[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]
Printed for the use of the Committee on Agriculture
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
(ii)
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
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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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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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