for contributions to nonprofits, predominantly in rural 
areas.
    Early this month, CoBank recently provided emergency relief 
funding and response to the devastating grassland wildfires 
that were occurring in Kansas, Oklahoma, Texas, and Colorado. 
With our affiliated associations and customers, we contributed 
a total of over $400,000 to local relief efforts.
    Finally, it is important to discuss the similar entity 
participation authority extended by statute to all Farm Credit 
institutions. Despite past criticisms with which I am sure you 
are all familiar, similar entity participations, in fact, 
support Farm Credit's mission. Similar entity participations 
provide risk and income diversification in portfolios that are 
heavily concentrated in production agriculture and commodities. 
Diversification is the key reason Congress extended this 
authority in 1992, and it remains critical today. Each Farm 
Credit institution is permitted to hold similar entity 
participations up to 15 percent of their total assets, though 
they constitute only three percent of the consolidated assets 
of the Farm Credit System. By law, similar entity 
participations must be originated by commercial banks. This 
authority remains a prudent risk management tool, and allows 
Farm Credit institutions diversification, and strengthens their 
mission service capacity across rural America.
    Thank you again for your attention. I very much look 
forward to answering your questions.
    [The prepared statement of Dr. Halverson follows:]

  Prepared Statement of Thomas Halverson, Ph.D., President and Chief 
 Executive Officer, CoBank, Denver, CO; on Behalf of Farm Credit System
    Good morning Chairman Conaway, Ranking Member Peterson, and Members 
of the Committee. Thank you for the opportunity to testify today on 
behalf of the vital role the Farm Credit System plays in the U.S. rural 
economy.
    My name is Tom Halverson and I am President and CEO of CoBank.
    CoBank is a proud member of the Farm Credit System, and we share 
the Farm Credit mission to support rural communities and agriculture. 
CoBank is unique in Farm Credit in that we are chartered to serve 
farmer-owned cooperatives, agribusinesses, and rural infrastructure 
providers. We also finance the export of about $5 billion worth of U.S. 
farm products around the world.
    Unlike most Farm Credit institutions, CoBank doesn't directly lend 
to farmers. Instead, we provide funding to 23 farmer-owned Farm Credit 
associations that make loans to more than 70,000 agricultural producers 
in 23 states in the Northeast, Plains, and West. In addition to 
providing funding to Farm Credit associations, CoBank directly loans to 
cooperatives and other businesses in the agribusiness, rural power, 
rural water and rural communications industries in all 50 states.
    Like all Farm Credit institutions, we are a cooperative owned by 
our customers, and our board of directors is comprised predominantly of 
men and women from agricultural co-ops and rural infrastructure 
companies we serve or from the Farm Credit lending associations we 
fund. A substantial percentage of CoBank board members are themselves 
farmers or ranchers. Our board members live and work in rural 
communities throughout the country; they have a generational mindset 
and are deeply committed to the bank's mission to support rural 
communities and agriculture.
CoBank Industry Portfolios




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    CoBank's customer-owners operate in highly capital-intensive 
sectors, and need reliable access to credit, regardless of market 
conditions. CoBank has built financial strength to deliver that 
reliable access to credit. We maintain our capital levels far in excess 
of regulatory minimums. We have a strong credit underwriting culture. 
And most importantly, we have deep expertise and experience in 
industries in which our customers operate.
    With commodity prices continuing at low levels, we are watching 
closely for signs of stress among our customers. Loan quality for 
CoBank, however, remains very strong by virtually every measure, 
despite stresses in the rural economy that have impacted our customers.
    The first line of defense for any financial institution is its 
earnings, and CoBank is no different. Like other Farm Credit 
institutions, CoBank's cooperative structure means that the bank's net 
income can only be used in two ways--either retained within the bank to 
build financial strength to withstand downturns and continue meeting 
the needs of our customers, or returned to those customers in the form 
of cooperative dividends (known as patronage distributions) that 
directly lower the cost of borrowing.
    Like every member of the Farm Credit System, CoBank is focused on 
providing credit and financial services to production agriculture. 
Lending Farm Credit associations comprises nearly \1/2\ of our 
portfolio. Our affiliated associations serve farmers and ranchers in 
many of the states represented on the Committee.
Strategic Relationships Portfolio


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    One of these associations is Farm Credit East, headquartered in 
Enfield, Connecticut, serving 14,000 customers in seven states reaching 
from New Jersey north to Maine. Agriculture and the future of our rural 
communities depend on the next generation of farmers getting started. 
To help in that effort CoBank partnered with Farm Credit East on their 
FarmStart program.
    FarmStart invests working capital up to $75,000 to give new farmers 
in their first 3 years of operation a healthy start as agricultural 
producers. The producers start with a business plan and work with a 
FarmStart advisor to create a roadmap to success. Recently, FarmStart 
made its 200th investment in the future of agriculture in the 
Northeast. Yankee Farm Credit, another CoBank-affiliated association 
serving Vermont and parts of New York and New Hampshire, is also a 
partner in FarmStart.
    One FarmStart success story is Abigail Barrows of Deer Isle, Maine. 
In early 2015, Abigail combined her science background and her interest 
in farming with an investment from FarmStart and a loan from the USDA 
Farm Service Agency to purchase the Long Cove Sea Farm. She appreciates 
the flexibility of FarmStart in accommodating the seasonal nature of 
her business. Marketing at a local night market and via FaceBook, her 
first season's demand exceeded supply. Now she is hoping to grow her 
business while improving the marine environment.
    Another FarmStart success story is Hudson Valley Seed Library in 
Accord, New York. Founded by Ken Greene and Doug Muller, its mission is 
to produce ethically grown and regionally sourced seeds to add to the 
diversity available to farmers. As their business grew faster than 
expected, FarmStart helped Greene and Muller make an investment in cold 
seed storage, improved germination testing equipment, and add an 
employee to help with sales and marketing. Today they boast a certified 
organic catalog of 400 vegetable, flower and herb varieties. They are 
creating local jobs and increasing the genetic diversity of plants 
found in their region.
    Thirty percent of CoBank's loan volume is with agribusiness. These 
loans support grain handling and marketing, farm supply, food 
processing, biofuels, and all types of agricultural products. These 
businesses provide the inputs and market the products of farmers and 
ranchers across the U.S. and abroad. CoBank serves agribusinesses in 
all 50 states.
    The cooperative business model has a long history of helping 
farmers and ranchers manage their input costs and market their products 
more efficiently, allowing producers to keep more of the revenue. That 
is especially important when times are tough in the agricultural 
marketplace. Like the entire Farm Credit System, CoBank has a long 
track record as a dependable provider of credit to co-ops of all sizes 
and shapes, from start-ups to well-established brands. We support our 
customers in good times and bad.
Agribusiness Portfolio



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    In 2015, CoBank customer CHS undertook a joint venture with CF 
Industries to help provide CHS and its member-owners with a dependable 
source of fertilizer through supply chain efficiency, thereby 
generating economic value for farmers and ranchers. The longstanding 
CHS relationship with CoBank meant the deal could move quickly while 
partnering with other Farm Credit institutions and commercial banks to 
get the transaction closed smoothly.
    Banking in agriculture doesn't require low prices to be 
challenging. In 2007 and 2008, a huge spike in global prices for corn, 
soybeans, and wheat placed enormous stress on farmer-owned grain 
elevators throughout the American Midwest, the vast majority of which 
were CoBank customers. During that period, hundreds of these 
cooperatives requested emergency increases to seasonal lines of credit 
and term loans from CoBank to fund grain purchases from their members 
and resulting margin calls. Without this financing, elevators were at 
risk of liquidity shortages that could have prevented them from meeting 
their obligations to producers and ultimately put them out of business. 
CoBank, consistent with its mission, expanded the availability of 
credit to the grain industry, approving incremental commitments to 
grain and agronomy customers that added more than $6 billion of loan 
volume between September 2007 and September 2008. Doing so helped avert 
tremendous dislocation for our agribusiness customers and the U.S. 
grain industry as a whole.
    Today, 22 percent of CoBank's business is rural infrastructure. 
These loans provide the capital that rural telephone co-ops, rural 
water systems, and rural electric cooperatives need to provide 
affordable and reliable service across all 50 states. While these three 
businesses are organized separately within CoBank, they are 
inextricably linked in rural America. CoBank and the entire Farm Credit 
System provide the capital that finances agriculture and rural 
communities.
Rural Infrastructure Portfolio



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    Union Wireless is a CoBank customer in Mountain View, Wyoming, 
serving 4,000 wireline customers and ten times that many wireless 
customers. Union covers over 120,000\2\ miles, relying on over 40 
towers. CoBank has worked with Union for more than 25 years, including 
financing their 2016 network upgrade.
    As electric co-ops have brought more renewable resources on-line, 
CoBank has been there as a partner. Indiana's generation and 
transmission co-op, Hoosier Energy, provides power to 18 distribution 
co-ops serving more than 300,000 homes, businesses, and industries in 
central and southern Indiana and southeastern Illinois. In 2015 CoBank 
financing helped Hoosier construct the first of ten planned 1MW solar 
arrays, on the way to Hoosier's goal of ten percent renewables by 2025.
    Since CoBank is a financial cooperative, our owners share in the 
bank's financial success. Earlier this month, CoBank returned $588 
million in patronage distributions, and we have returned over $2.4 
billion over the past 5 years. Patronage effectively lowers the net 
cost of borrowing for our customers, and provides them with funds they 
can reinvest in their businesses and in their local communities.
    CoBank's board has generously committed to additional direct 
investment in support of rural economic development. To date, the bank 
has committed $45 million as a limited partner in equity funds that 
promote economic growth and job development in rural communities, 
including two funds formed under the auspices of the USDA's Rural 
Business Investment Program. Additionally, the bank is an active 
investor in rural health care, senior care, and other community 
facilities through bond purchases that support individual projects, 
with investments totaling more than $80 million over the past 5 years.
    A great example of rural community investment by CoBank is Cook 
County Hospital in the rural town, Grand Marais, Minnesota. CoBank 
partnered with four local community banks and Farm Credit's AgStar 
Financial Services to fund a full-scale renovation of the hospital that 
began in 2016. The 16 bed critical access facility provides a community 
of 1,300 with 24-hour emergency services, inpatient care and outpatient 
services. The project will update the facility, which was first built 
more than a half-century ago, meaning local residents won't be forced 
to drive 90 minutes for care. This investment will help the hospital 
remain a reliable resource for the community.
    CoBank also supports rural communities by providing funds for a 
wide array of charitable organizations throughout the country. 
Consistent with the cooperative principle of concern for community, the 
board targets one percent of budgeted net income for charitable giving 
in rural areas and where the bank has business operations. In 2016, 
that meant CoBank invested $8.3 million in charitable contributions. 
Additionally, CoBank supports organizations and associations of the 
industries we serve. In 2016, CoBank provided $3 million directed to 
supporting cooperative advocacy and industry organizations.
    CoBank's Sharing Success program matches contributions directed by 
our customers, making their local contributions go twice as far. Those 
investments help fund public safety equipment like thermal imaging 
equipment for the volunteer fire department in Centerville, South 
Dakota.
    CoBank is also ready to lend a hand when disaster strikes. On March 
16, 2017, CoBank announced the establishment of a $150,000 matching 
fund to support wildfire relief in Kansas, Oklahoma and Texas. In 
Kansas, $80,000 of that pledge matches contributions from the five 
Kansas Farm Credit associations. The remainder is available to match 
contributions from other customers, or Farm Credit banks or 
associations. We subsequently increased the size of the fund to 
$200,000 in response to requests from customers who wanted to 
contribute to relief efforts.
    Moreover, like our Farm Credit partners, we focus on financial 
strength and stability to ensure we can be the dependable source of 
credit and financial services during our customer's good times and bad.
    CoBank, like other Farm Credit institutions, however, face unique 
challenges when it comes to portfolio diversification. We are, as you, 
know limited by statute to financing agriculture rural utilities and 
other infrastructure companies. Therefore, given the nature of our 
authorities there is a natural and inherent concentration in the loan 
portfolio that we diversify though our participation authorities.
    This leads me to the topic that I would like to focus the remainder 
of my testimony today on the ``similar entity'' participation authority 
that has been extended by statute to all Farm Credit institutions. 
Critics, especially trade associations from the commercial and 
community banking sectors, have frequently pointed to System 
participations under this authority as an indication that Farm Credit 
is straying beyond its mission. I respectfully submit that similar 
entity participations help fulfill Farm Credit's mission by providing a 
vital source of diversification.
    Similar entity loan participations are an important way that 
commercial banks and Farm Credit partner to serve customers. Similar 
entity transactions support Farm Credit's mission by providing valuable 
diversification that helps ensure Farm Credit can support its core 
customers through good times and bad. The authority is especially 
important in the current environment as falling commodity prices are 
impacting the incomes of many of the farmers, ranchers, and 
agribusinesses we serve.
    Similar entity loan participation authority is designed to 
encourage Farm Credit and commercial banks to partner on loans to 
entities that are not directly eligible to receive loans from Farm 
Credit but that are functionally similar to the entities that are 
eligible. The authority applies to all types of loans Farm Credit is 
eligible to make, including loans to agricultural and aquatic 
producers, certain agribusinesses, and rural infrastructure providers.
    Congress placed significant restrictions on similar entity 
participation authority. Farm Credit cannot, in the aggregate, hold a 
majority of an individual loan in this category. Commercial banks must 
hold at least half of every similar entity loan. In other words, 
without directly partnering with commercial banks, Farm Credit cannot 
participate in any similar entity lending transactions.
Similar Entity Loan Participations Remain Well Below 15% Statutory Cap



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    We understand the concerns of some Members of Congress over the 
similar entity loan participation involving Verizon made 4 years ago in 
2013. Even though this transaction was fully authorized by law, we 
respect the views of the Congress and have imposed a variety of self-
discipline measures that support the Farm Credit Administration's 
expectation of robust due diligence regarding the size and scope of 
similar entity loan participation activities while preserving their 
value as a diversification tool.
    Congress also mandated a hard limit on the aggregate amount of 
similar entity transactions any Farm Credit institution can hold to no 
greater than 15 percent of its total assets.
    Similar entity participation authority has existed for nearly 25 
years and, as the chart above demonstrates, today only three percent of 
Farm Credit's assets are invested in similar entity participations.
    Farm Credit uses similar entity loan participation authority in a 
limited manner to diversify loan portfolios, withstand industry 
downturns, and continue serving core customers. It is a small but 
meaningful way we are able to build the financial strength necessary to 
support customers during the kind of cycle we are experiencing right 
now in agriculture.
    Along with benefits from portfolio diversification for mission 
achievement, similar entity lending is important in providing support 
for rural infrastructure that CoBank is expected to serve. The U.S. 
rural economy encompasses far more than production agriculture; rural 
communities also depend on power, water, and communications services in 
order to remain vibrant and competitive.
    The area of greatest change and impact for rural infrastructure is 
communications services. In the rural communications space, our 
directly eligible borrowers include small, medium, and large carriers 
that provide communications services to rural areas. However, rural 
communications has evolved tremendously over the past 2 decades due to 
disruptive technology change and the transition of the industry away 
from the old utility-based business model of local phone service. The 
proliferation of broadband and mobile technology has fundamentally 
altered the requirements of consumers, and they have reshaped the 
industry as well, changing the appearance of those providers--CoBank 
customers--which serve rural America.
    Similar entity authorities not only support mission service through 
portfolio diversification but also through support of needed rural 
infrastructure services, including within the communications and 
broadband sectors. That infrastructure is critical to enabling farmers 
to take advantage of the latest technology to increase their 
efficiency. That broadband is critical to providing telemedicine 
services so people can live in their rural communities longer. And that 
communications technology is important to draw young people back to 
rural communities, to enhance the education of their children, and to 
power the new web-supported jobs that are possible anywhere.
    Congress was visionary when it established Farm Credit more than a 
century ago. That vision has helped produce great productivity in rural 
America. A quarter-century ago Congress provided similar entity 
authority to help Farm Credit diversify, manage risk, and today serve 
our mission in ways unimagined in 1992. And today, there still remains 
a need for capital investment in rural communities across this country. 
CoBank is proud to stand ready with our partners in Farm Credit to meet 
those needs.
    Thank you for the opportunity to testify and I would be happy to 
address any questions from the Committee.

    The Chairman. Thank you, Dr. Halverson. I appreciate that.
    The chair would remind Members they will be recognized for 
questioning in order of seniority for Members who were here at 
the start of the hearing. After that, Members will be 
recognized upon arrival. And I appreciate the Members' 
understanding.
    And I will recognize myself for 5 minutes.
    Well, gentlemen, thank you very much for being here today. 
I appreciate the testimony.
    The FCA has a role and a responsibility to make sure the 
System is safe and sound. The banks themselves have 
responsibilities for making sure that they are safe and sound, 
and I am confident, based on what we have seen this morning, 
that even in these hard times that we have currently and the 
ones we see over the horizon, that the System is safe and 
sound. But there is also responsibility to make sure that the 
System lenders stay within their statute lanes. While the 
analogy is not too precise, nevertheless, it is not too flawed 
either. In NASCAR, when folks share lanes, there is rubbing, 
and sometimes rubbing just means swapping paint, and other 
times rubbing means bending fenders and all that kind of stuff. 
As the administrator, is your role, in reviewing the banks, 
when you make sure that the banks and the lending associations, 
I will use the term banks in the generic, with these lending 
authorities set forth in the statute, and when there are 
instances or if there are instances where you believe they have 
made a loan they shouldn't have made, what are the remedies, 
and what steps do you take to remedy this situation?
    Mr. Tonsager. Thank you, Mr. Chairman. I would just say 
that one of the biggest challenges for the agency is to make 
sure--let me say that more correctly. Our responsibility is, 
along with everything else, is to make sure they do stay within 
those lanes. And we have built off the statute provided to us 
by you, we have built regulations and we have built processes 
to assure that we have the capacity to deal with that. From 
time to time, we have had to require divestiture of certain 
loans that have come outside of the System.
    Most of our work is focused on post-lending activities. We 
have a category called mission-related investments where the 
Board actually approves individual loans before they are made, 
but mostly the System goes out, does its lending work, we 
provide guidance to them, and then we have examination units 
that go in, look at the loans. We sometimes receive reports 
from institutions that say we believe this has gone outside of 
the category. We review those, our General Counsel's office 
reviews them, our regulatory unit reviews them. We have had six 
instances in the last several years where we have required a 
divestment of the loan. Out of many tens of thousands and 
hundreds of thousands of loans, that is the number that we have 
actually had to deal with, where we believe they have moved 
outside of the category.
    The Chairman. All right. And so if the bank disagreed with 
you, do you have the authority to require the divestiture if 
your lawyers say that it is outside the lane?
    Mr. Tonsager. We do.
    The Chairman. Okay. Jimmy, Mr. Stark, and Tom, your banks 
are originating loans. Do you participate those loans out? In 
other words, I understand the diversification where you buy 
participations, but do you sell participations into the 
private-sector, and if so, is that tracked as to how many of 
your loans, what is the volume of your loans that you guys have 
actually asked other non-FCS institutions to share the risks 
with you?
    Mr. Dodson. Yes, we do that. We have a portfolio that is 
both originated by commercial banks and that we originate and 
share with commercial banks. We track those loans by the 
originator or by the participants. In our bank we do that quite 
regularly.
    The Chairman. All right, Dallas, you may have this, $250 
billion in loans, is that right?
    Mr. Tonsager. Yes, that is approximately right.
    The Chairman. So that is your risk. What is the number of 
participations that the commercial banks and insurance 
companies, other folks, own in those loans on their books? Any 
idea what that number is? Do you track that total?
    Mr. Tonsager. Yes, we do, but I don't happen to have the 
number----
    The Chairman. Would you mind getting that for us? It would 
be helpful for all of us to understand that while you are 
originating a lot of paper, you are offloading some of that 
risk to the commercial market, and those banks are sharing in 
whatever those loans have done. Does that make sense?
    Dr. Halverson. That is absolutely true, and it is actually 
a tremendous success story from our perspective for rural 
America. The amount that CoBank alone buys and sells back-and-
forth with commercial banks, the sum total is in the vicinity 
of $20 billion. Between us and them, we are able to catalyze a 
substantial amount of capital that comes to rural America in 
the industries that we serve that might not otherwise get there 
but for this activity. We think it is actually a tremendous 
success story. We would be very happy to provide you the exact 
numbers.
    The Chairman. Jimmy.
    Mr. Dodson. The other option that I wanted to mention is 
the associations and banks have the options to trade and do 
commerce between each other.
    The Chairman. Sure. Sure.
    Mr. Dodson. And so we do that for loan diversification, if 
we have a concentration in a certain industry or certain 
commodity, instead of having to merge your balance sheets you 
can trade loans.
    The Chairman. No, I understand that.
    Mr. Peterson, 5 minutes.
    Mr. Peterson. Thank you, Mr. Chairman.
    Mr. Tonsager, last week the University of Minnesota 
extension announced that it will begin offering a one-to-one 
financial counseling to farmers that are in serious financial 
stress. This program is being modeled on similar financial 
counseling programs that are offered by the extension services 
in Iowa and Kansas, and I hear that there are similar programs 
in North Dakota, Nebraska, and South Dakota. Are your 
institutions participating with state extension services who 
are offering these counseling services?
    Mr. Tonsager. I believe so. I would have to find out for 
sure to the degree they are participating with them. I would 
certainly encourage it, and I would like to add that one of our 
big challenges is what happens with those producers who are 
struggling, and one of the lessons from the 1980s is how we 
handle that going into this one.
    Mr. Peterson. You haven't actually seen these work directly 
yourself?
    Mr. Tonsager. I have seen the programs that were used in 
the 1980s, some were funded by USDA at the time.
    Mr. Peterson. Right, but you haven't seen what is going on 
now?
    Mr. Tonsager. I have not seen one during the current 
circumstances.
    Mr. Peterson. How about the state mediation programs?
    Mr. Tonsager. I have personally seen state mediation 
programs and used state mediation programs back at that time, I 
am quite familiar.
    Mr. Peterson. And so you are not exactly sure how much you 
are participating in those?
    Mr. Tonsager. We have not surveyed, but we are addressing 
directly with the System frequently the need for them to work 
with producers who are in trouble and challenged.
    Mr. Peterson. Okay, thank you.
    Mr. Stark, I am beginning to get calls from constituents 
who claim that they are trying to work with the System lenders, 
and they feel some of them, at least, feel like they are not 
getting flexibility on loan terms that they think they should 
be able to get. Are your institutions permitted to provide 
flexibility to these borrowers facing stress, and is there 
anything that the regulators could do that could assist? I 
guess it goes back to what we were talking about earlier, these 
situations.
    Mr. Stark. Yes. Thank you for the question, Mr. Peterson. 
We are doing a lot to proactively, actually, reach out to 
modify loan terms with customers even before they have 
experienced stress. Even going back as far as 2 years ago, we 
started meeting with customers to amortize loan payments to 
reduce their overall debt burden on a per acre basis to a more 
manageable level. We also re-advanced against real estate 
equity to restore working capital for some of those same 
customers. Customers that had prepaid their loans down during 
the good times, we went back and either re-amortized those 
loans or restored working capital to give them that 
flexibility. And then we are really looking also at setting up 
those loan terms, extending terms such that maybe they had a 10 
year term initially, we may be stretching those out to a 15 or 
20 year term to allow them to pay them on a more scheduled 
basis. Yes, we are doing much of that on a proactive basis. We 
have been doing that over the last 2 years.
    Certainly, times are challenging, and not everybody has all 
of those options available to them. We are having one-on-one 
conversations with those producers, and there is no doubt that 
some producers are going to be challenged to make more severe 
cuts, including some asset sales or changes in their operation 
as they go forward. Those decisions are tough for individual 
producers that are in that position.
    Mr. Peterson. Thank you. It seems to me, at least in my 
part of the world, we had some years that were pretty good and 
people built up some equity and land and so forth, but the 
young producers generally don't have any land, and they are 
probably paying more for rent than they should, because they 
have to. It seems to me that those are the people that are 
really vulnerable in this situation as we go forward. Are there 
any kind of special conditions that are being thought about to 
deal with these young producers that have no equity to speak of 
and rented land?
    Mr. Stark. Mr. Peterson, we are doing a lot to work with 
young producers. We love working with them, helping them get 
started, as well as making sure that they succeed. We 
certainly, as you had guessed, don't go into any lending 
relationship with the idea that these operations are not going 
to be successful. When we have a young producer which we 
acknowledge doesn't have the equity or the net worth that some 
of our more seasoned, established producers do, we recognize 
that, and the first thing that we would look at is their 
operating plan as well as apply a level of patience that will 
allow us to work with them over time. If they can come to us 
with a reasonable plan, we are more than willing to work with 
them and to re-establish them over the longer-term.
    Mr. Peterson. All right. Well, thank you.
    Thank you very much. I yield back.
    The Chairman. The gentleman yields back.
    Mr. Lucas, 5 minutes.
    Mr. Lucas. Thank you, Mr. Chairman. And you are absolutely 
right, the quorum is important to the panel.
    Under Dodd-Frank, banks are required to do stress testing. 
Can you explain how Farm Credit Administration does stress 
testing of the Farm Credit System, and in particular how often 
these tests are done and how the tests compare to those done by 
commercial banks, that sort of thing?
    Mr. Tonsager. Yes. The institutions do stress testing. We 
examine for the stress testing. They are not the same kind of 
stress tests necessarily as required by Dodd-Frank. I spent 3 
months last year going from institution to institution to look 
at their stress testing model, and what I found was, I thought, 
exceedingly high quality, excellent work. And they are treating 
it as a learning process. As they go through each year, they 
are looking and updating their stress tests with different 
scenarios.
    So from my perspective, it is a wonderful regime that they 
have taken without a lot of direction, but have developed 
stress testing, and we have examined to make sure they are 
doing their stress testing.
    Mr. Lucas. And has it brought up any variations within 
region or within particular commodity areas?
    Mr. Tonsager. Yes, it varies significantly by institution. 
The Bank of Texas is quite a bit different than you might find 
in the Northeast Farm Credit area.
    Mr. Lucas. One other question. In Oklahoma, we have a state 
law that says the banks cannot hold real estate for more than 5 
years, and, of course, the logic behind that principle is that 
banks should be lenders and not long-term asset holders. And 
according to the 2015 FCA annual report, the Farm Credit System 
had about $76 million in income from mineral royalties on 
property. Could you visit with us for a moment about where 
these mineral rights are owned and how long the assets have 
been held by the System, and what ultimately the plan is for 
these old assets?
    Mr. Tonsager. Yes. I can't recall the year, but there was a 
change prior to, I think it was 1985, institutions could keep 
those assets permanently, but then the statute changed, and the 
newly acquired assets the mineral rights had to be sold off. 
And so primarily, those assets held before the change in the 
statute continued to be held in many cases, but since that time 
it is no longer the case.
    Mr. Lucas. And I assume those are minerals acquired through 
repossessions or where they were put up for collateral?
    Mr. Tonsager. Yes, I believe that is correct.
    Mr. Lucas. Forfeited?
    But at this time, the intent would still be, based on the 
old law, to hold those assets?
    Mr. Tonsager. It is based on the statute, that prior to 
that period in the 1980s they can be maintained and held by the 
institutions.
    Mr. Lucas. From your perspective as an administrator, and 
we have discussed quite a bit, the health of the agricultural 
economy and the trends that we are on, do you have any 
particular request of us that you can see that might help 
enhance the challenges you will face in the coming years if 
this present price level is maintained for a period?
    Mr. Tonsager. We don't have significant proposals for 
modifications of our process. We have a few small technical 
areas that we hope to visit with the Committee as the process 
for the farm bill goes on, but they are very technical and I 
would be reluctant to go into them now.
    And so no, we don't have a significant request at this 
time.
    Mr. Lucas. With that, Mr. Chairman, I will yield back.
    The Chairman. The gentleman yields back his time.
    Mr. Scott, 5 minutes.
    Mr. David Scott of Georgia. Thank you, Mr. Chairman.
    I want to begin my questioning with complimenting Farm 
Credit on your excellent program helping beginning farmers. I 
think that is a very crucial crisis facing our nation, getting 
more young people into farming, because as you well know, the 
average age of our farmers and food producers now is right 
there about 60 years of age. I know you have an excellent 
program, and I want to congratulate you on that.
    Mr. Tonsager. Thank you, sir.
    Mr. David Scott of Georgia. But, Mr. Stark, let me ask you, 
the System's use of what is called similar entry authority has 
been the subject of significant back-and-forth between the 
System and commercial banking. Could you please share with us 
the legislative history of this activity, and also could you 
provide our Committee with your perspective as to the benefits 
to Farm Credit borrowers across the nation?
    Mr. Stark. Well, at a real high summary level, I don't know 
the exact legislative history, but I do know that that law has 
been in place for something close to 25 years, so it is not 
something that is brand new to the Farm Credit System. Over 
time, the System has used that, it has ranged between one and 
three percent of our total assets. There are strict limits on 
our ability to use that in terms of the amount of assets we can 
employ in that regard. And, frankly, the ability to use that 
really helps us with the diversification of our loan 
portfolios, as well as income to keep us safe and sound and a 
strong manner. That is really the high-level summary that I can 
provide to you.
    Mr. David Scott of Georgia. That is great.
    And, Mr. Dodson, could we get your perspective on that?
    Mr. Dodson. The similar entity authority is very valuable 
to get risk diversification for us. A company or a bank, or 
anything really gets into trouble when it can't make payroll 
and it is liquidity that causes the problem. And so whenever 
you have a similar entity loan that is outside your normal 
focus for your borrowers or for your territory, it allows you 
to have income diversification as well as risk diversification. 
And so that income is very valuable for us to supply steady 
earnings during times when part of our ag portfolio is in 
trouble. It has been a valuable tool, but I agree with the 
assessment that it is a minor slice of our asset base.
    Mr. David Scott of Georgia. And let me continue with you, 
Mr. Stark. With the current decline in crop and livestock 
prices leading to tightening credit conditions, many people are 
quick to compare the situation with what happened in the 1980s. 
How are your institutions prepared to handle any possible loan 
defaults, and in what ways are you more prepared for economic 
downturn when they compare to the situation in the 1980s?
    Mr. Stark. Well, Mr. Scott, the current cycle we are in is 
one that we have anticipated for some time. We knew, looking 
back 5 years or so, that the times we were seeing in 
agriculture at that point were not going to be sustained 
forever, and so we employed a philosophy that we still carry 
today and that is to be conservative in good times so we can be 
courageous in tough times. And so rather than tighten our 
lending standards during tougher times, we are actually trying 
to lean into the wheel, as I mentioned earlier, by re-
amortizing loan payments, extending additional credit to 
restore liquidity, and having patience over loan terms and the 
length of terms to help them and assist them through these 
times.
    Our business, we know it is cyclical, we know that we were 
going to run into these kind of issues and we prepared for 
that, as well as building strong capital, as we talked about in 
our opening testimonies, and really working to make our 
operations more efficient and lean, such that when we had to 
put more of our funds in our allowance for loan losses, we 
still had the capability of doing that, supporting producers, 
and showing a strong financial statement ourselves.
    Mr. David Scott of Georgia. Very good.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman yields back.
    Mr. Crawford, 5 minutes.
    Mr. Crawford. Thank you, Mr. Chairman. Thank you, 
gentlemen, for being here today.
    I want to start with Dr. Halverson. The last time we had a 
hearing on Farm Credit System I asked a few questions about 
CoBank's use of similar entity authority to make certain loans. 
Can you give us a snapshot of how CoBank determines whether or 
not to make a loan under its similar entity authority, and 
specifically, do you have any internal practices in place that 
you use to review this type of lending decision?
    Dr. Halverson. Absolutely. Thank you for the question, 
Congressman Crawford.
    We have a robust, vigorous legal review, we have a robust 
internal set of processes, policies, and procedures where we 
look at the facts and circumstances of every single 
transaction, make an analysis as to whether it falls 
comfortably within the lanes of what the authorities are. 
Everything obviously has to be within the lane comfortably. 
There will be cases, as you can imagine, where it may fit 
within the letter of the law in the regulation, but there may 
be facts and circumstances that we think people might 
criticize, there might be reputational risk associated with it, 
and those are run through an additional screening process where 
we will render a good judgment as to whether we think we are 
comfortable with the reputational risk before we actually 
execute it. In addition, there are policies and procedures that 
we collectively, as the System leadership, have put in place 
over the last several years that involve a reduction in the 
size of the holes of the positions that we will take, and a 
vigorous review and assessment of disciplines that are commonly 
applied across the System.
    So we think we have a vigorous process for doing that, and 
we would be happy to share those details with you and anyone 
else who would like to look at them.
    Mr. Crawford. Thank you.
    I had a couple of other questions I was going to ask, but I 
kind of want to continue down the road that Mr. Scott started 
in talking about our mean age of farmers, what do we do to 
incentivize young people back onto the farm. There have been a 
couple of attempts in drafting legislation to create sort of a 
student loan payoff. I think that is dangerous because we are 
$20 trillion in debt, we don't really have the resources to 
repay student loans, but I do think the private-sector can play 
a pretty critical role. We have been, in fact, I have worked 
with Mr. Scott on this, we have drafted some legislation to 
essentially sort of create the conditions to allow the private-
sector to help an accelerated pay-down to incentivize young 
people to come back to the farm.
    Can you imagine, and this is to all of you, can you 
envision a role that you could play to help structure 
production loans, rolling in a student loan to help pay down 
that debt at an accelerated rate, and the byproduct of that 
being that if you have a young person who has now come back to 
the farm, and they have four or five crops under their belt, 
they are probably going to stick around for a while. That is 
just the nature of agriculture.
    So if you would, anybody that wants to weigh in on this, 
because I want to make sure, I don't think that we need to be 
trying to craft legislation to guarantee a student loan 
repayment in the condition that we are in financially, but I do 
think we need to be proactive in creating the conditions to 
incentivize young people to come back to the farm, and student 
loan debt is going to be a critical factor in that. Mr. 
Tonsager, we will start with you, if you want to weigh in on 
that and what you feel like the role you could play in that 
regard.
    Mr. Tonsager. Well, I would love to see what you are 
proposing and have an opportunity to read about it, just for my 
own benefit. I can say the System has developed an elaborate 
process regarding young, beginning, small farmers, and it has 
done very well. And we would love to provide you the 
information about how that works. It individualizes the needs 
by banks, so in some institutions it is lower interest rates, 
there are different steps that each institution deals with that 
they believe their area is the best.
    And I will pass it off to somebody else.
    Mr. Stark. I would be glad to talk about that, because we 
do a lot relative to young producers in particular, and 
beginning producers, and this hits right in the sweet spot of 
what we enjoy doing as well.
    All the way from several years ago we started, and most of 
my colleagues around the System at the association do something 
very similar, we started what we call an Ag Start Program. 
Basically, we threw out the normal underwriting standards for 
traditional producers and say we know they don't have the 
equity on the balance sheets that they do, and we are willing 
to lean into them. They had only three criteria, and that was 
they had to have a repayment plan that said, okay, we can 
reasonably repay, they had to have a good track record of 
handling credit already with a credit card and such, and they 
had to have a mentor, because we found that that mentorship was 
the most important factor in their success long-term, whether 
that be a family member or somebody else that could provide 
that direction, marketing advice, those kind of things. That 
was it. We made loans that were limited as no equity for some 
of those producers to start their first farm, lease their 
neighbor's operation, farm with their dad's equipment, those 
kind of things we allowed.
    Furthermore, our Board pushed us to do even more than that, 
and they said, ``Doug, you can do even more,'' and so we 
developed in this last year what we call a development fund. It 
is almost like a venture capital fund to help young producers, 
strictly young producers, to expand their operation and/or to 
build working capital to allow them to withstand the adversity, 
as we were talking about here a little bit ago, to get through 
a downturn of the cycle.
    Mr. Crawford. Right. I appreciate it and unfortunately, I 
am out of time, but I would love to confer further with you all 
on this.
    Mr. Stark. We would love to talk more with you about that.
    Mr. Crawford. Thank you. I appreciate it.
    The Chairman. The gentleman yields back.
    Ms. Kuster, 5 minutes.
    Ms. Kuster. Thank you, Mr. Chairman. And thank you for all 
of you for being here.
    I am from New Hampshire, where we are served by Yankee Farm 
Credit and Farm Credit East, and I just had the opportunity to 
meet with them this week, including Brenda Frank, the new CEO 
of Yankee Farm Credit. It was great to meet her and good to get 
an update on credit conditions in the Northeast.
    Two questions: My first question is for the whole panel. In 
the last 10 years, the Farm Credit System total assets have 
grown 86 percent from $163 billion to $304 billion. Where is 
the largest growth of the System, and how have you focused your 
workforce to ensure that the agency is well positioned to 
ensure the safety and soundness of the System?
    Mr. Tonsager. I would offer a couple of thoughts. One is, I 
believe the growth has been primarily in farm real estate much 
of it, and rural utilities have had a significant growth in the 
portfolio as well.
    I am sorry, the second part you were asking?
    Ms. Kuster. I am just wondering how can you focus your 
workforce to ensure that the agency is positioned to ensure the 
safety and soundness of the System.
    Mr. Tonsager. Yes. We have done it two ways. One is by 
having a very high standard for our examiners. Examiners go 
through a 4 year training program before they are fully 
certified. And we are finding the complexity has grown greater, 
and so we feel we have to have a greater capacity of talent for 
the employees. And second is technology. We have a platform 
that allows any examiner, anywhere to look at the same data of 
any institution when they are sitting in that institution's 
office. They have unparalleled access to the information about 
the institution, and it is available to them anywhere in the 
United States.
    Ms. Kuster. Great. And then my second question, I want to 
pick up where Mr. Peterson left off on the young, beginning 
farmers. We very much appreciate that program in New Hampshire. 
I understand this program provides working capital of up to 
$75,000, but can you go a little more in-depth on how the 
FarmStart Program works, and what type of feedback you have 
been hearing from producers who participate in the program?
    Mr. Stark. Well, thank you for the question. The FarmStart 
Program is very similar to what I talked about in our 
institution, the Ag Start Program. It is a program that was 
specifically designed for young producers that are just getting 
started, that really goes beyond the normal credit standards.
    I am familiar with Farm Credit East program. It was one of 
the first and most proactive programs in the country. They have 
done a really good job. I know CoBank has also invested with 
them in that program to help them support those young 
producers. Every Farm Credit association around the country has 
something very similar to what Farm Credit East and we have 
developed as well.
    Ms. Kuster. For a typical investment, can you tell us what 
producers are spending that type of capital on, and do you have 
any recommendations for this Committee about how we can further 
incentivize young people to pursue a career in agriculture?
    Dr. Halverson. It would depend very much on what they were 
intrinsically producing. It could be any number of things. That 
is a great question, your second part of that question. We 
would love to come back to you separately, if you don't mind, 
and make some specific recommendations. We partner, as Doug 
indicated, with Farm Credit East, we are the wholesale funding 
bank for both Yankee and for Farm Credit East, and we would 
love to have a little more dialogue with you about some 
recommendations.
    Ms. Kuster. Great.
    Mr. Dodson. Could I add something?
    Ms. Kuster. Sure. Yes, please do.
    Mr. Dodson. One of the primary reasons that some of my kids 
and my nephews and nieces are not on the farm is because farm 
prices didn't offer them the opportunity to project a profit. 
And so I would suggest that one of the strongest things that we 
can all do together is provide a strong farm bill with a safety 
net in it that has crop insurance and it has the title I 
programs in it. Pretty much we don't need a lot of changes, 
pretty much a little tweaking here and there in certain 
commodities. But that is very important for a young person 
looking at working hard and risking 50 or 60 or 100 percent of 
their net worth each year until they get established. And so 
that safety net is a vital portion of it. And we appreciate all 
your help in that.
    Ms. Kuster. Great. Thank you very much.
    And with that, I yield back.
    The Chairman. The gentlelady yields back.
    Mr. Gibbs, 5 minutes.
    Mr. Gibbs. Thank you, Mr. Chairman.
    First, I guess, a comment. A lot of people ask about what 
happened in the late 1970s, early 1980s when the whole system 
collapsed. I do believe that there were some different lending 
practices back then, and I think we learned. I am confident 
that what you are saying, you are in a lot better position than 
you were back when we had the collapse in the early 1980s.
    I want to go back first to Mr. Stark and Mr. Dodson, you 
mentioned, or maybe it was Mr. Stark, about the similar entity 
authority, it is one to three percent. There are four banks and 
there are all kinds of associations, is that based on the banks 
or the associations that are part of the portfolio?
    Mr. Stark. That would be the total assets of the Farm 
Credit System that less than three percent, yes.
    Mr. Gibbs. Okay. The reason I ask that because I have my 
rural community bankers they were in last week, they are not 
happy, and I am trying to kind of sort through this. Of course, 
if it is one or two percent of the total System, you guys are 
big, and a small bank, a $50 million bank or whatever they are, 
I can see where there could be some issues.
    I don't know if I heard the Chairman's answers correctly 
when he asked a question about divesture, Mr. Tonsager, did I 
hear you say that a bank could challenge a Farm Credit loan if 
it is not within the Act?
    Mr. Tonsager. When it comes to similar entity lending, we 
examine the loans after they have been made and look for loans 
that we think might be of concern, or we have, from time to 
time, an institution, like a bank, has pointed out to us a loan 
that they are not pleased with, and we look at those as well. 
Our General Counsel looks at them, our regulatory office looks 
at them, and we will make a judgment about whether or not we 
believe it falls as an authorized loan under the Farm Credit 
Act.
    Mr. Gibbs. Track record: have there been many of those 
requests from banks, and if there has, have there been some 
overturned, or the association divested those loans, or what is 
the record?
    Mr. Tonsager. Well, we have had six instances in the last 
several years out of many hundreds where we felt that it went 
outside the parameter of the statute. And I can't recall if 
those were found by our examiners or individual institutions. 
It seems to me there has been a case at least where that has 
occurred.
    Mr. Gibbs. Most of the time it is the banking examiners 
come in and they raise a red flag, the possibility this is out 
of your scope?
    Mr. Tonsager. Right. It may not be in the scope of the 
program.
    Mr. Gibbs. Okay. Well, like I said, I have a lot of my 
community banks, they are not happy, and I am trying to sort 
through all this.
    Mr. Tonsager. Yes. And I would remind that every similar 
entity loan must be initiated by a bank, and the System buys 
into those loans as a participation. And banks have to hold a 
half or greater in the total loan.
    Mr. Gibbs. Yes. And I got that part. And that has actually 
been good. The positive things is, like you say, Farm Credit is 
able to diversify some, so that is positive, and then also, as 
you say, banks have to come to Farm Credit first if they want 
to sell a loan or be partner in a loan to get more capital in. 
So those are positive aspects.
    Mr. Tonsager. Yes.
    Mr. Gibbs. But, on the other side of it, my bankers talk 
about that they don't really think it is a fair, competitive 
playing field, and they have some issues.
    I am just raising a cautionary note, whatever we can do to 
address that. When you say one or two percent, but if we are 
looking at the whole Farm Credit System, that is still a lot of 
money----
    Mr. Dodson. Yes, each institution is limited to 15 percent 
or less of their assets. There is a little variation in the 
System, but it never gets over 15. And I don't think anybody is 
approaching that even.
    Mr. Gibbs. Okay.
    Mr. Dodson. I would say though that this authority was 
granted by Congress to bolster our finances and our capital and 
our diversity for just such a time we are entering right now.
    Mr. Gibbs. Yes. No, I understand that, and it is kind of a 
balancing act.
    Mr. Dodson. Right.
    Mr. Gibbs. But, on the other side of it, and you testified 
on the importance of banks, especially community banks, and we 
are losing them, I have heard projections maybe one per day in 
the United States, and that raises an alarm too because there 
are a lot of small businesses, not ag businesses but related in 
that community, so it is very important.
    Mr. Dodson. Sure.
    Mr. Tonsager. I want to offer one clarification. The 
overall amount in that category is seven percent System-wide at 
this time.
    Mr. Gibbs. All right, thank you.
    And I yield back, Mr. Chairman.
    The Chairman. Well, just to clarify, the divestitures of 
loans that were directly made by the institution, these are 
divested participations, right?
    Mr. Tonsager. These are participations, yes.
    The Chairman. So you ask them to divest of a participation. 
Have there been circumstances where a bank, or an institution, 
has made a direct loan themselves, originated the loan, that 
you saw was outside the scope and you made them divest of that? 
Because that is really what the commercial bankers are 
complaining about. I don't think they are complaining about 
participation, they are complaining about loans that are made 
directly by the institution. Have there been circumstances 
where you have had an institution make something, you had them 
divest?
    Mr. Tonsager. Yes.
    The Chairman. How many?
    Mr. Tonsager. We have had direct loans. It is very few. And 
since my time back at the agency, it is one or two.
    The Chairman. Okay, we may want some information with 
respect to the record on that, because that is really where the 
issue is. It is not the participation, I wouldn't think.
    Mr. Gibbs. Yes, and I appreciate you interjecting and 
clarifying. I appreciate that.
    Ms. Blunt Rochester.
    Ms. Blunt Rochester. Thank you, Mr. Chairman. And thank you 
for starting the clock again. I want to thank the panelists.
    We have a lot of conversation about immigration, we have 
heard a lot of testimony in the past few weeks about the impact 
on farmers and being able to have a reliable source of labor, 
actually. And so my question is tying that to credit, if you 
could talk about the inability to secure a reliable labor 
market and what effect that has on creditworthiness of your 
members.
    Dr. Halverson. Well, CoBank is the funding bank for a 
number of affiliated associations in the West, particularly, 
for example, in California, I have spent some time out there 
earlier this year. There is a significant amount of 
agricultural activity in the State of California. It is the 
single largest state exposure of the Farm Credit System. And 
without going into individual details of all the different 
components of the agricultural complex in California, it is 
fair to say that labor is a significant issue there. And to the 
extent that producers, whether they be growing grapes or 
tomatoes or leaf lettuce, or whatever it happens to be, if they 
can't maintain the labor force to harvest their crops, or 
whatever it is that they need to do, that may cause an issue 
for them. We pay close attention to that, as we do to any other 
component of their creditworthiness. Our affiliated 
associations in California are paying very close attention to 
that, and they are dialoguing with their Members of the House 
of Representatives to express their views.
    Ms. Blunt Rochester. Anyone else want to respond? Thanks.
    Mr. Dodson. This is a highly variable thing depending on 
the industry and the location of the producers, but we all need 
able-bodied workers, and we all need access to those labor 
markets. And so immigration is a high concern for the people 
that own our cooperatives. We haven't led that, but we are 
trying to join in that conversation.
    Ms. Blunt Rochester. Got you. Thank you.
    I would go a little deeper, but I will not because I have 
another question. And it is just about the overall state of 
credit conditions. Can you talk both generally, but also 
regionally, the differences?
    Mr. Stark. I would be glad to answer. In the general sense, 
and certainly from the region I am in, the grain industry in 
the Midwest is probably one of the hardest hit areas in terms 
of the impact of credit and credit availability, credit 
quality. We are certainly seeing that, and we are impacted by 
that as much as any in the Farm Credit System. But we think 
that we are really pleased on one side that we haven't seen the 
deterioration in land values that we might expect, and 
certainly that we saw in the 1980s, a big difference. Most 
producers are starting to make adjustments, and making 
adjustments in their operations to restore profitability. We, 
by far, still have the majority of our producers are in really 
strong and sound financial shape. They have built equity, they 
have working capital reserves. That is really demonstrated in 
what we see in land values today as well when land comes up for 
sale in these local areas, there is still pretty active bidding 
on it, and that tells us that producers are still doing fairly 
well.
    There is a concern in the ag and farm economy and with 
those producers though, every year as we look out, and then 
sitting here in March and April, what is this year going to 
bring and what do we have to look forward to. And so that is a 
key issue for us. But across the country it varies. I would say 
we are probably, in the grain industry and the livestock 
industry which we have is probably one of the stronger hit 
areas.
    Mr. Hall. Could I add one thing to point out the 
differences, we have compared to the 1980s crisis several 
times. One of the biggest differences is the interest rate, the 
amount of income that producers have to dedicate to repay debt 
is significantly lower than it was in the 1980s, and that 
improves debt-to-asset ratios and financial ability. In the 
last few years, they were able to put aside some capital and 
build equity, so we are coming into it. A lot of the lending 
practices are now stronger than they were several years ago, 
and those factors make a difference.
    Mr. Dodson. I would say a regional report in Texas and the 
Southwest, we have a highly diverse portfolio in Farm Credit, 
and so even though there are some sectors that are in some 
trouble, overall our credit is strong and our risk is being 
managed pretty well. But there are individual producers in the 
cotton industry that are really struggling. And they have had 
some high prices looking back 5, 6, 7 years, and we have had 
some of the worst droughts during those years, so they didn't 
have anything to sell whenever prices were high. And now they 
are rolling into low-price scenarios and they are really 
stressed.
    Ms. Blunt Rochester. Okay.
    Mr. Dodson. I guess it just depends. You can go into the 
Southeast and look at the Carolinas, they have had two floods 
in a row, and Georgia has had a drought, so those things have 
really caused problems.
    Ms. Blunt Rochester. Thank you so much.
    Thank you.
    The Chairman. The gentlelady's time has expired.
    Mr. Allen, 5 minutes.
    Mr. Allen. Thank you, Mr. Chairman. And thank you for 
coming out today and giving us an idea of what is going on in 
the credit markets. I have been in the district and my folks 
are a little nervous. Of course, I am the Georgia District 12 
Representative, and cotton is a big crop.
    And, Mr. Dodson, as a farmer yourself, you mentioned in 
your testimony the downturn in the farm economy over the past 
few years, and how accomplishing Farm Credit's mission has been 
more difficult during this time of low commodity prices. In 
fact, we have had testimony from several commodity groups, and 
in their testimony they said the good news is they thought we 
were at the bottom. The bad news is they don't see much 
improvement. I don't know how long we have to live with this. 
But like I said, specifically, in my district, cotton is among 
the largest crop planted. As you are aware, conditions for 
cotton growers are dire, and we have many of our farmers 
concerned.
    How are these conditions affecting credit to the cotton 
producers, from your viewpoint?
    Mr. Dodson. I agree with your assessment that it is a trial 
we are going through. There are parts in my territory where 
associations have been working with cotton producers to do all 
the steps we have been talking about, re-amortizing debts, even 
getting to the point of planning an asset sale. Going into this 
year no one could project a profit in cotton, and they went 
ahead and planted it, that is their only option. And I would 
say that they made record crops in most of my area. And that 
extraordinary yield enabled them to survive another year, to 
kind of kick the can down the road another year, but there are 
a lot of producers that are on the bubble. If it hadn't have 
been for those record crops, it would have already been in 
process right now as we are analyzing their performance. They 
don't have much time. It is a serious situation.
    And that is not every producer, it varies, but it is 
regionally and in that commodity it is especially tough.
    Mr. Allen. Right. Well, how is Farm Credit working with 
these producers to assist them in weathering these conditions, 
going forward?
    Mr. Dodson. We are doing all that we can do to readjust 
their balance sheet and to extend terms and all those tools. 
But there is a point to where you can't go any farther, and so 
we are nervous about some of our producers reaching that point 
right now.
    Mr. Allen. And have you got any projections on when we have 
a farm bill, obviously, we have one coming up and we have to 
address cotton. The last farm bill was negotiated in the 
highest commodity prices we have seen in a long time and, of 
course, there are repercussions to that.
    Mr. Dodson. That is right.
    Mr. Allen. And, of course, we have the farm bill coming up. 
Can we make it to the new farm bill, I guess is what I am 
trying to say?
    Mr. Dodson. I mentioned tweaks earlier in the farm bill, 
that is one I was referring to and if that happens to those 
producers, it won't make them well, it is not going to turn red 
ink black, but it is going to turn it a shade of purple, and 
that will be enough to keep many of them on the land, I 
believe.
    Mr. Allen. Right.
    Mr. Dodson. It is vital.
    Mr. Allen. Right. Okay. Any other comments with regard to--
--
    Mr. Stark. Yes, Mr. Allen, I would add, as you talk about 
the farm bill and this Committee's role in that, one of the 
critical things, obviously, in the farm bill is the crop 
insurance program. The System is on record as supporting a 
strong safety net for agriculture, including cotton, but all 
the crops that are included in that. And one of the things that 
it provides, obviously, the protection from the disasters of 
Mother Nature, but it also provides producers another 
opportunity that is not often talked about, and I will give the 
example, we had a young producer, as a matter of fact, told me 
this story, and this was a year ago while I was visiting with 
him, the fact that he uses his crop insurance for his marketing 
opportunities as much as he does for the crop protection 
itself.
    Mr. Allen. Yes.
    Mr. Stark. And the reason that is, is because he can insure 
up to 85 percent of his crop, and he knows he has that kind of 
money or crop to work with, and he can go to the commodity 
markets then and hedge that, and when the opportunity is there, 
to lock in a profit.
    Mr. Allen. Right.
    Mr. Stark. The crop insurance program is much more than 
just a disaster program from Mother Nature, it really provides 
a foundation for our producers not only in that regard, but, of 
course, the revenue coverage that it provides, and then also 
the marketing opportunities it provides them as well. That is 
becoming an increasing part of farmers' approach to 
profitability today. It is a very critical program for us, 
going forward, and I just wanted to leave that with you as you 
think about that and your Committee's role.
    Mr. Allen. Okay, good.
    Thank you very much, and I yield back.
    The Chairman. The gentleman's time has expired.
    Mr. Soto, 5 minutes.
    Mr. Soto. Thank you, Mr. Chairman.
    First off, I come from Florida, and we have had quite a hit 
on citrus greening. I was wondering what programs you all have 
in place that will assist with replanting a lot of these trees?
    Dr. Halverson. Well, Congressman, we have a number of 
customers, like Florida's Natural, in Florida. We work closely 
with our customers in support of the activity that they 
themselves and the industry are undergoing to do the research 
and development to try and figure out the causes and potential 
cures for citrus greening. We are aware that it increases the 
costs and is forcing people to destroy a lot of trees and 
replant them. We are working with our customers to support them 
as they go through this process.
    I am not sure off the top of my head whether we are 
specifically supporting university and other research programs, 
but I will certainly come back to you separately with an answer 
on that specifically, because at CoBank we support a number of 
educational institutions and I want to make sure that I get the 
answer right, and I will come back to you on that.
    Mr. Soto. I would strongly encourage you all to consider a 
pilot program to help with that replanting, since we are down 
70 percent in production.
    My second question is have we seen any effect in labor 
costs, there has been an attempted crackdown on immigration, 
has that been something that you have seen to affect prices or 
costs?
    Dr. Halverson. For a specific commodity that you have in 
mind?
    Mr. Soto. Well, just overall.
    Dr. Halverson. I personally haven't seen anything that I 
could generalize in that regard. It would be very specific to 
the specific physical location and the specific commodity and 
geography of the country.
    Mr. Soto. What states do you think are most at risk?
    Dr. Halverson. Jimmy, I wonder if you have a view with 
respect to Texas. I would have thought California would be 
susceptible.
    Mr. Dodson. Can you repeat the question?
    Mr. Soto. Yes, given an attempted push for more strenuous 
immigration crackdown, which states would be most at risk for 
increased labor costs?
    Mr. Dodson. I would think the fruits and vegetable industry 
would be. In Texas, we do have some fruits and vegetables and 
citrus in south Texas, but that industry is not as large as it 
used to be. I would expect California, Florida, the temperate 
zones that have irrigation water and producing fruits and 
vegetables will be first to be affected. I think the dairy 
industry would be too. But, that is just my opinion, I don't 
have numbers to support that.
    Mr. Soto. Sure. My next question is with prices being 
stagnant, is there an oversupply problem generally? Is that one 
of the main driving reasons that prices continue to be 
stagnant?
    Mr. Stark. Well, in response to that, the answer to that is 
yes, American agriculture is one of the most prolific 
industries in the country and we are proud of that fact, and 
certainly our role in that on behalf of Farm Credit. You can go 
down by the industries: soybeans, 50 percent or so are shipped 
overseas; corn, \1/3\; livestock, cattle, and meat, ten 
percent. We are very dependent on trade for our country's 
agriculture and produce, and that will have a big impact, and 
what happens with trade internationally will have a big impact 
on commodity prices here right at home. Yes, it does have a big 
impact.
    Mr. Dodson. Another factor is the value of the dollar 
versus the foreign currencies. Sometimes when the dollar is 
strong and the U.S. economy is picking up and doing better, it 
is good for the local economy but for those of us that are 
selling a lot of our commodities overseas, it prices us out of 
markets.
    And the other thing I might point out is that U.S. farmers 
are very efficient, and they produce wonderful food, and it is 
safe and it is very low priced as a percentage of income, but 
we can't compete with foreign governments very well. Producers 
can compete with other producers anywhere, but whenever we have 
to compete with governments that manipulate prices or 
manipulate access to markets, it is very difficult. Trade is 
very important, and immigration is very important, but we are 
going to be more challenged in the future to keep producing 
more food to feed all the people that are going to be on the 
planet. We don't want to get too concerned with surpluses, we 
just want to make sure it gets delivered to the people that 
need it.
    Mr. Soto. We don't have an oversupply problem, we need more 
customers then. Is that what you are saying? Well, thank you.
    The Chairman. The gentleman yields back.
    Mr. King, 5 minutes.
    Mr. King. Thank you, Mr. Chairman.
    First, I would like to also like to express my sympathies 
to the family of Ken Spearman. And we had a terrific 
conversation just a little over a year ago in my office, the 
day before the hearing here, and I look back on those times 
fondly. And I appreciate the service of all of you and the 
credit services that are there, and have been for a long time. 
I have lived through the 1980s farm crisis and the years hence, 
and I have a feel and a flow for what has happened within the 
Farm Credit System, the banking system, and the stresses that 
come with trade, as we just mentioned, and other factors.
    But I wanted to go back and mention a couple of things that 
are part of those memories. One of them is a hearing here on 
June 25, 2014, when I had an exchange then with Dr. Lauren 
Thompson, seated in your seat, I believe, Mr. Tonsager, and we 
had the discussion about who writes the mission statement for 
the Farm Credit. And the answer was, well, her answer was that 
would be the Board of the Farm Credit Administration. And so 
then I asked then, and who approves it, and it came back, 
pretty much the same people that wrote it. And so that was 
always on my mind.
    Mr. Tonsager. Sure.
    Mr. King. And then when we had this discussion in December 
2, 2015, this was with Mr. Spearman, and I asked a similar 
question, and I asked who makes sure that you stay within the 
bounds of the mission statement, and his answer was that you 
receive legal guidance from your attorneys, and you referenced 
that in this testimony today, and that Farm Credit 
Administration then follows the guidance of the legal team, 
pretty much what I heard here today. And you referenced six 
instances where there was concern that you at least had the 
applications to go outside the bounds of the mission statement. 
Could you identify what those six were, or give us a sense of 
the scope of those six that you referenced?
    Mr. Tonsager. We could certainly provide you with the 
information. I don't have it right in front of me to be able to 
list the six, of course.
    Mr. King. Okay, and the status of the Verizon loans that 
were part of our discussion here over the last few years, can 
you tell us what they are now?
    Mr. Tonsager. It is my belief that there are no longer any 
loans held by the System on that.
    Mr. King. Yes, and that is my understanding too. And I 
appreciate that, and I see that as perhaps a direct reaction to 
Congress' concern about the expansion of the mission statement.
    And so then I look at that mission statement that was the 
subject of our discussions in the two previous hearings that I 
mentioned, and I really don't have a lot of heartburn when I 
read the mission statement, it is more concern about how we 
stay within those definitions. These hearings have helped 
define those definitions, and yet I thought it would be a good 
idea to go back and look at the mission statement again, and I 
find that it doesn't look the same as the one we were 
discussing in those previous years, and so it seems to be 
apparent that you have written a new mission statement. And 
when I look at that new mission statement, I see there are 
words inserted such as vital rural infrastructure and 
communication services, and that is the first component. It 
seems to me that definition might encompass Verizon again. But 
can you tell us why this mission statement was rewritten, what 
your level of dissatisfaction was? It looks to me like some of 
the things we were concerned about the expansion and the 
interpretation of the existing mission statement might have 
been encompassed now in the new mission statement.
    Mr. Tonsager. I would like to say we have remembered your 
concerns about the mission statement, and I went back to the 
original Act, and I would like to cite that if I could. The 
Farm Credit System mission, as stated in the preamble of the 
Farm Credit Act, ``to further provide for the farmer-owned 
cooperative system of making credit available to farmers and 
ranchers and their cooperatives for rural residence, and to 
associations and other entities upon which farming operations 
are dependent, to provide for an adequate and flexible flow of 
money to rural areas.'' It is good if we step back and look at 
this original statement that is part of what Congress has 
authorized us to do, and we examine our mission statement in 
that context.
    Mr. King. Well, thank you, but I still don't understand why 
we have a 2017 Farm Credit mission statement in front of me 
that, in comparison to the previous mission statement, has the 
words by financing vital rural infrastructure and communication 
services. It looks to me like it is clearly an expansion. And 
as our clock ticks down, I would just submit to you and to all 
of you, I do appreciate this service, and I appreciate the 
capital that is available, but I want to look at this and have 
more conversations, perhaps we can have those on the side and 
get to a better understanding about how to restrain this, 
because it is a natural thing for all of us to try to do more 
with what we have. I will come back to each of you on this in a 
way that asks for your input, and Congress may want to take a 
better look at this.
    Thank you very much, and I yield back.
    Mr. Tonsager. Thank you.
    The Chairman. The gentleman's time has expired.
    Mr. Lawson, 5 minutes.
    Mr. Lawson. Thank you, Mr. Chairman.
    Mr. Stark, I also serve on the Small Business Committee and 
the issues that keep coming up from last week in different 
groups is access to capital for minority-owned businesses and 
women-owned businesses. And so my question would be, and you 
might not be the only one to elaborate on it, is that have we 
shown any improvement in having access to capital, some 
barriers sometime exist among African American and women-owned 
businesses that keeps them from accessing capital, and do you 
have any way that you all keep up with the amount of capital 
loans that have been made to these individuals to see what kind 
of progress is being made?
    Mr. Tonsager. Doug, would you answer that?
    Mr. Stark. Well, I would say in direct response to your 
question, we take exerted efforts to extend both outreach and 
lending activities to minorities as well as women in 
agriculture. Specifically, in my area we do a lot in the women 
in agriculture area, sponsoring groups, educational sessions 
specifically for women, and a host of activities that are 
designed to keep them involved not only independently in farm 
operations, but also in conjunction with their family 
operations so they have a bigger role and understand how their 
role can be effective in that. A number of sessions in that 
regard are really worked on within our association 
specifically.
    Mr. Dodson. I would say that is common in our district as 
well. For the women's outreach, there is a program called 
Annie's Project, we support that and fund it, to work with 
women in agriculture and help them prepare.
    One of the things that helps us more than anything else, 
besides the community investment that we do with the 1995 
universities with Tuskegee, with Prairie View A&M, other 
universities that are focused in communities that are typically 
under-served, is our diversity inclusion program and inclusion 
program in our banks, in our associations, to try to help 
associations realize the value in having a more diverse 
workforce. We want to look like the communities that we serve, 
and that is the best thing that we can do to promote providing 
services in all the different communities in our district. So 
that is a big focus for us. We try to be a leader in the System 
doing that. And it is gaining some ground, we are getting some 
traction. Beyond that, we work with the extension service in 
Texas, which is highly active in working in under-served 
markets, and we try to help support them as well. Several other 
independent groups, but I don't have all the information with 
me today.
    Mr. Tonsager. Could I add to that a bit? We carry out a 
required program that each institution must have a plan to 
offer their services to their entire district, including the 
population inside that. We examine the institutions to see if 
they have established that program and they comply with it. We 
are not allowed to collect information on ethnicity of people 
that are served, so we don't have data on how many minorities 
are involved or how many are being served.
    Mr. Lawson. Okay. And one other thing I might say, that is 
very interesting information, the Congresswoman who left asked 
about how you encourage families to stay in the area and 
continue farming. I grew up in the country and there were a lot 
of different programs to FFA and 4-H clubs and stuff to get 
this kind of exposure, but what is happening today, even though 
I was in the country, I went to school in the city, and they 
were not exposed to the same kind of things that I was exposed 
to. Even, Mr. Chairman, in this farm bill, hopefully, is that 
there can be resources that are allocated to keep those 
programs in those high schools, so that they can get that kind 
of exposure, because by the time I finished high school I 
raised hogs, cattle, crops, everything that you can think of, 
but they don't get that today when you talk about families 
having to continue the process, it really starts early on, it 
just doesn't happen to somebody who has been out of school. I 
guess I will go into farming right now, it really starts early 
on. I hope that you all can encourage, and the Chairman here, 
to make sure that those programs, especially historically black 
colleges, that they have a strong component to continue to 
encourage people to get them involved while they are young.
    I yield back, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    Mr. Marshall, 5 minutes.
    Mr. Marshall. Yes, thank you, Mr. Chairman.
    My first question is for Dr. Halverson, who is very 
familiar with my district. And, Mr. Halverson, a common 
question, what am I going to do to help rural Kansas survive. 
And people talk about infrastructure, so talk specifically what 
CoBank is doing to help rural Kansas survive, and give some 
specific examples, if you want to.
    Dr. Halverson. Sure. Look, thank you for the question, 
Congressman Marshall. This will be a good one for Congressman 
King as well. CoBank is uniquely configured within our 
authorities to originate infrastructure loans. Okay? As I said 
at the beginning, we originate infrastructure loans for water, 
electric generation and transmission co-ops, as well as a lot 
of components of the communications infrastructure. As you 
travel around your district, as I travel around the country, 
what you find is for local communities to survive in your 
district and in other rural parts of the country, people, 
whether they are in agricultural production or, frankly, any 
other component of rural life and business, they require, 
obviously, good water, they require electricity, and these days 
increasingly they require communications infrastructure. You 
will not get people to stay there, you will not get people to 
open a business, and these days you cannot get a combine or a 
tractor to operate unless it has wireless Internet 
connectivity. It drives itself, it has GPS, it collects data, 
it sends data, it gets remotely diagnosed when it doesn't start 
by somebody sitting hundreds of miles away. And so we believe 
quite strongly because of the convergence of our infrastructure 
businesses and their vitality to rural life and rural business, 
particularly their criticality to modern production 
agriculture, that these things are all interlinked. And we are 
doing everything we can to bring all of those lending 
authorities and resources to bear, whether they are in your 
district or others. We have a large Internet investment in 
Kansas and other areas of the country there, with local 
educational institutions, hospitals, agricultural producers, 
co-ops, and others can tap into that allows them to have the 
benefits that they need to sustain their life and their 
business.
    Mr. Marshall. Okay, yes. Yes, thank you, and thank you for 
your contributions to that.
    My next question is for Mr. Stark. We see mergers and 
acquisitions across the agriculture industry, including Farm 
Credit associations. Farm Credit Services of America and 
Frontier Farm Credit have taken up a different path with their 
alliance agreements. Can you describe a little bit how that 
agreement works and what changes your customers have seen as a 
result?
    Mr. Stark. Yes, thank you. Yes, Farm Credit Services of 
America and Frontier Farm Credit came together a little over 2 
years ago and started exploring ways that they could work 
together for the benefit of customers, for producers in Kansas 
and the four states of Farm Credit Services of America. The 
Board at Frontier Farm Credit felt that, by the nature of what 
they had available to them, they were constrained in some 
regards and didn't have access to some of the technology that 
we had employed with Farm Credit Services of America, wanted 
that available to their producers, particularly when you look 
at the Internet, the speed of decision making, the analytics 
that we can apply, and decision making which applies to service 
and better service for customers, and really just getting their 
operation more efficient. That was a big outcome of the 
alliance between Frontier and Farm Credit Services of America. 
That is really evident this year and this very week, and last 
week as our dividend checks went back to customers. In Frontier 
Farm Credit's territory, we have been able to increase in this 
second year now from $7 million to $9 million amount of 
dividends that goes back to producers in the eastern third of 
Kansas. We have been able to significantly reduce the net 
operating rate for producers and for the Frontier Farm Credit 
Association. Those are some of the key benefits and the reason 
we brought them together.
    Even though we have two separate entities, we operate as 
one company, and so we share services and products across those 
two organizations in those five states.
    Mr. Marshall. Okay, thank you.
    My last question. I would like to go back to Dr. Halverson. 
You guys contribute through infrastructure and, of course, to 
the common farm loans that we see. Ethanol is becoming more and 
more important. In my state, we have now ten ethanol plants. Do 
you guys ever participate in any projects like that, ethanol 
plants, those types of things?
    Dr. Halverson. Well, CoBank is, if I have my facts 
correctly, the largest investor in the ethanol industry, in the 
United States as a lender. We partner very closely with Farm 
Credit Services of America and other associations, and we are a 
very significant investor in the ethanol industry, have a 
substantial loan portfolio and a substantial amount of subject 
matter expertise. If you have someone out there that you would 
like us to talk to, we would be delighted to do it.
    Mr. Marshall. Okay, thank you.
    Thank you, I yield back.
    The Chairman. The gentleman's time yields back.
    Mr. Walz, 5 minutes.
    Mr. Walz. Thank you, Mr. Chairman. Thank you for holding an 
aggressive hearing schedule and getting ready for the next farm 
bill. It is appreciated.
    I would like to give a thank you to Mr. Davis for chairing 
and Mr. Soto yesterday for attending the mock hearing with our 
4-H-ers from across the country in their leadership conference. 
If you wanted to feel good about where America is going in 
agriculture, being there with those young people, talking about 
all of these important issues from their perspective is really 
encouraging. Thank you to both of you.
    And thank you all for being here. I am lucky that I have a 
wonderful agricultural area in southern Minnesota, and I have a 
really great Farm Credit Service in AgStar out there. And I 
have to tell you something that I am listening to all of you 
talking about the cyclical nature of this, it was about 12 
months ago they proactively reached out to us, brought myself 
and my staff in, sat down with some really smart people, some 
economists and everyone, and showed us what your portfolio 
looked like, showed us the scatterplot on there and made 
observations that, as you manage that portfolio in each of 
those producers, some folks are struggling to get by when corn 
was $6, others are making it at $3.25, and they talked about 
the differences in how you manage those and the skillset that 
you bring in. I thought it was really thinking where we were 
going to end up. In Minnesota talk, you were skating to where 
the puck was going to be, and I appreciate that because it is 
what we need to do.
    And also in Minnesota vernacular, we are Minnesota 
Lutherans, if you do a good deed and talk about it, it doesn't 
count. The way we get around that is we have others say it for 
us. I am very proud of what we did in risk management in the 
last farm bill, and I would like each of you, in just a word or 
two, to let us know how important is crop insurance? You said 
it a little bit, but I can't get over we need to say it a lot. 
If you could each give a word or two, how important is crop 
insurance to vitality out in rural American food supply?
    Mr. Dodson. It is the most important part of the safety 
net. It is not the only part, but it is the most important 
part, as we look at it.
    Mr. Stark. Yes, I would add it is critical, as I mentioned 
earlier, not only for the protection it gives from natural 
disasters, Mother Nature, but now it has become a real 
marketing tool for even young producers to be able to go to the 
futures exchanges and those kind of things, to forward price 
their product when they see opportunities for a profit, and not 
wait for what just comes to them. It has evolved into a very 
robust tool for producers, including young producers.
    Dr. Halverson. I agree completely with my colleagues.
    Mr. Walz. All right.
    Mr. Hall. I will add it is extremely important, but an area 
that you might look at are some of the crops that are not 
necessarily covered in all areas with crop insurance.
    Mr. Walz. Okay.
    Mr. Hall. And I know that there is the NAP program at USDA 
that does provide some coverage, but being able to look at 
broadening the coverage for some other crops is very important, 
particularly to young farmers who are participating----
    Mr. Walz. Some aren't working quite right. We heard barley 
yesterday, they said they have some issues on how that is 
implemented.
    Mr. Hall. Yes.
    Mr. Tonsager. Yes, and I would just say in the middle 
1980s, 14 percent of farmers had crop insurance, and today 91 
percent of farmers have crop insurance. This is a reassuring 
factor for all of us.
    Mr. Walz. Well, if you can say it a lot, it certainly helps 
us. I will say it a lot while we are here, but all of you know 
there will be a discussion and a fair debate during the farm 
bill, and there will be those that will ask us to severely 
restrict or even some will ask us to remove it as an unfair 
government subsidy. And so that discussion will come up, we are 
going to need to make that case.
    I just want to ask a final question on this, because we 
hear this, this would probably not surprise any of you but when 
my bankers come in, they have some critiques that they level. 
Could you tell me simply, as simply as you can, how do I 
respond to my constituents when they talk about that you have 
an unfair tax advantage? How do you respond to that?
    Mr. Stark. Mr. Walz, I would say when you look at the 
bottom line how it washes out, it is really borne out on a 
market share. For 100 years the Farm Credit System has been in 
existence. They have 40 percent market share, we have 40 
percent market share. Last year, even by the ABA's own 
testimony, the ag banks grew by 7.9 percent, we grew 5\1/2\ 
percent. When you wash out all the differences in our 
structure, it comes down to the fact that we are really, really 
level at this point in time when it comes to serving and how we 
impact producers.
    Mr. Walz. And, Mr. Stark, it is your belief then that that 
gives ample opportunity for access to capital for our 
producers?
    Mr. Stark. Yes. Simply, our business models are different. 
You can't debate that. I mean it is, it is the nature, it is 
never going to change, and so when you get down to the bottom 
line it provides competitive alternatives for producers that 
makes us all better, it keeps our pencils sharp, and it keeps 
our businesses more effective and efficient in the long run.
    Mr. Walz. I appreciate it.
    Thank you, Mr. Chairman. I yield back.
    The Chairman. The gentleman yields back.
    Mr. Arrington, 5 minutes.
    Mr. Arrington. Thank you, Mr. Chairman. And I thank the 
panelists for your time and input. And thank you for your 
contribution to agriculture and the rural America, which is who 
I represent in District 19 in the great State of Texas, Mr. 
Dodson. I think that we all agree that the health and future 
viability of rural America and agriculture are inextricably 
linked, and without access to credit for the risky business of 
agriculture, my dad was in agriculture for over 40 years, as we 
grew up in an ag community there in Plainview, Texas, if we 
didn't have the access to credit we wouldn't have farmers and 
ranchers, and we wouldn't have the capacity to feed and clothe 
the American people. And that wouldn't just be a bad thing for 
the millions of jobs, that would be a bad thing with respect to 
national security. I know we all agree on that, but I just want 
to make that statement of affirmation for the role you play.
    I understand the tension between my commercial bankers, my 
community bankers. It is real, it is there. Most of them work 
in partnership with you. Most of them love working with you, 
participate, and it is a very collegial relationship, but I 
appreciate that they want the scope of practice to be limited 
to the mission of the Farm Credit System. I think you would 
agree, and we need to make sure that it is enforced so that 
there is not mission creep.
    And so I won't ask a question there. I think enough 
questions have been asked in that regard, but I want to say for 
the record that there is more collaboration than there is 
conflict, but I would also be remiss if I didn't say, if I was 
a commercial banker I would have the same tension as I look to 
you guys to work together, but not in competition with me, 
because of the benefit that you enjoy. Do you all agree with 
that, generally?
    Okay, I will let you speak more specifically to that, but 
let me ask this question. And, Mr. Dodson, you are probably in 
the best position to answer it. Obviously, historical downturn, 
historically low prices, cost of production up, it is a bad 
situation. But you know what, it is not just bad, it is 
disastrous, it is a threat to the lifeblood of west Texas 
because our cotton farmers are out of the safety net that is 
title I in the farm bill. Could you quantify for me, and 
anybody could answer this, but quantify for all of us the 
effects from the perspective of the financial institution, that 
is, the write-off or the non-performing assets, or the loan 
evaluations, give me the banking or financial institution 
metrics on how disastrous it has been specifically for cotton 
producers.
    Mr. Dodson. I can't speak for associations. I am at the 
bank level, I don't look down into the association loans, but 
what I am hearing from the country is that a lot of producers 
are losing \1/3\ of their net worth a year. And that will turn 
you upside down in a hurry.
    This year, Congressman Arrington, they had extraordinary 
yields in your part of the country, and that was the only thing 
that kept them from being off the bubble, so to speak, and 
really going down.
    I mentioned this earlier in your absence, but the lenders 
out there are working with producers trying to re-amortize debt 
and stretch payments, and work with them to give them tools to 
handle this. But in some cases they are getting close to 
running out of options, and so it is urgent that something is 
done.
    Mr. Arrington. Thanks for the feedback.
    In the interest of time, let me go on to the next question. 
And as a former regulator, I served at the FDIC during the Bush 
Administration, I understand that diversification is a 
cornerstone for safety and soundness in the system, in the 
financial system. What are the challenges that you have to 
address as a regulator with respect to needing that 
diversification, but having the constraints of the scope of 
practice?
    Mr. Hall. The statute is pretty clear from the Farm Credit 
Act what the lines of authority are. Staying within those lines 
of authority as a safety regulator is vital. We look at the 
diversification of the portfolio and some of the changes that 
have been made since the 1971 Act allow the System to go 
outside of what was traditionally just lending for farm loans.
    Mr. Arrington. In the interest of time, do we need more 
tools for diversification?
    Mr. Hall. That would be a question best asked of the 
System, but we will be glad to respond back.
    Mr. Arrington. I yield back, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    Mr. Comer, 5 minutes. Jamie.
    Mr. Comer. Thank you, Mr. Chairman.
    And let me say this. I have been in agriculture all my 
life, and I have been to a lot of cattle shows and ag events 
all over Kentucky and Tennessee, and I don't ever remember an 
event that Farm Credit wasn't a sponsor of something. I 
appreciate what you do in the agriculture community, in 
addition to helping farmers and young farmers have access to 
credit. You are a great community citizen and I appreciate 
that.
    And I have to recognize my friend, Jeff Hall, a good 
Kentucky boy. And we end up on the same flight a lot coming out 
of Louisville, heading to this great city, so it is good to see 
Jeff.
    My first question is for Mr. Tonsager and Jeff Hall. Many 
Farm Credit institutions are seeing customers with a third year 
of losses, and are preparing for customers to, unfortunately, 
have a fourth year of losses. However, individual Farm Credit 
institutions see their customers are economically viable and 
plan to continue to work with these customers. Will FCA 
examiners provide flexibility to Farm Credit institutions when 
examining?
    Mr. Hall. We will provide flexibility. And that is one of 
the advantages of the System that, being a sole source for 
agriculture through good times and bad, we are allowed to 
provide that flexibility. And I will add too that that 
flexibility is available because of the diversification of the 
portfolio, not only within ag spread across the country, but 
the other things that we are able to do that allow the System 
to stay with producers.
    Mr. Comer. Right.
    Mr. Tonsager. Yes, I agree with Mr. Hall as well. But I 
would like to add two things. I found we have a dual 
responsibility at the agency. One is the scorekeeper of the 
banks and the quality of the credit, and we have to continue to 
score accurately and completely and transparently for our 
bondholders' market so they are comfortable with it. But we 
also have a mission responsibility, and we have an equal 
responsibility there to make sure now and the bad times that we 
are carrying out that mission and making sure producers have 
access to credit.
    Mr. Comer. Yes. Good deal.
    Next question is for Mr. Stark. When I was Commissioner of 
Agriculture in Kentucky, I worked to create the Homegrown by 
Heroes labeling program, and I was also proud to partner with 
Farm Credit and the Farmer Veteran Coalition to make that label 
available to farmer veterans across the nation. In your view, 
are labeling programs like this helpful to producers in 
marketing their products, and can you provide an update to the 
Committee on Homegrown by Heroes?
    Mr. Stark. I don't have the specific updates on where we 
are with Homegrown by Heroes. My understanding that we have 
over 800 participants in that now that are using that brand. 
Certainly, every little thing like that helps, and when you 
have a group like our veterans, we do want to help and support 
them in their efforts to get established in agriculture 
operations. Yes, from the time we provide that initial seed 
capital to launch that brand, to where we are at today, my 
understanding it has grown to over 800 participants.
    Mr. Comer. Right. That is great. That is great. Yes.
    Mr. Hall. It has grown beyond the states. USDA has taken 
over a major role and several states have done that, it was a 
great thing that you started.
    Mr. Comer. Good deal. I appreciate Farm Credit. You took it 
to the next level and took it nationwide, and it has made a big 
difference with veteran farmers all over Kentucky, I know, and 
have a pretty good sense all over America. Thank you for that 
and all that you do for farm families all across America.
    I yield back, Mr. Chairman.
    The Chairman. The gentleman yields back.
    Mr. Austin Scott, 5 minutes.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
    Gentlemen, I apologize, I have been running back-and-forth 
among three meetings. I know many of the things that I had to 
say have been said.
    I just want to reiterate a couple of points. One is, I am 
glad to hear you talk about trade. As we renegotiate some of 
the agreements, I am extremely concerned that other countries 
might pick individual commodities, and that can create a 
tremendous amount of turmoil in different segments of the 
economy. And so if they pick corn, for example, it might be 
horrible for the Midwest and not have much impact on the 
Southeast, but if they picked peanuts it would be the exact 
opposite. And so we are going to have to make sure that our 
commodity groups hold together and our trade relationships. I 
look forward to your input and advice on that.
    I know that there has been a lot of discussion about the 
similar entity lending. I look at Farm Credit as one system. If 
one bank does something that is outside of the parameters, I 
think that all of you in the end will be held accountable for 
it. I want to encourage you to hold your brothers accountable 
to the standard that has been set for you so that we don't end 
up becoming a referee in that, where one bad actor causes 
problems for the rest of you.
    And then I want to mention that specialty crops have become 
a bigger and bigger part of the ag economy in many areas. 
Specialty crops offer a unique opportunity for people to get 
into farming without much acreage. And we have in Georgia a lot 
of farmers have begun planting blueberries and other specialty 
crops along those lines. We had a huge loss with blueberries 
due to a late year freeze. And any input that you have for how 
we help those farmers in those specialty crop areas when they 
suffer a loss, the way our blueberry farmers in Georgia did 
this past year, open the input on that as we go into the farm 
bill.
    With that said, I would just ask one question, primarily 
for the regulators. The overall credit quality of the Farm 
Credit System portfolio, are there any particular segments in 
it that you feel that have been particularly hard hit, or that 
are going to be an issue for non-performing loans, going 
forward? And with regard to potential trade issues, how will 
you address the potential issues with if we see a certain 
country attack, if you will, attack a certain commodity?
    Mr. Tonsager. The overall quality of the Farm Credit 
System's loan portfolio is very good. The non-performing assets 
are less than one percent of the portfolio today, about $2 
billion out of the whole thing. And there are numerous sectors 
that are suffering, that are being more challenged, of course, 
in the commodity sectors. We think, in the Northern Plains, the 
corn and soybeans typically have been problematic when we have 
had downturns. They had great yields this year that helped them 
get through 1 more year without a lot of changes. But, the 
sectors you identified are all challenging to us, and all we 
are going to have to be watchful about as commodity prices 
continue to be weak.
    Mr. Hall. The thing that we don't know and wish we did know 
is how long this down cycle is going to last, and that is the 
hardest thing to predict. We know we are coming into it with a 
considerable amount of capital and equity, but it is just 
eating away a little bit at a time.
    And your point on trade is right-on because the export 
market is so vital to our commodity prices, particularly when 
they are this low. And not just in terms of trade, we have to 
be able to produce and provide for that export market, because 
that is where USDA says 30 percent of the income is coming from 
the export market.
    Mr. Austin Scott of Georgia. Yes. Absolutely.
    Mr. Chairman, my time has expired, but I do want to just 
reiterate, I am extremely concerned about individual commodity 
groups being attacked, and the impact on certain regions, and 
making sure that when that happens to one of our commodity 
groups, that the other commodity groups rally around to protect 
them.
    With that, I yield the remainder of my time.
    The Chairman. The gentleman yields back.
    Mr. Yoho, 5 minutes.
    Mr. Yoho. Thank you, Mr. Chairman. I appreciate you all 
enduring this hearing.
    I am going to touch on a question that Congressman Soto 
kind of briefly touched on, but I want to come at it a 
different way. As you know, citrus greening is of great concern 
to the citrus industry. My state, production has dropped from 
over 400 million boxes to below 70 million boxes, with nearly 
all groves affected. The question is, can you describe Farm 
Credit's capacity to work with the affected customers in such a 
large volume, and would any private entity by willing to work 
with such a challenged crop outside of the Farm Credit System? 
What are your thoughts on that?
    Dr. Halverson. As I said to your colleague earlier, 
Congressman Yoho, we at CoBank are banking with cooperatives in 
the citrus industry in your state and your district right now. 
It requires patience and perseverance to support them as they 
go through this unprecedented situation. I can't speak to 
hypothetically how other lenders outside of the Farm Credit 
System would respond to this sort of a situation. I can say 
that we are working very closely with our customers who are 
part-owners of the bank, equity holders in the bank, and we are 
doing everything we can to help them be successful as they try 
to figure out what is, in fact, a very difficult problem that 
is taking a long time, and is likely to take significantly 
longer to work their way to a solution.
    Mr. Yoho. Thank you. Does anybody else want to tackle that, 
or is that pretty much all that needs to be said? Okay.
    Let me move on to the next question. As you know, the USDA 
is administering direct loans to farmers. Some are high risk, 
some are minorities, and others are new farmers. Now, it is my 
understanding, based on the numerous meetings I have had over 
the years, that both Farm Credit and private lenders are both 
capable of and willing to provide these loans in lieu of USDA. 
My question to you all is what are your thoughts on eliminating 
this program from the USDA, and transferring these kinds of 
loans to the Farm Credit and private lenders, but with a 90 
percentage guarantee provided by the USDA? Because they are 
already doing the loans, but they have the bureaucracy of 
administering the loan and lending that out, and transferring 
it to the private-sector or you guys.
    Mr. Hall. I would like to address that. I worked for USDA 
and the Farm Service Agency in a previous job.
    Mr. Yoho. Yes, sir.
    Mr. Hall. I will tell you, at least in Kentucky, the direct 
and guaranteed program was an important part of keeping a lot 
of operations in business. There is always a lot of pressure on 
both of those to make sure they are adequately funded. Your 
idea of rather than having direct loans, have a higher 
guarantee, is an interesting one that it would be worthwhile to 
look at. The System and private lenders would be interested in 
that.
    Mr. Yoho. Well, we are at a point where we are running into 
some budgetary constraints, and you are going to hear those 
coming up real soon.
    Mr. Hall. Right.
    Mr. Yoho. And so we have to look at reforming programs to 
make them more efficient, and instead of duplicating that which 
can be done in the private-sector or through Farm Credit, 
remove that, leave the guarantee there that the USDA will stand 
behind, add a percentage, and I have talked to some and they 
have said, heck, we would be happy to do it at 90 percent.
    Mr. Hall. Yes.
    Mr. Yoho. And so it would still be a guaranteed loan from 
the USDA at high risk. Those are the things we want to think 
outside the box to reform the Department of Agriculture, to 
make it more productive, to get those things out. I am glad to 
hear that thought. Does anybody else want to weigh in on that?
    Mr. Hall. Could I add one more point that I think is 
important?
    Mr. Yoho. Yes, sir.
    I have a minute and 16 seconds.
    Mr. Hall. There are caps on the direct loan program, so you 
have to look at taking those caps away and that would free-up 
more capital.
    Mr. Yoho. All right. And then, Dr. Halverson, you said you 
lend to the rural area infrastructure and companies. What kind 
of projects do you finance?
    Dr. Halverson. We finance electric generation co-ops, 
electric distribution co-ops all over the United States.
    Mr. Yoho. What about sewer and water?
    Dr. Halverson. We do sewer and water as well. And we also 
do a significant amount of renewable energy lending.
    Mr. Yoho. And then broadband?
    Dr. Halverson. Absolutely. We have a substantial 
communications business that includes fiber builds, cell phone 
businesses, towers, data centers, cable TV companies, all of 
the above.
    Mr. Yoho. Okay. Well, Mr. Chairman, those are my questions. 
I yield back and thank you for your time.
    The Chairman. The gentleman yields back.
    Mr. Yoho. Thank you.
    The Chairman. Mr. Thompson, 5 minutes.
    Mr. Thompson. Mr. Chairman, thank you. Thank you for this 
hearing. Gentlemen, thank you for being here.
    My question specifically is for Mr. Tonsager or Mr. Hall, 
but if there are others that have input on this, I serve as the 
Chairman of the Subcommittee on Nutrition, and I am interested 
in the intersection between agriculture and nutrition. It is 
pretty strong, given the fact that farmers and feeding is a 
pretty strong, pretty busy intersection. And I understand that 
Farm Credit Services producers who are heavily involved in 
farmers' markets and in particular, farmers' markets which are 
EBT-capable, do you have any anecdotal or other information 
regarding how Farm Credit customers view the business 
opportunities of having EBT at farmers' markets?
    Mr. Tonsager. I would just say that I would like to turn 
the question over to my colleagues from the System. We have 
seen that, we are aware of it, and think of it as a very 
positive thing, but these folks are in a better position to 
give you a good answer.
    Mr. Thompson. Sure.
    Mr. Stark. Well, I would just say this, we find this as a 
very much new and evolving area of the business, and we are 
supportive of farmers' markets and the inclusion that you 
talked about. We are supporting some directly through some 
grants, and also we have producers that are producing for 
farmers' markets. It is not uncommon that you go to a farmers' 
market and you will find a number of Farm Credit customers 
there. Maybe the scope of their operation includes a commercial 
operation, but they also have a part of their operation that is 
growing locally grown and produced or direct-to-retail type of 
activity. We very much are we in support of that. We are 
financing them, some both directly and indirectly through their 
farming operations, directly through those activities. Although 
I would tell you, undoubtedly, it is limited at this point, but 
it is an area we are continuing to watch and evolve and we have 
an interest in.
    Mr. Dodson. In Texas, we are financing a lot of organic 
locally grown foods, and it is interesting though, it is 
difficult for us to actually finance the farmers' markets or 
the hubs because they are typically privately owned and not 
owned by the producers. And so we were talking about lanes, the 
Chairman earlier mentioned that, that is outside of our lane.
    Mr. Thompson. Okay. Well, thank you. And I appreciate what 
you are able to do for that. Obviously, we are trying to, 
farmers' markets are just great access points, especially in 
food deserts where folks are not fortunate enough live. 
Farmers' markets, first of all, play a great role for access to 
nutritious food; and second, it helps our producers earn 
sometimes a premium for their product.
    Mr. Stark, I want to touch on dairy a little bit, because 
right now we know that our dairy farmers, and probably many of 
your customers, are really challenged financially. And I am 
looking specifically in Pennsylvania, but obviously, like most 
dairy producers across the country are struggling. Can you 
describe the services and tools that Farm Credit offers to 
Pennsylvania dairy producers or anywhere in the country at this 
particular time when runaway prices are such that they are 
having a challenging time?
    Mr. Stark. Yes. And I can't specifically talk to maybe all 
that is going on in Pennsylvania, but certainly, those 
producers have the same access to products and services that 
our other producers would. Specifically, I know a program that 
Farm Credit East has in New York, which is right there, and 
through the Northeast, where they actually have a benchmarking 
service that they provide to dairy producers where they bring 
in the financial information, they are able to benchmark their 
peers, and help producers understand where they may be out of 
alignment in their cost, to help them provide counsel as well 
as insights to their operation, to get to a point that they are 
more effective and efficient.
    Mr. Thompson. Very good.
    Dr. Halverson. I would supplement that, if I might?
    Mr. Thompson. Please.
    Dr. Halverson. Associations are the ones who will be 
financing the individual dairy producers and their farming 
operations. We at CoBank bank many of the co-ops that they 
supply, and we have been supporting substantial investments by 
some of the nation's largest dairy co-ops as in other commodity 
products, to the extent that they can pull together through a 
co-op and develop higher value-added products and services, in 
addition to milk production. That is good for their members, 
they can get a premium for their product. And we have a very 
substantial portfolio of investments supporting dairy co-ops 
all across the country.
    Mr. Thompson. Very good.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman yields back.
    Mr. Bost, 5 minutes.
    Mr. Bost. Thank you, Mr. Chairman. I want to thank you for 
being here. And there is one specific question, and it is a 
leading question, okay, just so you know, and I wanted to ask 
that of Mr. Dodson, Mr. Stark, and Dr. Halverson. And that is, 
as a lender, do you believe that the current limits on FSA 
guaranteed loans are adequate to support the needs of the 
modern farmer?
    Mr. Dodson. I would say they are not adequate at these 
levels. They need to be raised.
    Mr. Bost. Okay.
    Mr. Stark. Yes, I would agree with that. It was illustrated 
earlier with the way loan volume and the trends in agriculture 
and the cost of both commodities and land has increased, the 
limits need to be re-evaluated.
    Dr. Halverson. I would strongly support my colleagues.
    Mr. Bost. Yes, we will try this. Let me switch to a 
different microphone. How about that. That is better. All 
right. Let me just say that whenever I am dealing with a lot of 
the farmers that I am working with right now, and you know what 
their costs are and what their overheads are, and what a 
combine runs, what an investment it is, when we are trying to 
get young farmers. The reason why I am leading that question is 
I have a particular bill to raise it to $2\1/2\ million, above 
the $1.39 million that it is at right now. In today's farming, 
it has been since the early 2000s since we have raised that, 
and it is vitally important and it is time that we do that when 
farm costs have risen the way they are. Thank you for what you 
do.
    That was as simple as I could be. I waited all day to do 
that, just to ask that one question. But thank you for being 
here.
    The Chairman. The gentleman yields back.
    Mr. LaMalfa, 5 minutes.
    Mr. LaMalfa. Well, thank you, Mr. Chairman. And we are 
getting down to being lonely in here again, aren't we? I am in, 
again, multiple committees at the same time, so if I didn't 
hear, and I hope I didn't miss something I should have heard 
earlier that pertains to the questions I would have.
    So basically, I will boil it down to this here. And Mr. 
Yoho touched on it here at the end of his comments. Broadband 
is a big deal these days in rural America and I have a very 
rural district in northern California near where I farm as 
well. And so expanding the base of rural broadband is a pretty 
big deal in order to be able to keep up.
    So my question would be geared to you, Dr. Tom Halverson, 
on the issue. When we are looking at it, we need to work to 
make it affordable. And again, you have issues with rural and 
ratios of people to customers to infrastructure ratios aren't 
as easy as in urban areas. But, with the advance of technology 
we need for all aspects of rural life, what can we see as a way 
to advance that infrastructure? Tom, what is Farm Credit doing 
to help our rural broadband users in the broad sense?
    Dr. Halverson. Thank you for the question, Congressman. As 
I said earlier, we at CoBank are uniquely chartered among the 
institutions in the System to originate infrastructure lending, 
which includes a broad array of capacities in our 
communications business, which includes broadband. Now, we 
support doing that in all 50 states throughout rural areas of 
the country. We do that with customers in the form of 
communications, rural local exchange carriers, but, frankly, we 
do it also with other industries. We support some broadband 
build-outs with rural electric distribution co-ops.
    Mr. LaMalfa. Let me jump in, please. How is that playing 
out lately? What kind of trending are you seeing on that?
    Dr. Halverson. We are seeing a constant demand for that, a 
lot of growth.
    Mr. LaMalfa. And is it financeable, is a lot of it making 
sense, do you have to turn some of it away because it isn't 
adding up, how does that look?
    Dr. Halverson. We have to strike the same balance that we 
all have to strike in our agricultural businesses and other 
businesses, which is the desire to fulfill our mission and to 
do what our customers want us to do on the one hand, versus the 
desire and the need, and the requirement, to do safe and sound 
business, make sure that we are going to get paid back, be able 
to retain some earnings, and pay patronage to our customer-
owners.
    So the answer is we are doing a lot of that business. We 
would like to do more. We do turn it away from time to time. 
When we turn it away it is because it may not be financeable in 
the construct as it is brought to us, but we will certainly go 
much further, much longer, much more patiently than some other 
private-sector investors might do and support them.
    Mr. LaMalfa. Do you find it boils down most of the time to 
just, again, number of ratio of customers to the 
infrastructure? If it is too rural you are unable to do it, or 
are there other factors?
    Dr. Halverson. That is an important factor, right, how many 
customers per mile, but, frankly, that is not much different 
than what we have been dealing with for 75 years with the local 
wireline telephone companies.
    Mr. LaMalfa. CoBank, Farm Credit----
    Dr. Halverson. It is not very----
    Mr. LaMalfa.--you are able to fund things in a little 
different direction, you can push a little harder than like 
what----
    Dr. Halverson. Absolutely.
    Mr. LaMalfa. Yes.
    Dr. Halverson. Absolutely. We will go as far as we possibly 
can, but at the end of the day we have to do things that are 
bankable, but we are able to do things for companies and co-ops 
where that may be a minor part of their business, and they can 
build out something there and do it with the reliance on the 
creditworthiness of their consolidated company.
    Mr. LaMalfa. All right. Anybody else on the panel want to 
touch on that, like who has the most rural base there? Maybe, 
Mr. Jimmy Dodson, have you got that in Texas?
    Mr. Dodson. Yes, I agree with the assessment Dr. Halverson 
gave. And as a matter of fact, there are times when CoBank will 
originate a loan and we will participate in that loan when it 
impacts an area that we are sensitive to, or it fits our 
portfolio well. I would agree with his assessment, and agree 
with the value of this ability to participate in those kinds of 
loans.
    Mr. LaMalfa. Thank you. One last one for anybody on the 
panel. My understanding is that there are four main banks for 
Farm Credit, four main facilities there, and so I just wonder 
is that spreading it out far enough, is there too much 
concentration of risk with the four main banks? Am I 
understanding that correctly?
    Mr. Tonsager. The four banks, they have numerous 
associations underneath them that own the banks, and so there 
is a diversity of locations, of course. As far as risk, the 
System operates under a shared risk agreement that are based at 
the banks, so we want to make sure that bondholders have a 
comfort level when they buy and sell their bonds to help 
finance the System, and this agreement requires the banks to 
back each other up in providing that capital. The agency in 
turn makes sure there are adequate capital at the banks to 
support that.
    It is part of the structure of the aid system that we are 
going to continue to look at and make sure that we have enough 
stability to make sure that the bondholders are comfortable, 
and that we have adequate funds.
    Mr. LaMalfa. All right. Thank you.
    I had better stop there. Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    Well, thank you very much for being here today. One of our 
missions was to review the safety and soundness of the System, 
and we have gotten great comments from the regulator and the 
regulated about the professionalism with which you approach a 
banking function that is important. The road forward for all of 
production agriculture doesn't look particularly smooth, but I 
am encouraged that your System, your banks, and your 
associations are ready to stand in the breach with the other 
lending options that folks have access to. And so I appreciate 
all of you being here this morning. I don't have any other 
questions, and with that, let me get my official language here.
    Under the Rules of the Committee, the record of today's 
hearing will remain open for 10 calendar days to receive 
additional material and supplementary written responses from 
the witnesses to any question posed by a Member. And I did have 
that question about the participations that commercial lending 
has purchased from you guys.
    This hearing on the Committee on Agriculture is adjourned. 
Thank you.
    [Whereupon, at 12:21 p.m., the Committee was adjourned.]
    [Material submitted for inclusion in the record follows:]
 Supplementary Material Submitted by Hon. Dallas P. Tonsager, Chairman 
        and Chief Executive Officer, Farm Credit Administration
    Farmer Mac's agricultural loan portfolio is geographically diverse. 
The company's direct credit-risk loan portfolio, the Farm & Ranch line 
of business, stood at $6.1 billion on more than 11,000 loans at the end 
of 2016. Regionally, loan volume tracks the distribution of national 
agricultural cash receipts. Approximately 34 percent of the Farm & 
Ranch loan portfolio is in the mid-North region.\1\ In comparison, the 
states in the mid-North region generated an average of 36 percent of 
all agricultural cash receipts generated between 2010 and 2015.\2\ The 
Southwest region is the other primary ag-producing region; it contains 
approximately 30 percent of the Farm and Ranch portfolio, and farms in 
the region generated nearly 17 percent of the agricultural value-added 
between 2010 and 2015. Producers in the Northeast states make up the 
smallest sub-portfolio at just under four percent; this region makes up 
nearly ten percent of all agricultural cash receipts. Table 1 details 
the current outstanding balance by region as well as the cumulative 
originations within the Farm and Ranch portfolio since Farmer Mac's 
inception in 1987.
---------------------------------------------------------------------------
    \1\ Geographic regions: Northwest (AK, ID, MT, OR, WA, WY); 
Southwest (AZ, CA, CO, HI, NM, NV, UT); mid-North (IA, IL, IN, MI, MN, 
NE, ND, SD, WI); mid-South (AR, KS, LA, MO, OK, TX); Northeast (CT, DE, 
KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT, WV); Southeast (AL, FL, 
GA, MS, NC, SC, TN).
    \2\ USDA Economic Research Service, Farm Income and Wealth 
Statistics. https://www.ers.usda.gov/data-products/farm-income-and-
wealth-statistics/data-files-us-and-state-level-farm-income-and-wealth-
statistics/.

                              Table 1: Farmer Mac Farm & Ranch Portfolio by Region
----------------------------------------------------------------------------------------------------------------
                                                                                                     Average
                           12/31/2016                          Cumulative                         Percentage of
        Region           Ending Balance     Percentage of     Originations      Percentage of     Agricultural
                           (millions)           Total          (millions)           Total         Cash Receipts
                                                                                                 from 2010-2015
----------------------------------------------------------------------------------------------------------------
          Mid-North               2,105               34%             5,540               25%               36%
          Mid-South                 837               14%             2,598               12%               18%
          Northeast                 230                4%             1,310                6%               10%
          Northwest                 657               11%             2,909               13%                7%
          Southeast                 518                8%             1,910                9%               12%
          Southwest               1,792               29%             7,488               34%               17%
                      ------------------------------------------------------------------------------------------
  Total..............             6,139              100%            21,754              100%              100%
----------------------------------------------------------------------------------------------------------------

    The Farm and Ranch portfolio is also diversified by production 
typology. Farmer Mac has underwritten more than 130 different 
commodities, from alfalfa to zucchini. Figure 1 displays the company's 
geographic regions overlayed with a breakout of the 12/31/2016 loan 
balances by commodity group. Operators in the mid-North region tend to 
be concentrated in crop production, and thus Farmer Mac portfolio 
volume has a high concentration in crop production (i.e., corn, 
soybeans, wheat, etc.). Loan typology is more diverse in the Southwest, 
mid-South, Southeast, and Northeast regions, which follows[:]
Figure 1: Farmer Mac Farm and Ranch 2016Q4 Balance by Region and 
        Commodity Group
        
        
        
        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
    Farmer Mac is committed to serving all of America's farmers and 
ranchers, regardless of location or production type. This analysis 
highlights that commitment, demonstrating the presence of the company's 
loan products from coast-to-coast and from crop-to-crop.
                                 ______
                                 
  Submitted Letter by Roger Johnson, President, National Farmers Union
March 29, 2017

 
 
 
Hon. K. Michael Conaway,             Hon. Collin C. Peterson,
Chairman,                            Ranking Minority Member,
House Committee on Agriculture,      House Committee on Agriculture,
Washington, D.C.;                    Washington, D.C.
 

    Dear Chairman Conaway and Ranking Member Peterson:

    Thank you for holding today's hearing entitled, Review of the Farm 
Credit System. As you are well aware, the farm credit system (FCS) 
plays an integral role in providing credit to America's farmers, 
ranchers, and rural communities. Our members, engaged in all forms of 
agriculture, have relied on FCS and other lending institutions for 
generations, so that they may feed, fuel, and cloth our nation.
    The cooperative model, central to the FCS, is very important to 
National Farmers Union (NFU) members. Cooperatives, in their many 
forms, are of critical importance. Our members firmly believe that 
government policies and programs should help to better develop, 
protect, advance, and promote cooperatives and the work they carry out. 
NFU opposes any attempt to revise cooperative laws, administratively or 
legislatively, that would diminish or jeopardize the democratic nature 
of cooperatives, their unique governance structure, and ability to 
maintain financial and ethical integrity.
    Cooperatives allow farmers and ranchers to reduce costs of 
production, maintain a reliable source of inputs, and effectively 
market and process farm products. Our members across the country 
actively serve on cooperative boards and provide leadership in the 
patronage, direction, operation, and development of cooperative 
enterprises, and in the education of members and the public as to 
cooperative philosophy and principles. There is no other governing 
structure that provides for such intimate involvement in the 
development and direction of business entities.
    It is also not lost on NFU, that this hearing is being held in the 
House Committee on Agriculture and not the House Financial Services 
Committee. Our members support jurisdiction of the FCS remaining with 
the Committees on Agriculture. As previously stated, FCS is critical to 
the agricultural economy, there is no Committee that understands the 
needs of agriculture better than this one. As you review the structure 
and operations of the FCS, we ask that you take the opportunity to 
explore the health of FCS borrowers. As previous hearings in this 
Committee have shown, farmers and ranchers are struggling in this 
depressed farm economy.
    As you are well aware, net farm income has declined 50 percent 
since 2013. This decline has put significant stress on agricultural 
operations. Financial institutions across the board are seeing that 
stress manifest itself within their loan portfolios. Our members have 
shared stories of their loan officers creatively working towards 
solutions in order to provide needed credit. At the same time we have 
heard other situations where our members, despite having strong debt-
to-asset ratios, are increasingly challenged to obtain operating credit 
without selling off assets.
    NFU is greatly concerned over the implications of commodity prices 
remaining lower than the cost of production over a multiyear timeframe. 
This multiyear downward trend, if uncorrected in the next year or two 
will do even greater harm to family farmers than what we have already 
witnessed. The capital burn rate over the last few years has left our 
producers in a very vulnerable and unsustainable position. As the U.S. 
Department of Agriculture pointed to earlier this year, financial 
liquidity measures, including working capital, are forecasted to weaken 
again in 2017.
    As you review the FCS we urge you to explore financial health 
indicators, which you have done in part during previous hearings, but 
which nonetheless require continuous attention. NFU remains concerned 
over the increase of non-performing loans, decline in real estate 
values, higher collateral requirements, weaker debt-to-asset ratios, 
increased rolling of short and medium-term debt into long-term debt, 
high demand for Farm Service Agency loans, and a number of other 
trends.
    The timing of this hearing is particularly important. As many of 
our nation's farmers are preparing for the spring 2017 planting, credit 
is a particularly relevant subject. We urge this Committee as you 
explore the FCS, to provide particular focus on a producer's access to 
credit.
    We greatly appreciate your attention in this matter.
            Sincerely,
           
           
           
           
           [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
            
Roger Johnson,
President, National Farmers Union.
                                 ______
                                 
          Submitted Statement by American Bankers Association
    Chairman Conaway, Ranking Member Peterson, and Members of the 
Committee, the American Bankers Association (ABA) writes to thank you 
for holding a hearing to review the Farm Credit System. On behalf of 
the approximately 2,000 agricultural banks we represent, the ABA wishes 
to provide our views and perspective on the Farm Credit System for the 
record.
    The ABA is the voice of the nation's $16 trillion banking industry, 
which is composed of small, regional and large banks that together 
employ more than two million people, safeguard $12 trillion in deposits 
and extend nearly $8 trillion in loans. The ABA is uniquely qualified 
to comment on agricultural credit issues as banks have provided credit 
for agriculture since the founding of our country. Over 5,000 banks--
more than 82 percent of all banks--reported agricultural loans on their 
books at year end 2015 with a total outstanding portfolio of over $171 
billion.
    The topic of today's hearing is very timely. The agricultural 
economy has been slowing, with farm sector profitability expected to 
decline further in 2017 for the fourth consecutive year. However, farm 
and ranch incomes for the past 5 years have been some of the best in 
history.
    With the new farm bill in place, farmers, ranchers, and their 
bankers have certainty from Washington about future agricultural 
policy. Interest rates continue to be at or near record lows, and the 
banking industry has the people, capital and liquidity to help American 
farmers and ranchers manage through any turbulence in the agricultural 
economy.
    Banks continue to be one of the first places that farmers and 
ranchers turn to when looking for agricultural loans. Banks have very 
diverse agricultural credit portfolios--they finance large and small 
farms, urban farmers, beginning farmers, women farmers and minority 
farmers. To bankers, agricultural lending is good business and banks 
make credit available to all who can demonstrate they have a sound 
business plan and the ability to repay.
    In 2015, farm banks--banks with more than 15.5 percent of their 
loans made to farmers or ranchers--increased agricultural lending 7.9 
percent to meet these rising credit needs of farmers and ranchers, and 
now provide over $100 billion in total farm loans. Farm banks are an 
essential resource for small farmers, holding $48 billion in small farm 
loans, with $11.5 billion in micro-small farm loans (loans with 
origination values less than $100,000). These farm banks are healthy 
and well capitalized and stand ready to meet the credit demands of our 
nation's farmers large and small.
    In addition to our commitment to farmers and ranchers, thousands of 
farm-dependent businesses--food processors, retailers, transportation 
companies, storage facilities, manufacturers, etc.--receive financing 
from the banking industry as well. Agriculture is a vital industry to 
our country, and financing it is an essential business for many banks.
    Banks work closely with the USDA's Farm Service Agency to make 
additional credit available by utilizing the Guaranteed Farm Loan 
Programs. The repeal of borrower limits on USDA's Farm Service Agency 
guaranteed loans has allowed farmers to continue to access credit from 
banks as they grow, ensuring credit access for farmers across the 
country.
    However, we remain concerned with certain areas of the agricultural 
credit market. In particular, we are worried that the Farm Credit 
System--a government-sponsored enterprise--has veered away from its 
intended mission and now presents an unwarranted risk to taxpayers. The 
Farm Credit System was founded in 1916 to ensure that young, beginning 
and small farmers and ranchers had access to credit. However, today's 
Farm Credit System provides many of the same products and services as 
the banking industry, and often neglects the young, beginning and small 
U.S. farmers and ranchers. Since the Farm Credit System's inception 100 
years ago, it has grown into an enormous $320 billion system offering 
complex financial services. To put this size into perspective, if the 
Farm Credit System were a bank it would be the seventh largest in the 
United States, and larger than 99.9 percent of the banks in the 
country.
    This [S]ystem operates as a government-sponsored enterprise and it 
presents a risk to taxpayers in the same way that Fannie Mae and 
Freddie Mac do. It benefits from significant tax breaks--valued at $1.3 
billion in 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 that has been renewed annually without 
the need for Congressional approval.
    The Farm Credit System has moved dramatically away from its charter 
to serve young, beginning and small farmers and ranchers, and now 
primarily serves large established farms, which could easily obtain 
credit from the private-sector. In fact, the majority of Farm Credit 
System loans outstanding are in excess of $1 million. Any farmer able 
to take on over $1 million in debt does not need subsidized credit. In 
addition to these loans, the Farm Credit System currently has eight 
loans between $750 million and $1 billion, and two loans of over $1 
billion.
    Our nation's farmers and ranchers are a critical resource to our 
economy. Ensuring that they continue to have access to adequate credit 
to thrive is essential for the well-being of our whole nation. 
America's banks remain well equipped to serve the borrowing needs of 
farmers of all sizes. An important step in ensuring credit availability 
is to oversee and closely examine entities such as the Farm Credit 
System and ensure that they stick to their charter of helping young, 
beginning and small farmers.
    This statement for the record will elaborate on the following 
points:

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

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

  b The Farm Credit System has become too large and unfocused, using 
        taxpayer dollars to subsidize large borrowers.
I. Banks Are a Primary Source of Credit to Farmers and Ranchers in the 
        U.S.
    For many of the ABA's members, agricultural lending is a 
significant component of their business activities. The ABA has studied 
and reported on the performance of farm banks for decades, and we are 
pleased to report that the performance of these highly specialized 
agricultural lending banks continues to be strong. The ABA defines a 
farm bank as one with more than 15.5 percent farm or ranch loans (to 
all loans).
    At the end of 2015, there were 1,976 banks that met this 
definition. Farm lending posted solid growth during 2015. Total farm 
loans at farm banks increased by 7.9 percent to $100.3 billion in 2015 
up from $94.6 billion in 2014. Approximately $1 in every $3 lent by a 
farm bank is an agricultural loan.
Farm Banks Exhibit Solid Farm Loan Growth
$ Billions



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          Source: Federal Deposit Insurance Corporation & American 
        Bankers Association analysis.

    Farm real estate loans grew at a faster rate than farm production 
loans. Outstanding farm real estate loans grew at a pace of 9.1 
percent, or $4.2 billion, to a total of $50.6 billion. Farm production 
loans rose by 6.6 percent, or $3.1 billion, to $49.8 billion.
    Farm banks are a major source of credit to small farmers, holding 
more than $47.8 billion in small farm loans (origination value less 
than $500,000) with $11.5 billion in micro--small farm loans 
(origination value less than $100,000) at the end of 2015. The number 
of outstanding small farm loans at farm banks totaled 761,192 with the 
vast majority--over 496,200 loans--with origination values less than 
$100,000. Farm banks are healthy and well capitalized and stand ready 
to meet the credit demands of our nation's farmers large and small.
    Equity capital--often thought of as the strongest form of capital--
at farm banks increased 4.9 percent to $47.7 billion in 2015. Since the 
end of 2007, farm banks have added $19.5 billion in equity capital, 
building strong high-quality capital reserves. These capital reserves 
give farm banks flexibility as the agricultural sector adjusts to lower 
commodity prices, allowing bankers to work with and serve the needs of 
our nation's fa[r]mers and acting as a buffer from the risks associated 
with any downturn in the agricultural sector.
Farm Banks Increase High-Quality Capital
$ Billions




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          Source: Federal Deposit Insurance Corporation & American 
        Bankers Association analysis.

    One area of concern for farm bankers and their customers has been 
the rapid appreciation in farmland values in some areas of the country. 
The run up in farmland values has not been a credit driven event. After 
several years of large increases in farmland values, the consensus view 
among bankers is that the increase in cropland values has slowed--USDA 
estimates of lower commodity prices for the third consecutive year in 
2016 seem to have modestly cooled off the demand for farm real estate. 
Banks watch the farm real estate market very closely. USDA estimates a 
1.2 percent decline in the value of farm real estate in 2016. In recent 
years, over \4/5\ of the agriculture sector's asset values were held in 
real estate. Farm banks are actively managing the risks associated with 
agricultural lending and underwriting standards on farm real estate 
loans are very conservative. The key consideration in underwriting any 
loan is the ability of the customer to repay regardless of the 
collateral position in the loan. To further manage risk, banks 
regularly stress test their loan portfolios to judge repayment capacity 
under different scenarios.
II. Banks Work Closely with the USDA's Farm Service Agency To Make 
        Additional Credit Available by Utilizing the Guaranteed Farm 
        Loan Programs
    The ABA would like to thank Congress, especially the Agricultur[e] 
Committees, for repealing borrower term limits on USDA Farm Service 
Agency guaranteed loans. Term limits restricted farmer access to 
capital, and with the expansion of the farm economy over the past 10 
years, there are some farmers who would not have been able to obtain 
credit from banks without a guaranty from USDA. The USDA's Farm Service 
Agency guaranteed loan program has been a remarkable success. Today, 
nearly $12 billion in farm and ranch loans are made by private sector 
lenders and are guaranteed by the USDA. There are nearly 43,000 loans 
outstanding. Some farmers have more than one guaranteed loan, so this 
number does not match one-to-one with the number of individual farmers 
and ranchers; nonetheless the numbers of individuals accessing credit 
under this program is very significant.
    This program has grown over the past 5 years, with less than $9 
billion outstanding at the close of FY08 to nearly $12 billion today. 
The loans made by banks under this program are modest in size. The 
average outstanding guaranteed real estate loan is $480,969 and the 
average outstanding guaranteed non-real estate secured loan is 
$309,700. Clearly, banks are reaching customers who have modest-sized 
operations, who are in the process of starting their farm or ranch 
operation, or who are recovering from some sort of financial setback. 
Despite the fact that these customers do not have either the earnings 
or collateral to qualify for conventional credit, losses in the program 
have been extremely small. Over the last 5 fiscal years, losses have 
ranged from a high of 0.5 percent in FY11 to a low of 0.2 percent in 
FY15. These are extremely low losses--especially for customers who are 
perceived to be a higher risk than other customers, hence the need for 
the USDA credit enhancement. Bankers who utilize the guaranteed farm 
loan programs offered by USDA know what they are doing and work very 
closely with their farm and ranch customers to properly service these 
loans. The Farm Service Agency deserves a great deal of credit for 
administering such a successful public/private partnership. The ABA 
urges the Committee to continue to support this very worthwhile 
program.
III. The Farm Credit System Is a Large Government-Sponsored Enterprise 
        That Primarily Serves Large Borrowers at the Expense of 
        Taxpayers
    As mentioned earlier in this testimony, the market for agricultural 
credit is very competitive. Banks compete with several other banks in 
particular service areas and with finance companies from all of the 
major farm equipment manufacturers, several international banks, life 
insurance companies and finance companies owned by seed and other 
supply companies to name a few.
    The most troublesome competitor banks face is the taxpayer-backed 
and tax-advantaged Federal Farm Credit System (FCS). The FCS was 
chartered by Congress in 1916 as a borrower-owned cooperative farm 
lender at a time when banks did not have the legal authority to make 
long-term farm real estate loans. Over the ensuing 100 years, the FCS 
has received numerous charter enhancements, and has ventured into areas 
that are not appropriate for a farmer-owned farm lending business. In 
fact, today's FCS provides many of the same services and products as a 
commercial bank, while benefiting from a special tax-treatment status.
    Today, the FCS is a large and complex financial services business 
with nearly $320 billion in assets. If it were a bank, it would be the 
seventh largest bank in the United States. It is tax-advantaged and 
enjoyed a combined local, state and Federal tax rate in 2015 of only 
4.0 percent (a significant decrease from the effective tax rate of 4.5 
percent in 2014). Despite Congress's intentions, the FCS's tax subsidy 
has not been passed on to its customers. The tax advantages enjoyed by 
the FCS in 2015 was worth $1.296 billion or 28 percent of the Farm 
Credit System's net income in 2015[.] \1\
---------------------------------------------------------------------------
    \1\ Federal Farm Credit Banks Funding Corporation; 2015 Annual 
Information Statement of the Farm Credit System; March 7, 2016. Page F-
3.
---------------------------------------------------------------------------
The Farm Credit System Is a Government Sponsored Enterprise
    The Farm Credit System presents the same kind of potential threat 
to the American taxpayer as Fannie Mae and Freddie Mac. As a 
government-sponsored enterprise (GSE) like Fannie Mae and Freddie Mac, 
the American taxpayer is the ultimate back stop should the Farm Credit 
System develop financial problems. This reality was formalized in 2013 
when the Farm Credit System Insurance Corporation arranged a $10 
billion line of credit ``with the Federal Financing Bank, a Federal 
instrumentality subject to the supervision and direction of the U.S. 
Treasury--to which the Federal Financing Bank would advance funds to 
the [Farm Credit System] Insurance Corporation. Under its existing 
statutory authority, the [Farm Credit System] Insurance Corporation 
will use these funds to provide assistance to the System Banks in 
exigent market circumstances which threaten the Banks' ability to pay 
maturing debt obligations. The agreement provides for advances of up to 
$10 billion.'' \2\ The line of credit has been extended annually, for 
12 month periods, and now expires on September 30, 2016.
---------------------------------------------------------------------------
    \2\ Federal Farm Credit Banks Funding Corporation; 2013 Annual 
Information Statement of the Farm Credit System; February 28, 2014, 
page 23.
---------------------------------------------------------------------------
    We believe the farmers who own stock of the Farm Credit System--and 
the American taxpayers who back it--deserve a better understanding of 
the deep financial commitment between the Farm Credit System and the 
U.S. Treasury, but very little information is available to the public. 
Unlike the housing GSEs, which are subject to reform efforts to lessen 
the taxpayer's exposure, the Farm Credit System seems to be increasing 
its dependence upon the U.S. Treasury.
Large Borrowers Benefit Most from Farm Credit System Subsidy
    The Farm Credit System's tax subsidy benefits have not been passed 
along to those Congress intended to benefit from the taxpayer 
subsidized loans--young, beginning and small farmers and ranchers. 
Instead, a review of the 2015 Annual Information Statement from the 
Federal Farm Credit Banks Funding Corporation indicates that 45.5 
percent of all Farm Credit System outstanding loans at the end of 2015 
were in excess of $5 million. At December 31, 2015, just 4,458 persons 
or entities--less than one percent of the FCS's 527,462 borrowers--had 
each borrowed at least $5 million from the FCS for a total of $107.3 
billion in lending.
    Further analysis shows that the FCS has one loan outstanding of $1 
to $1.5 billion, and five loans of $750 million to $1 billion 
outstanding.
    The Farm Credit System does not provide the public with aggregated 
data by borrower; if it did, we would see a much higher percentage of 
borrowers with debt in excess of $1 million. In addition, the Farm 
Credit System does not disclose approved, but unfunded commitments. If 
it did, the numbers would be even higher. In short, nearly \1/2\ of the 
entire Farm Credit System's portfolio at the end of 2015 was to 
individuals who owed it much more than $1 million. Any farmer able to 
take on over $1 million in debt does not need taxpayer subsidized 
credit.
    Congress created the Farm Credit System as a public option for farm 
finance when farmers were having trouble getting the credit they needed 
from non-government sources. The conditions that led to the creation of 
the Farm Credit System nearly 100 years ago no longer exist, and yet we 
continue to have a government assisted, tax advantaged lender providing 
credit to customers who could easily borrow from taxpaying institutions 
like mine.
    In fact, the heavily subsidized credit that FCS provides goes to 
those who need it least. Despite amendments to the Farm Credit Act of 
1980 requiring each FCS lender to have a program for furnishing credit 
to young, beginning and small farmers and ranchers (YBS), the share of 
new YBS loans to total new FCS loans continues to be dismal--even as 
the assets of the system have expanded enormously. Loans to small 
farmers have steadily dropped over the past several years with small 
farm loans declining from a high of 30.3 percent of total new loan 
volume in 2003 \3\ to just 14.1 percent in 2015. Clearly, those who 
would benefit the most from the highly subsidized credit made available 
by the FCS are not receiving the benefits that Congress intended them 
to receive.
---------------------------------------------------------------------------
    \3\ ``FCA's Annual Report on the Farm Credit System's Young, 
Beginning, and Small Farmer Mission Performance: 2013 Results''. Office 
of Regulatory Policy, June 12, 2014 Board Meeting.
---------------------------------------------------------------------------
Farm Credit System Lending Outside of Mission
    The Farm Credit System has wandered dangerously off course into 
areas of finance that have nothing to do with agriculture, or rural 
America for that matter. Two recent Farm Credit System loans 
demonstrate this point:
    In 2013, Denver based CoBank, the largest Farm Credit System bank, 
approved a $750 million loan to Verizon. CoBank's loan was part of a 
financing package that totaled over $6 billion. Financial institutions 
from all over the world shared a portion of the loan. CoBank was the 
only government sponsored enterprise to be a participant in the loan. 
CoBank's share of the loan was the largest single piece of the credit 
package. The purpose of the loan was to enable Verizon to purchase the 
portion of Verizon Wireless that it did not already own. The proceeds 
of the loan, which closed in 2014, went to London based Vodafone, the 
corporate entity that owned the rest of Verizon Wireless. The Farm 
Credit Administration, the regulator of the FCS, has publicly stated 
that the loan is perfectly legal because Verizon is a ``similar 
entity'' to a rural cooperatively owned telephone company. In other 
words, the FCA believes that since Verizon provides telephone services 
like a rural telephone cooperative, the loan is legal for a Farm Credit 
System lender to make. This clearly stretches any reasonable 
interpretation of the FCS charter.
    On June 2, 2014, CoBank entered into a $350 million ``credit 
agreement'' with Connecticut-based Frontier Communications Corporation 
to help finance a $2 billion acquisition by Frontier Communications 
from AT&T. Frontier Communications is a $16 billion publicly traded 
company. CoBank played a major role in this financing package in that 
they are credited with being the ``administrative agent and lead 
arranger'' by Frontier. As with the Verizon loan, this too stretches 
the chartered purpose.
    It is interesting to note that many of these loans and credit 
agreements are syndicated loans. The Farm Credit System often says that 
banks ask them to join in these loan agreements, but that is stretching 
the truth. Banks ask all other financial institutions if they would 
like to join these loans. To say that banks are seeking out the Farm 
Credit System is very misleading. It would be more accurate for the 
Farm Credit System, and its regulator for that matter, to state that 
the Farm Credit System is asking to join these syndicated loans, not 
the other way around.
    What new benefit has accrued to rural America as a result? These 
loans facilitated corporate deals designed to maximize shareholder 
returns. In the case of the Vodafone buyout, U.S. taxpayer supported 
money was transferred to European investors. All taxpayers should be 
concerned that the Farm Credit System can be involved in these deals 
and that its regulator is working to aid and abet these activities 
which are clearly beyond the scope envisioned by Congress.
Conclusion
    The banking industry is well-positioned to meet the needs of U.S. 
farmers and ranchers.U.S. agriculture has begun to adjust to lower 
commodity prices after enjoying one of the longest periods of financial 
prosperity in history. While it is true that debt-to-asset and debt-to-
equity ratios have risen some--to 13.23 and 15.25 percent, 
respectively--each remains low relative to historical levels. During 
the past few years, while farmers experiences unprecedented high 
commodity prices and rising farm profits, farmers used their excess 
cash profits to retire debt and to acquire additional equipment and 
land. As a result, farmers and ranchers today have the capacity to tap 
their equity should there be a decline in farm profitability resulting 
in diminished cash flows. While no farmer or rancher wants to take on 
additional debt, the strength of the U.S. farm and ranch balance sheet 
gives producers options to do so if the need arises.
    When the agricultural economy collapsed in the middle 1980s, the 
banking industry worked closely with farmers and ranchers to 
restructure their businesses and to rebuild the agricultural economy. 
Since that time banks have provided the majority of agricultural credit 
to farmers and ranchers. While other lenders, including the Farm Credit 
System, shrank their portfolios of agricultural loans or exited the 
business altogether, banks expanded agricultural lending. Bankers saw 
opportunity where others did not. Bankers still see great opportunities 
in agriculture.
    Bankers remain concerned that the Farm Credit System now represents 
an unwarranted risk to taxpayers. In addition, the Farm Credit System 
does not pass the benefits of its tax subsidy onto those intended by 
Congress. Nearly \1/2\ of the entire Farm Credit System's portfolio of 
loans at the end of 2015 was to individuals who owed it much more than 
$1 million. Borrowers who can amass over $1 million in credit do not 
need taxpayers to subsidize their debt. The Farm Credit System's 
regulator has expanded the authorities of the Farm Credit System, to 
the point today where the Farm Credit System provides similar products 
and services as a typical tax-paying commercial bank. All taxpayers 
should be concerned about where the Farm Credit System is choosing to 
lend taxpayer subsidized credit and that its regulator is working to 
aid and abet these activities.
    Thank you for the opportunity to express the views of the American 
Bankers Association.
                                 ______
                                 
    Submitted Statement by Independent Community Bankers of America
The Farm Credit System Flouts the Law and its Historic Mission
    On behalf of the more than 5,800 community banks represented by the 
ICBA, thank you for convening today's full Committee hearing: Review of 
the Farm Credit System. We appreciate that Chairman Conaway has sought 
to have an aggressive oversight of the policies and programs under the 
Committee's jurisdiction. This type of review is especially important 
in regards to the Farm Credit System (FCS), a government sponsored 
enterprise (GSE), which has run amuck of the law and its historical 
mission.
    ICBA noted in previous Congressional testimony on credit 
availability in rural America: ``We could raise a number of additional 
issues regarding FCS abuses. We believe these types of issues and 
questions warrant a series of separate hearings. There are many 
concerns Congress should explore in their oversight capacity over the 
FCS.'' We continue to urge this Committee and its Senate counterpart to 
conduct a series of in-depth hearings on the FCS's questionable and 
nontransparent activities.
    Not only do we believe further hearings on the FCS are warranted, 
particularly in advance of a farm bill, but they should involve the 
full participation of the community banking industry. Community banks 
are impacted every day by the activities of the FCS and should have a 
seat at the table when FCS issues are reviewed and discussed. Obviously 
the FCS prefers not to have the banking industry involved in hearings 
on the System as they apparently fear their controversial activities 
will be brought to light in advance of finalizing a farm bill. 
Transparency is warranted particularly when it involves GSEs.
Adrift from its Historic Mission
    Congress created the FCS to specifically serve bona fide farmers 
and ranchers, farmer cooperatives and a narrow group of businesses that 
provide on-farm services. However, the Farm Credit Administration 
(FCA), the System's regulator, in recent years has become a willing 
accomplice aiding and abetting the FCS's efforts to expand into non-
farm financing and has created crafty ways to circumvent the law to 
accommodate FCS's desires. FCS has sought to morph from a GSE with a 
narrowly targeted mission of serving agriculture into a generalized 
rural lender serving all types of borrowers in rural credit markets and 
even non-farm borrowers in non-rural areas. In this sense, the FCA, 
quite frankly, has become a captive regulator, often willing to do the 
System's bidding at the drop of a hat while claiming to be independent.
    Illegal Investment Schemes: One example of FCA's capitulation to 
FCS's expansionist agenda to engage in non-farm lending is the agency's 
tortured effort to implement its `Investments in Rural America' 
program. The FCA allowed FCS lenders to create a series of pilot 
programs which often included non-farm lending projects. FCA also 
released a major proposed regulation to allow FCS non-farm lending if 
such illegal lending was characterized as ``investments.''
    FCS lenders could, for example, extend credit for hospitals, 
commercial offices (doctors, lawyers, and dentists), manufacturing 
facilities, apartment complexes in cities, hotels and motels, trucking 
and towing companies, auto dealerships, etc.). Any limitations would 
only be based on the FCA/FCS's lack of imagination.
    After 5 years, the FCA announced it was withdrawing its proposed 
rule and ending its allowance of FCS rural investment pilot programs. 
However, these actions were just a dubious sleight of hand by the 
regulator. While eliminating the pilot programs, the FCA allowed the 
financed projects to continue through the term of the financing which 
in some cases will last for decades. The FCA then briefly published on 
its website a guidance memo instructing FCS lenders on how to apply and 
gain approval to engage in investment programs that included financing 
for non-farm businesses, communities, rural areas and infrastructure 
projects. In other words, even though the FCS lobbied Congress for 
years to receive expanded powers--appeals that were typically rejected 
by Congress--the FCA has suddenly and quietly decided to just allow FCS 
lenders to do whatever they want as long as FCA provides their rubber 
stamp of approval.
    ICBA submitted several letters with comprehensive questions to FCA 
asking for details on FCA's intentions based on the guidance memo. FCA 
refused to answer the questions for many months and when finally 
pressured by the Senate Agriculture Committee, FCA only answered the 
questions partially. This raises a further question--why is the FCA 
adamantly against transparency and accountability to taxpayers that are 
the ultimate backstop against another bailout of the FCS?
    When FCA did partially respond to questions, FCA's lame response 
was its investment authorities are in a separate section of the Farm 
Credit Act (Act) and therefore financing of FCS investments were 
virtually unlimited and could go beyond the constraints Congress put in 
place for the loan making sections of the Act. ICBA adamantly rejects 
this preposterous interpretation and notes the complete lack of 
legislative history supporting FCA's position. Congress did not intend 
to limit the purposes of FCS loan making in one section of the Act and 
then allow unlimited purposes for FCS financing in another section of 
the Act.
    Similar Entity Provision: Much attention has been focused on FCS 
activities under the so-called ``similar entity'' provision of the Act. 
It was revealed that CoBank, the behemoth FCS lender to cooperatives, 
made a $725 million loan to Verizon to buyout Vodafone's interest in a 
joint venture. Verizon and Vodafone are headquartered in New York City 
and London and this extremely large loan was not rural in nature nor 
should it ever have included CoBank's participation.
    Verizon (NYSE: VZ) has a market capitalization of over $200 
billion. Vodafone (NASD[A]Q: VOD) has a market cap of over $70 billion. 
Can anyone seriously claim that these Fortune 500, non-rural, 
nonagricultural corporations headquartered in some of the world's 
largest cities were what Congress envisioned the FCS and CoBank would 
be lending to when it enacted, at the FCS's request, the similar 
entities provisions? We think not.
    This provision was never meant to allow CoBank or any FCS lender to 
make ineligible loans to large corporations. FCA is again abandoning 
their regulatory oversight responsibilities to go to any length 
necessary to allow FCS lenders to make whatever types of non-farm loans 
they desire. During debate on the 2008 Farm Bill, ICBA noted that the 
FCS's Horizon Project proposals were loosely worded and would allow FCS 
lenders to engage in financing large Fortune 500 companies. FCS 
representatives haughtily derided this contention and claimed it was 
misleading. But what has happened since then, even though Congress 
rejected the misguided Horizons proposal?
    CoBank has provided major financing to Verizon, AT&T, U.S. 
Cellular, Frontier Communications, Constellation Brands, a leading 
beverage alcohol and liquor company and other very large corporations. 
Recently CoBank participated in a $1.5 billion loan to Cyrus One.
    In the Verizon instance, CoBank's financing did not target a 
``rural'' telecommunications cooperative. Vodafone is a British 
multinational telecommunications company headquartered in London and 
ranks as the world's second-largest mobile telecommunications company 
in terms of revenues and number of subscribers. Verizon Communications, 
headquartered in New York City, reported at the time quarterly profits 
of over $2 billion and revenues of over $30 billion and hardly 
represented a rural telephone cooperative in need of financing by a 
government sponsored enterprise.
    Cyrus One (NASDAQ: CONE), a publicly traded company with a $4.4 
billion market cap, operates 33 data centers across the U.S., the 
United Kingdom and in Singapore. A data center is a facility used to 
house computer systems and associated components. Their data centers 
are not located in rural areas as anyone can see by linking to their 
locations map (https://cyrusone.com/data-center-locations/). Neither is 
Cyrus One an agricultural entity.
    Constellation Brands (NYSE: STZ), a Fortune 500' company 
with a $31.8 billion market cap is a leading international producer and 
marketer of beer, wine and spirits with operations in the U.S., Canada, 
Mexico, New Zealand and Italy. Constellation is the No. 3 beer company 
in the U.S. with high-end, iconic imported brands such as Corona Extra, 
Corona Light, Modelo Especial, Modelo Negra and Pacifico.
    CoBank's newly found lending activities appear to be an effort to 
leverage their GSE advantages deeply into the realm of multi-national, 
non-agricultural, non-rural and non-cooperative corporate financial 
deals. CoBank has been, not just a participating lender, but the lead 
lender, in some of these loans. This is not the purpose for which 
CoBank and other FCS lenders were created.
    Recently FCS representatives have tried suggesting to Congress the 
`similar entities' provision is an outgrowth of the 1980's ag crisis. 
However, this provision was enacted by Congress in the mid-1990's and 
had nothing to do with the 1980's farm credit crisis a decade earlier. 
In fact, the intent of Congress was underscored by the FCA's final rule 
on the similar entity provision which FCA published on January 30, 
1997. FCA stated the similar entity rule: ``expressly prohibits FCS 
institutions from participating in nonagricultural loans to similar 
entities'' \1\ (emphasis added).
---------------------------------------------------------------------------
    \1\ Final Rule, Eligibility and Scope of Financing, January 30, 
1997, 62 FR 4429.
---------------------------------------------------------------------------
    Congress clearly did not intend for this authority to allow FCS and 
CoBank to finance any large nonagricultural Fortune 500 corporation as 
is being done today. Keep in mind the FCA has raised the lending limit 
for FCS entities to $1.5 billion and the FCS already has several very 
large loans in their portfolio. Congress should require a list of these 
large borrowers and the amounts financed.
    If the FCA wants to ignore the legislative history and suggest the 
activities currently being engaged in by FCS lenders is compliant with 
their regulations, then both the Act and their regulations need an 
overhaul to ensure the FCS is complying with their mission to serve 
agriculture as a GSE. The FCS and FCA need to stop hiding behind 
excuses such as `diversification' and `risk management' as cover for 
engaging in non-rural and non-agricultural loans intended to line the 
pockets of FCS lenders with millions of dollars of profits.
    $10 Billion Line of Credit: On September 24, 2013, the Treasury 
Department, through its Federal Financing Bank, entered into a $10 
billion note purchase agreement with the FCS Insurance Corporation 
(FCSIC) to establish a standby line of credit to provide FCS funds at 
the Treasury's cost of funds. This line of credit, which the FCA sought 
in secret, raises a number of serious questions. For example, why did 
the FCA seek a $10 billion line of credit at a time when FCS lenders 
were reporting record profits of $4.64 billion in 2013?
    Why did the FCA not seek Congressional approval? When the FCS 
failed in the 1980s, the farmland values which the FCS utilized as 
collateral had collapsed significantly. Yet, the $10 billion line of 
credit, according to FCA, is ``collateralized'' meaning the collateral 
backing this line of credit could be dramatically reduced. If the FCS 
were to collapse, as it did in the 1980s, taxpayers would be on the 
hook once again for a sizeable bailout.
    The FCSIC was created to collect premiums from FCS institutions as 
a backstop in the event of financial deterioration within the System. 
Why then did the FCA seek and obtain a line of credit from the 
Treasury's FFB as additional protection? A report to the FCSIC prepared 
by the Brookings Institution stated: ``FCS should be required to 
approach the Congress and the Administration for legislative help'' in 
seeking a line of credit. Yet, FCA did not go to Congress but secretly 
went to the Treasury to obtain the line of credit. There should have 
clearly been Congressional hearings on a GSE seeking a $10 billion line 
of credit. This is another example of FCA/FCS seeking to avoid 
transparency and accountability.
FCA and FCS Diminishing Ag Credit Markets
    When ICBA has surveyed bankers about their experiences with the FCS 
the responses are always quite informative. Bankers complain about the 
FCS cherry-picking activities and notes FCS almost exclusively targets 
the best and largest farm and ranch borrowers, offers these targeted 
borrowers below market rates and is willing to set those below market 
rates at longer terms.
    By taking the best borrowers from community banks, FCS weakens the 
overall community bank portfolios and leaves the less seasoned/younger 
borrowers and higher leveraged borrowers with community banks. 
Similarly, if community banks stretch to keep these prime borrowers, 
community banks must accept less return and assume more interest rate 
risk by fixing the rate for a longer period of time, which is difficult 
to do based on the short term nature of deposits. Bankers typically 
point out the FCS largely ignores young, beginning and small farmers. 
As one banker stated, ``FCS wants us to get these types of farmers 
started first and then later attempts to take them away once they 
become financially stronger.''
With Farm Financial Stress on Horizon FCS Needs to Focus on Farm Sector
    USDA has projected net farm income to decline by 8.7 percent to 
$62.3 billion, the fourth consecutive year of declines after reaching a 
record high in 2013. In addition, farm asset values are forecast to 
decline by 1.1 percent in 2017, and farm debt is forecast to increase 
by 5.2 percent. Farm sector equity, the net measure of assets and debt, 
is forecast down by $51.2 billion
    With low prices expected to continue next year and potentially 
greater financial stress over the next year and possibly beyond, this 
is not the time for the FCS to dilute its emphasis on farmers and 
ranchers by seeking to finance non-farm borrowers. FCS needs to remain 
focused on its mission as a GSE intended to serve the narrow niche of 
production agriculture.
Conclusion
    We thank the Committee for conducting this review of the FCS. The 
FCA has clearly lost respect for the Act's constraints established to 
keep the FCS as a narrowly targeted GSE focused on agricultural 
lending. By thumbing their noses at the Act, the FCA and FCS are also 
thumbing their noses at Congress and the history and legislative intent 
of the Act. If FCA believes the Act is so loose as to allow it to grant 
any type of financing desired by FCS lenders, then the Act needs to be 
tightened.
    Congress never intended for FCS to be a general purpose rural 
lender. If the FCA and FCS do not want to play by the rules, there are 
other lenders that would welcome the enormous subsidies enjoyed by the 
FCS as a GSE with significant tax and funding advantages. The FCS has 
an almost nonexistent tax burden and should not, as a GSE, be crowding 
out private-sector, taxpaying community banks from lending markets and 
should not be abusing their authorities by making indefensible loans to 
the world's largest corporations.
    A series of hearings focused on FCS abuses and FCA's complicity in 
circumventing the law and intent of Congress should be pursued. These 
hearings should obviously involve the banking industry. We look forward 
to discussing these and other issues in more depth with Committee 
Members. Thank you again for holding this hearing and for the 
opportunity to submit this statement for the record.
                                 ______
                                 
                          Submitted Questions
Response from Hon. Dallas P. Tonsager, Chairman and Chief Executive 
        Officer, Farm Credit Administration
Question Submitted by Hon. K. Michael Conaway, a Representative in 
        Congress from Texas
    Question. Gentlemen, the Federal Agricultural Mortgage Corporation 
(Farmer Mac) is requesting several revisions to their charter. They 
are:

   Elimination of the provision which constrains Farmer Mac to 
        purchases of land under 1,000 acres unless the value of the 
        loan over a thousand acres is less than $12.6 million and allow 
        the corporate board of directors and its regulator to determine 
        loan size constraints using the same capital-based lending 
        limit restrictions to which banks and Farm Credit System 
        Institutions adhere.

   Clarifying that an ``eligible borrower'' can also include 
        family trusts and other family farming structures and not only 
        ``individuals, partnerships, and corporations''.

   Allowing Farmer Mac to purchase the guaranteed portions of 
        USDA loans outside of the ConAct of 1972, such as certain 
        guaranteed operating loans, rural home loans, water and waste 
        infrastructure loans, and renewable energy loans.

    As the regulator of the Farm Credit System and Farmer Mac, we would 
appreciate your evaluation of these potential revisions. Thank you.
    Answer.
The 1,000 Acre Rule
    The Federal Agricultural Mortgage Corporation (Farmer Mac) is 
chartered to operate a secondary market for agricultural real estate 
mortgage loans, rural housing loans, and loans to rural utility 
cooperatives. Farmer Mac was designed to increase the availability of 
long-term credit at stable interest rates to rural communities and to 
provide eligible borrowers with the benefits of capital market pricing 
and product innovation.
    Section 8.8(c)(1) of the Farm Credit Act of 1971, as amended, 
forbids Farmer Mac from treating an agricultural loan as a qualified 
loan if its principal amount exceeds $12.6 million (as adjusted for 
inflation). However, section 8.8(c)(2) allows a qualified loan to 
exceed this cap on the principal amount of the loan if it is secured by 
agricultural real estate that in the aggregate comprises no more than 
1,000 acres. This is commonly referred to as the ``1,000 Acre Rule.''
    Under section 8.11 of the [A]ct, the Office of Secondary Market 
Oversight (OSMO) oversees the safety and soundness of Farmer Mac. OSMO 
is responsible for reviewing Farmer Mac's underwriting, servicing, and 
loan portfolio risk management It also evaluates the effectiveness of 
Farmer Mac's credit exposure policy limits relative to its regulatory 
capital base and overall risk-bearing capacity. Further, OSMO evaluates 
Farmer Mac's effectiveness at managing risk concentrations to single 
borrowers, industry segments, and geographic regions. As shown by 
Farmer Mac's history of low delinquency and default rates, Farmer Mac's 
loan underwriting and lending policy limitations have been effective in 
managing credit risk.
    If Congress were to remove the ``1,000 Acre Rule,'' it would not 
create any unmanageable oversight challenges or safety and soundness 
concerns for OSMO. The Farm Credit Act gives OSMO the authority to 
establish regulatory limitations and policy requirements to ensure that 
Farmer Mac's credit exposure remains appropriate relative to its 
capital base and that it maintains sufficient capacity to grow and 
serve all aspects of its program business (including small and family 
farms).
Eligibility
    Farm Credit System (FCS) associations, commercial banks, and 
insurance companies have authority to lend to trusts. Amending section 
8.0(9)(A)(iii) to authorize lending to trusts would better enable 
Farmer Mac to provide liquidity and credit to retail farm lenders.
    OSMO does not perceive any significant safety and soundness 
concerns or oversight challenges that would result from this change. We 
would need to ensure that Farmer Mac reviews and updates (as necessary) 
its underwriting and servicing guidelines and other business processes 
to ensure it maintains appropriate legal reach to address performance 
issues, defaults, and other issues that may arise.
USDA Guarantees
    Farmer Mac conducts its secondary market activities through four 
lines of business:

   Farm and Ranch.

   USDA Guarantees.

   Rural Utilities.

   Institutional Credit.

    The 1990 Farm Bill granted Farmer Mac the authority to purchase 
farm ownership and operating loans guaranteed by USDA. The USDA 
Guarantees Program (formerly Farmer Mac II) was created to boost the 
liquidity of rural lenders by purchasing portions of loans guaranteed 
by USDA Rural Development and the Farm Service Agency (FSA).
    Currently, the USDA Guarantees Program allows Farmer Mac to 
purchase USDA loans under the Consolidated Farm and Rural Development 
Act (7 U.S.C. 1921 et seq.), which includes the Community Facility, 
Business and Industry, Water and Environmental, and FSA Farm Ownership 
and Operating Guaranteed Loan programs. As of December 31, 2016, Farmer 
Mac successfully held and managed $2.1 billion in USDA guarantees.
    The USDA Guarantees Program is well established, and Farmer Mac has 
sufficient operating capacity to further develop its USDA-guarantee 
loan purchase program. OSMO does not believe that any safety and 
soundness concerns would arise from allowing Farmer Mac to purchase the 
guaranteed portions of USDA loans outside of the Consolidated Farm and 
Rural Development Act.
    It's worth noting that Farmer Mac is also permitted to purchase and 
guarantee rural electric and telephone loans made by cooperatives that 
are eligible to receive loans under the Rural Electrification Act of 
1936. As of December 31, 2016, the aggregate outstanding principal 
balance of the Rural Utilities Program was $4.47 billion.
Question Submitted by Hon. Stacey E. Plaskett, a Delegate in Congress 
        from Virgin Islands
    Question. Farmer-owned cooperatives have made significant 
contributions to rural America, providing services to farming and 
ranching operations of all sizes.
    Why is it important for the financial industry in agriculture to 
have farmer-owned cooperatives dealing with the needs of farmers and 
ranchers?
    Answer. In early 20th Century America, farm real estate loans were 
difficult to obtain at affordable rates and terms and in some cases 
farm credit was unavailable at any terms. If a farmer or rancher did 
have access to credit it was at much higher rates and for shorter terms 
than for manufacturing and commercial borrowers.
    This lack of available, much less competitive farm credit lead to 
the study of American farm credit needs by several governmental and 
nongovernmental commissions. Between 1908 and 1912 Congress received a 
number of reports examining and recommending European cooperative 
credit systems as a solution to American's lack of available farm 
credit. The first (unsuccessful) bill providing for a long-term 
agricultural mortgage credit system was introduced in the Senate in 
1912. Between 1913 and 1915, about 60 bills were introduced in Congress 
dealing with agricultural credit.
    Also in 1912, the Southern Commercial Congress--a nongovernmental 
organization--organized an agricultural commission (the ``American 
Commission'') to study agricultural cooperation in Europe; Congress 
subsequently passed a joint resolution accrediting this commission to 
foreign governments. The American Commission was joined by the ``United 
States Commission,'' authorized by Congress and appointed in early 1913 
by President Wilson. Each Commission issued reports influential in the 
development of the 1916 Federal Farm Loan Act, establishing the Farm 
Credit System (System).
    Overall, the American Commission was greatly impressed with the 
productivity and efficiency of European farmers and praised it for the 
revival of European agriculture over the preceding 30 years. The 
Commission attributed this success to the ``cooperative spirit'' among 
farmers in all phases of agriculture, including credit delivery. The 
American Commission's Majority Report found cooperation effective 
because farmers working collectively could achieve what they could not 
achieve individually, and banks seek profits for investors while 
cooperatives save for farmers/members what would otherwise be profits 
for banks.
    Today, the System is a sophisticated financial organization that 
provides credit and financially related services to agricultural 
producers, aquatic producers or harvesters, and farmer-owned 
agricultural and aquatic cooperatives. It also finances agricultural 
processing and marketing activities, rural housing, farm-related 
businesses, and international agricultural trade. In addition, the 
System funds and discounts loans for certain ``other financing 
institutions.'' And through participations and syndications with 
commercial banks, it provides additional credit to agriculture and 
rural America.
    The Farm Credit Administration's oversight role is to ensure the 
System's safety and soundness. It also ensures the System fulfills its 
mission to agriculture and rural America by maintaining its presence in 
the agricultural marketplace and providing competitive and dependable 
credit for all eligible and creditworthy farmers, ranchers, aquatic 
producers or harvesters, and agricultural cooperatives. The System is 
expected to serve its mission during difficult market conditions and 
downturns in the agricultural economy. For example, when commodity 
prices soared in early 2008, System institutions stepped forward to 
meet the critical financing needs of the grain elevator industry. Loans 
to this borrower-owner segment at CoBank alone increased 176 percent, 
from $4.2 billion at February 28, 2005, to $11.6 billion at May 31, 
2008. Similar increases in loan demand from grain elevators occurred at 
the other System banks.
    Since then, the System has met increased demands from financing 
machinery and higher input costs for producers. System institutions 
also helped Midwestern borrowers affected by floods and worked with 
livestock, dairy, and hog producers during stressful market conditions. 
Overall, the System continued to have access to funds and increased its 
lending to agriculture and rural America during a financial crisis and 
severe recession.
    In conclusion, over 100 years ago, Congress was seeking a way to 
make farm credit more readily available and affordable for American 
farmers. The result is the cooperative Farm Credit System which is 
owned and controlled by its borrower/owners. Congress created the Farm 
Credit System to provide creditworthy farmers, ranchers and their 
cooperatives with equitable and competitive credit. As of December 31, 
2016, the Farm Credit System had approximately 500,000 borrower/members 
and assets totaling $320 billion.
Question Submitted by Hon. Alma S. Adams, a Representative in Congress 
        from North Carolina
    Question. As a follow-up to Chairman Tonsager, how is the Farm 
Credit Administration shaping its policies and regulations to encourage 
more lending to small farmers that serve regional food systems?
    Answer. Local and regional food systems are among the fastest 
growing segments of the agriculture industry. USDA estimates that more 
than 160,000 farmers are benefiting from direct connection to consumers 
interested in where and how their food is grown. USDA projects that by 
2019 local and regional food systems will generate $20 billion in sales 
annually.
    Section 1.1(b) of the Farm Credit Act mandates that the Farm Credit 
System be responsive to the credit needs of ``all types of agriculture 
producers having a basis for credit.'' To emphasize this point, FCA 
issued a book-letter (BL-66) on October 11, 2012, which provides 
guidance on how FCS associations can meet the credit and related 
service needs of producers who market their goods through local and 
regional food systems. The book-letter provides guidance in the 
following areas:

   Determining eligibility and scope of financing for local 
        food farmers.

   Determining when a local food hub, aggregator, or support 
        business qualifies for financing as a farm-related service 
        business, processing or marketing operation, or similar entity.

   The application of creditworthiness and underwriting 
        standards to local food farmers.

   The role of FCS banks in supporting association lending.

   Educational support for local food farmers.

   Developing a strategic business plan for emerging 
        agricultural markets.

    Also, section 4.19 of the Farm Credit Act requires each FCS 
association, under policies of the district Farm Credit Bank board, to 
prepare a program for furnishing sound and constructive credit and 
related services to young, beginning, and small (YBS) farmers and 
ranchers. FCA has also promulgated a regulation ( 614.4165) and 
published a book-letter (BL-40) to implement this statutory section. 
Many farmers and ranchers who market their agricultural products 
through local and regional food systems meet the definitions of young, 
beginning, or small producers. Therefore, FCS institutions are already 
meeting the credit needs of many local and regional food producers.
    Identifying and reaching potential YBS farmers is key to fulfilling 
the Farm Credit System's mission. That's why the YBS programs of FCS 
institutions include strategies to reach out to YBS producers in their 
territories. Through these programs, institutions also offer 
educational programs for YBS producers, and local and regional food 
producers often participate in these education programs.
    Associations foster early relationships with potential YBS 
producers by partnering with state or national young-farmer groups, 
colleges of agriculture, land grant extension offices, state or 
national cooperative association leadership programs, local chapters of 
4-H and National FFA, Ag in the Classroom, and other agricultural 
organizations.
    Associations reach out to these potential YBS farmers by providing 
grant money, participating in conferences related to local and regional 
food systems, advertising in different languages through diverse media 
outlets, and creating specific programs to enhance credit opportunities 
to all YBS farmers. Included in these activities are local and regional 
YBS food producers and supporters of local food systems, as well as 
producers who are veterans and members of minority groups.
Response from Thomas Halverson, Ph.D., President and Chief Executive 
        Officer, CoBank, Denver, CO; on behalf of Farm Credit System
Question Submitted by Hon. David Rouzer, a Representative in Congress 
        from North Carolina
    Question. I understand that a WTO decision has severely diminished 
the ability of USDA's GSM program to help keep U.S. agriculture 
products competitive in overseas markets. Has that decision impacted 
CoBank's efforts to finance U.S. exports?
    Answer. Thank you very much for your question. The GSM Program is 
less competitive than in past years and as a result CoBank uses it 
less. That decline was starting before the WTO dispute settlement case 
regarding the cotton dispute between Brazil and the US but the decline 
continues. There are likely additional factors that currently make the 
program less competitive.
    If the terms and pricing were more competitive we believe the 
program would be useful in helping export more U.S. commodity volume 
and in the current market that would be positive.
Questions Submitted by Hon. Alma S. Adams, a Representative in Congress 
        from North Carolina
    Question 1. Mr. Halverson, much attention in the media has been 
directed to the availability of `locally grown' food and urban 
agriculture. Do you see Farm Credit Institutions involved in these 
areas?
    Answer. Thank you very much for your question. Farm Credit's 
mission is to serve all of agriculture, that means supporting urban 
agriculture and non-traditional agriculture that increases the 
availability of locally grown food. I'd like to highlight a couple of 
projects CoBank supports, the National Farm to School network, the 
National Food Hub Collaboration, D.C. Central Kitchen, L.A. Kitchen and 
the Campus Kitchen Project. These nationally recognized programs are 
leading the way for other communities to create sustainable systems to 
support a locally grown food system and urban agriculture.
    The National Farm to School network supports the efforts of 
communities to introduce healthy local foods into their school system. 
With support from CoBank, the organization is bringing together 
participating schools and local farmers to share best practices and 
strategies to purchase and promote local food use in school systems 
across the country. We are also supporting a pilot project to assist 
farmers to become GAAP certified to sell to their local school 
district.
    The National Food Hub Collaboration is working with established and 
fledgling food hubs across the country to provide technical assistance, 
outreach and research needed to promote the use of local foods by 
institutional buyers such as schools and hospitals.
    CoBank supports D.C. Central Kitchen and L.A. Kitchen in their 
efforts to increase their use of local food. D.C. Central Kitchen uses 
local food in their Healthy Corner Programs, their school lunch 
program, their new value-add program with Union Kitchen and their 
preparation of 5,000 meals a day for over 70 organizations in D.C. L.A. 
Kitchen partners with St. Vincent Meals on Wheels to incorporate local 
produce into healthy meals for senior citizens.
    CoBank supports the Campus Kitchen Project (CKP) and their student-
led efforts to address rural hunger with local food in 60 schools 
across the country. Last school year, the CKP engaged 28,697 student 
volunteers to dedicate 88,039 volunteer hours to recover 1,306,163 
pounds of food and to prepare 349,376 nutritious meals. These meals 
were delivered to 19,745 clients along with 913 sessions on nutrition 
education, community gardening and more. This added $2 million in 
economic value from meals and extra food provided.
    I am pleased to report that Fayetteville State University won a 
``launch video'' contest and received a $5,000 grant to start their 
Campus Kitchen Project last year. CoBank also supported the creation of 
a Rural Hunger Solutions initiative that fosters the creation of new 
and replication of existing programs that address rural hunger.
    CoBank supported other projects focused on local food and non-
traditional agricultural including:
    CoBank sponsors the American Community Garden Association Annual 
Meeting which provides a national forum for other communities to learn 
from each other with their focus on local foods and urban agriculture.
    CoBank supports the Appalachia Sustainable Development's work to 
create a regional food distribution system in Appalachia by building on 
a successful food hub model. The goal is to create the Appalachia Food 
Enterprise Corridor, a 43-county collaboration in five states, 
Kentucky, Ohio, Tennessee, Virginia, and West Virginia that will 
develop a coordinated local food distribution network throughout 
central Appalachia.
    CoBank and MidAmerica Farm Credit support Cleveland Crops which 
provides employment training and customized support for persons with 
developmental disabilities in Cuyahoga County to encourage independence 
and to improve the quality of employment skills with vegetable 
production and culinary job training. Cleveland Crops employs 60 adults 
with developmental disabilities. In addition, CoBank funded kitchen 
equipment for the facility that houses Ohio State University Extension. 
OSU teaches a Market Gardening class at this facility to educate 
Clevelanders how to create a business plan to market locally grown 
product.
    CoBank, AgriBank and MidAmerican Farm Credit support the Gardening 
for Greenbacks program in Cleveland which provides grants to beginning 
urban farmers.
    In Colorado, CoBank supports Denver Urban Gardens and GrowHaus to 
increase the marketing of local foods in Denver. CoBank is also 
supporting the Colorado Farm to School Task Force to increase the GAAP 
certification of small and medium-scale farms to sell to school 
districts.

    Question 2. Last, Mr. Halverson, consumer food co-ops are becoming 
increasingly popular throughout North Carolina and the 12th District. 
Can you discuss some of your work with co-ops and what authorities you 
use to support them?
    Answer. As a cooperative, one of our core principals is helping 
other cooperatives. CoBank supports the development of new cooperatives 
by supporting cooperative development centers across the U.S. that 
belonging to Cooperation Works! We also provide financial support for 
training of new cooperative developers.
    In reference to food coops specifically, CoBank sponsors the Up & 
Coming Food Co-op conference. This conference is focused on helping 
communities start their own food co-ops. It offers resources and 
workshops for co-ops in the first years of operation, with the aim of 
helping them achieve success.
    CoBank is also a sponsor of CCMA 2017, the largest gathering of 
U.S. food cooperatives in the country. This year's event will welcome 
400-500 food co-op general managers, board members, consultants, 
buyers, staff members and member-owners.
    CoBank recognizes that consumer food co-ops often source from local 
farmers. In the case of Mandela Food Coop in Oakland, CA, CoBank was 
able to provide a lease for a refrigerated truck for the local farmers 
to use to transport their project to the coop.
    CoBank doesn't have the authority to lend to food coops directly, 
but we would welcome the opportunity to partner with other financial 
institutions to support this important sector of the food and 
agriculture economy.

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