[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]



 
                      REVIEW OF CREDIT CONDITIONS

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

                                HEARINGS

                               BEFORE THE

        SUBCOMMITTEE ON COMMODITY EXCHANGES, ENERGY, AND CREDIT

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                  NOVEMBER 19, 2019; DECEMBER 11, 2019

                               __________

                           Serial No. 116-24
                           
                           
                           
 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]                  
 


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov
                         
                         
                         
                         
                            ______                      

 
              U.S. GOVERNMENT PUBLISHING OFFICE 
 42-146 PDF             WASHINGTON : 2020 
                         
                         
                         
                         


                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

DAVID SCOTT, Georgia                 K. MICHAEL CONAWAY, Texas, Ranking 
JIM COSTA, California                Minority Member
MARCIA L. FUDGE, Ohio                GLENN THOMPSON, Pennsylvania
JAMES P. McGOVERN, Massachusetts     AUSTIN SCOTT, Georgia
FILEMON VELA, Texas                  ERIC A. ``RICK'' CRAWFORD, 
STACEY E. PLASKETT, Virgin Islands   Arkansas
ALMA S. ADAMS, North Carolina        SCOTT DesJARLAIS, Tennessee
    Vice Chair                       VICKY HARTZLER, Missouri
ABIGAIL DAVIS SPANBERGER, Virginia   DOUG LaMALFA, California
JAHANA HAYES, Connecticut            RODNEY DAVIS, Illinois
ANTONIO DELGADO, New York            TED S. YOHO, Florida
TJ COX, California                   RICK W. ALLEN, Georgia
ANGIE CRAIG, Minnesota               MIKE BOST, Illinois
ANTHONY BRINDISI, New York           DAVID ROUZER, North Carolina
JEFFERSON VAN DREW, New Jersey       RALPH LEE ABRAHAM, Louisiana
JOSH HARDER, California              TRENT KELLY, Mississippi
KIM SCHRIER, Washington              JAMES COMER, Kentucky
CHELLIE PINGREE, Maine               ROGER W. MARSHALL, Kansas
CHERI BUSTOS, Illinois               DON BACON, Nebraska
SEAN PATRICK MALONEY, New York       NEAL P. DUNN, Florida
SALUD O. CARBAJAL, California        DUSTY JOHNSON, South Dakota
AL LAWSON, Jr., Florida              JAMES R. BAIRD, Indiana
TOM O'HALLERAN, Arizona              JIM HAGEDORN, Minnesota
JIMMY PANETTA, California
ANN KIRKPATRICK, Arizona
CYNTHIA AXNE, Iowa

                                 ______

                      Anne Simmons, Staff Director

              Matthew S. Schertz, Minority Staff Director

                                 ______

        Subcommittee on Commodity Exchanges, Energy, and Credit

                     DAVID SCOTT, Georgia, Chairman

JEFFERSON VAN DREW, New Jersey       AUSTIN SCOTT, Georgia, Ranking 
FILEMON VELA, Texas                  Minority Member
STACEY E. PLASKETT, Virgin Islands   ERIC A. ``RICK'' CRAWFORD, 
ABIGAIL DAVIS SPANBERGER, Virginia   Arkansas
ANTONIO DELGADO, New York            MIKE BOST, Illinois
ANGIE CRAIG, Minnesota               DAVID ROUZER, North Carolina
SEAN PATRICK MALONEY, New York       ROGER W. MARSHALL, Kansas
ANN KIRKPATRICK, Arizona             NEAL P. DUNN, Florida
CYNTHIA AXNE, Iowa                   DUSTY JOHNSON, South Dakota
                                     JAMES R. BAIRD, Indiana

               Ashley Smith, Subcommittee Staff Director

                                  (ii)
                                  
                             C O N T E N T S

                              ----------                              
                                                                   Page

                       Tuesday, November 19, 2019

Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................    11
Scott, Hon. Austin, a Representative in Congress from Georgia, 
  opening statement..............................................     3
Scott, Hon. David, a Representative in Congress from Georgia, 
  opening statement..............................................     1
    Prepared statement...........................................     2

                                Witness

Smith, Hon., Glen R., Chairman and Chief Executive Officer, Farm 
  Credit Administration, McLean, VA; accompanied by Robert 
  Coleman, Chief Operating Officer, FCA; Charles R. Rawls, J.D., 
  General Counsel, FCA; David Grahn, J.D., Director, Office of 
  Regulatory Policy, FCA.........................................     5
    Prepared statement...........................................     7
    Submitted questions..........................................    33

                      Wednesday, December 11, 2019

Scott, Hon. Austin, a Representative in Congress from Georgia, 
  opening statement..............................................    40
Scott, Hon. David, a Representative in Congress from Georgia, 
  opening statement..............................................    39
    Prepared statement...........................................    40

                               Witnesses

Hanes, Shan, President and Chief Executive Officer, Heartland 
  Tri-State Bank; Member, Board of Directors, American Bankers 
  Association, Elkhart, KS.......................................    43
    Prepared statement...........................................    44
    Submitted question...........................................    88
Handke, Steven J., Regional President and Chief Administrative 
  Officer, First Option Bank; Chairman, Agriculture-Rural America 
  Committee, Independent Community Bankers of America, Horton, KS    50
    Prepared statement...........................................    51
    Submitted question...........................................    89
Knisely, Marcus L., President and Chief Executive Officer, 
  AgCountry Farm Credit Services, Fargo, ND; on behalf of Farm 
  Credit System..................................................    57
    Prepared statement...........................................    58
    Submitted questions..........................................    87


                      REVIEW OF CREDIT CONDITIONS

              (REPORT FROM THE FARM CREDIT ADMINISTRATION)

                              ----------                              


                       TUESDAY, NOVEMBER 19, 2019

                  House of Representatives,
   Subcommittee on Commodity Exchanges, Energy, and Credit,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:02 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. David 
Scott of Georgia [Chairman of the Subcommittee] presiding.
    Members present: Representatives David Scott of Georgia, 
Van Drew, Vela, Plaskett, Spanberger, Delgado, Craig, Axne, 
Peterson (ex officio), Austin Scott of Georgia, Crawford, Bost, 
Rouzer, Marshall, Dunn, Johnson, and Baird.
    Staff present: Isabel Rosa, Ashley Smith, Luke Theriot, 
Josh Maxwell, Callie McAdams, Ricki Schroeder, Patricia 
Straughn, Dana Sandman, and Jennifer Yezak.

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

    The Chairman. This hearing of the Subcommittee of Commodity 
Exchanges, Energy, and Credit, which is entitled, Review of 
Credit Conditions: Report from the Farm Credit Administration, 
will now come to order.
    Good morning to everyone, and thank you for joining us at 
today's hearing to review credit conditions in rural America. 
This is a very, very important and critical hearing for us to 
examine the condition in rural America for credit and access to 
capital, and quite honestly, for the survival of so many of our 
smaller communities.
    We have held several hearings across multiple Subcommittees 
that do speak to the economic landscape in rural America, and 
all have underscored the same key factors. Depressed investment 
as a result of lower crop prices and reduced demand; land and 
input prices that haven't come down accordingly; a tight labor 
market; and very significantly, limited access to capital and 
credit. And as we all know in our system, we are a credit-based 
economy, and this is one of the most significant points that we 
want to cover today in this hearing. These factors all combine 
to point to one thing: for all the bluster we hear about the 
greatest economic recovery ever, the greatest economy ever, the 
facts show that for far too many Americans living in small 
rural communities, their economic reality is very, very 
different. The folks that live in these small communities, 
whether they are farmers, whether they are small business 
owners, they are not experiencing the same chance at success as 
many of their counterparts in the urban and suburban 
communities. It is my hope that through Chairman Smith's update 
this morning, and we are certainly delighted to have a man of 
his knowledge to really open this up, so we can figure out how 
we can make sure that not only are we doing everything we know 
we can do now, but the things that we can do in the future, as 
well, to help.
    We will be able to get a bigger and better picture of our 
rural economic trend lines so that we can continue a 
conversation on how best to help these individuals from our 
positions here in Congress. And specifically, I want to look 
today at the credit conditions facing all of our farmers, but 
our younger farmers as well, and small and beginning African 
American farmers.
    As everyone on this Committee knows, I have taken a keen 
interest in making sure that we are combating the rising 
average age of farmers with all the tools we have available. 
And that is why, as I said in speaking with the Chairman 
earlier this morning, when you combine all that we have said 
with the pressures on our farmers, the average age of our 
farmers now is right at 60 years of age, and going up. This is 
our future. Agriculture is the single-most important industry 
we have. We can do without everything else, but we cannot do 
without food or shelter or clothing. That is agriculture.
    And everyone knows that we must do all we can to ensure 
that there are young folks to take over when current farmers 
retire. It is a matter of national security, and is, in my own 
opinion, it is a national crisis. And we are going to have to 
look at it within that landscape.
    The Farm Credit Administration is uniquely positioned to 
keep a finger on the pulse of the rural economy. The Farm 
Credit System that it oversees comprises nearly 70 local and 
regional lending entities that serve farmers and small 
businesses in our rural communities in all 50 states, and also 
in Puerto Rico. Our FCA also oversees Farmer Mac, which serves 
as a nationwide provider of agriculture credit. This coverage 
and access means that FCA has the ability to see trends in the 
rural economy at their early stages, and it is worth noting 
that out of this is the first time we have had the chance to 
sit down with Chairman Smith since his appointment by President 
Trump in July, and our first hearing with Farm Credit since the 
passing of our dear friend and colleague, Dallas Tonsager. We 
continue to miss his voice and his counsel, and we look forward 
to continuing his advocacy, his strong advocacy for people 
living in small communities across our great country.
    [The prepared statement of Mr. David Scott of Georgia 
follows:]

 Prepared Statement of Hon. David Scott, a Representative in Congress 
                              from Georgia
    Good morning, and thank you for joining us at today's hearing to 
review credit conditions in rural America. With us is Glen Smith, 
Chairman and CEO of the Farm Credit Administration.
    We have held several hearings across multiple Subcommittees that 
speak to the economic landscape in rural America. All have underscored 
the same key factors: depressed investment as a result of lower crop 
prices and reduced demand, land and input prices that haven't come down 
accordingly, a tight labor market, and limited access to capital and 
credit.
    These factors all combine to point to one thing: for all the 
bluster we hear about ``the greatest economy ever,'' the facts show 
that, for far too many Americans in small, rural communities, their 
economic reality is very different. Whether these folks are farmers or 
small business owners, they are not experiencing the same chance at 
success as many of their counterparts in urban and suburban 
communities.
    It is my hope that through Chairman Smith's update this morning, 
we'll be able to get a bigger and better picture of the rural economic 
trendlines, so that we can continue a conversation on how best to help 
those folks from our posts here in Washington.
    Specifically, I want to look today at the credit conditions facing 
younger farmers as well as smaller, beginning, and minority operators. 
As everyone on this Committee knows I have taken a keen interest in 
making sure that we are combating the rising average age of the farmer 
with all tools available. We must do all we can to ensure that there 
are young folks to take over when current farmers retire, it is a 
matter of national security and could evolve into a national crisis if 
we aren't careful.
    The Farm Credit Administration is uniquely positioned to keep a 
finger on the pulse of the rural economy. The Farm Credit System that 
it oversees comprises nearly 70 local and regional lending entities 
that serve farmers and small businesses in rural communities in all 50 
states and Puerto Rico. FCA also oversees Farmer Mac, which serves as a 
nationwide provider of agricultural credit. This coverage and access 
means FCA has the ability to see trends in the rural economy in their 
earliest stages.
    It's worth pointing out that this is the first time we've had the 
chance to sit down with Chairman Smith since his appointment by 
President Trump in July, and our first hearing with Farm Credit since 
the passing of our friend and colleague Dallas Tonsager. We continue to 
miss his voice and his counsel, and we look forward to continuing his 
advocacy for folks in small communities across this great country.
    With that I want to again welcome Chairman Smith and recognize my 
colleague and Ranking Member Austin Scott for any opening comments that 
he would like to make.

    The Chairman. In consultation with the Ranking Member, and 
pursuant to Rule XI(e), I want to make Members of the 
Subcommittee aware that other Members of the full Committee may 
join us here today. I now recognize my distinguished Ranking 
Member, Austin Scott, for his opening statement. Mr. Scott?

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

    Mr. Austin Scott of Georgia. Good morning, and thank you to 
my friend, Chairman Scott, for holding today's hearing.
    Our Committee has an obligation to proactively review the 
Farm Credit System to ensure its soundness. To help us do that 
today, we have brought representatives from the Farm Credit 
Administration, the independent agency tasked with regulating 
the Farm Credit institutions, to ensure that they fulfill their 
mission and stay within the scope of that mission.
    The importance of the Farm Credit System is largely unknown 
to those outside of the agricultural community, so I am 
thankful that we have an opportunity today to highlight the 
System and its century-long mission of providing credit to 
agriculture in rural America during the good times and the bad, 
as well as the role of the Farm Credit Administration in 
ensuring the soundness of the System, and its lending 
practices.
    Agriculture today is far more complex than it was 100 years 
ago. Providing credit to America's farmers and ranchers is a 
necessary and serious challenge for many lenders in the United 
States. That challenge is heightened with current struggles in 
the farm economy. Net farm income is at all-time lows, and farm 
debt is forecast to climb near an all-time high of $416 
billion, up $100 billion in just the last 6 years. The value of 
farmers' land also stopped gaining value over that time. Add to 
that the concerns about increasing Chapter 12 farm 
bankruptcies, which have reached their highest level since 
2011, and we have good cause for a renewed focus on farm 
lending and oversight of our Farm Credit System.
    In my home State of Georgia, we have had to deal with 
hurricanes, other natural disasters, and low prices that have 
added to farmers financial difficulties. I strongly encourage 
the USDA to ensure that the WHIP+ payments and state block 
grants are dispersed in a timely and efficient manner, and that 
farmers who have been impacted by our trading partners' poor 
behavior receive complete payments, MPF payments for 2019.
    It is in times like these that our farmers and ranchers are 
most in need of reliable sources of credit at competitive 
rates. Thankfully, we have a network of commercial and 
community banks, USDA loan programs, and the Farm Credit System 
that each play a crucial role in providing that access.
    While we in Congress have generally outlined the authority 
by which the Farm Credit System may fulfill its ultimate 
mission of ensuring dependable sources of credit for 
agriculture in rural America, I realize that the authority is 
not necessarily delineated with bright line rules. Therefore, 
we largely rely on the Farm Credit Administration as the 
regulator to ensure that the System banks are doing their part 
to stay within the bounds of the Farm Credit Act.
    Today, we will hear from Mr. Glen Smith, CEO and Board 
Chairman of the Farm Credit Administration. Thank you, Mr. 
Smith, for being here today. I appreciate you taking time to 
appear before the Committee. Rural America is facing some 
unique, but I would say not unprecedented, challenges and we 
now, more than ever, are in need of an efficient and effective 
Farm Credit System.
    With that, Mr. Chairman, I yield the remainder of my time.
    The Chairman. Thank you very much, Ranking Member.
    The chair would request that other Members submit their 
opening statements for the record so the witness may begin his 
testimony to ensure that there is ample time for questions.
    I would like to certainly welcome our witness, Farm Credit 
Administration Chairman Glen Smith. Thank you for being here. 
And Chairman Smith, as a native of Atlantic, Iowa, which is in 
our colleague, Mrs. Axne's, district, I would like to yield to 
Mrs. Axne to introduce you, our distinguished witness.
    Mrs. Axne. Thank you, Chairman Scott. It is my great 
pleasure to introduce Mr. Glen Smith, Chairman and CEO of the 
Farm Credit Administration. Mr. Smith, of course, is a native 
of Atlantic, Iowa, I say from the best district in this 
country, Iowa's third district. Glen was raised on his family's 
farm in Atlantic and graduated from Iowa State University, an 
incredible agriculture college, with a degree in agriculture 
business. Shortly after college, he moved back to his hometown 
with his wife to start farming and to develop his ag service 
business. Today, his family farm encompasses 2,000 acres 
devoted to corn, soybeans, and hay. He is also the founder and 
co-owner of Smith Land Service Company, an ag service company 
specializing in farm management, land appraisal, and farmland 
brokerage, which serves about 30 counties in Iowa. Glen has 
been serving on the Board of the Farm Credit Administration 
since December 2017, and then was designated Chairman and CEO 
of the Farm Credit Administration in July of this year.
    But, with all of the great history and the wonderful honors 
that he has received, he has an incredible wife, a lovely 
person, a great couple, and he also cares a lot about rural 
Iowa. He has served on school boards and has made sure that his 
community is successful.
    I am so glad that you are here today, Glen. Thank you for 
joining us, and it is an honor to have you here with us.
    The Chairman. Thank you, Mrs. Axne.
    We will now proceed to hearing the testimony. Chairman 
Smith, you will have 5 minutes to present your testimony, and 
when 1 minute is left, the light will turn yellow, signaling it 
is time to close and your time will be expiring. However, as 
Chairman, I do have the opportunity to extend that, because 
this is a very important hearing. I want you to really make 
sure, because you have critical information here and our 
farmers, our rural communities need to hear from you, so I will 
be very considerate of points that you want to make. Please 
don't leave any points on the table. I will make sure you have 
the time. Thank you.
    Chairman, you may begin.

 STATEMENT OF HON. GLEN R. SMITH, CHAIRMAN AND CHIEF EXECUTIVE 
OFFICER, FARM CREDIT ADMINISTRATION, McLEAN, VA; ACCOMPANIED BY 
ROBERT COLEMAN, CHIEF OPERATING OFFICER, FCA; CHARLES R. RAWLS, 
                             J.D., 
 GENERAL COUNSEL, FCA; DAVID GRAHN, J.D., DIRECTOR, OFFICE OF 
                     REGULATORY POLICY, FCA

    Mr. Smith. Well first, thank you for that kind 
introduction, Congresswoman Axne. It is really neat to be from 
the same district.
    Chairman Scott, Ranking Member Scott, Members of the 
Committee, it is a privilege to appear before you today. I will 
be reporting to you on the operations of the Farm Credit 
Administration and its oversight as regulator of the Farm 
Credit System and Farmer Mac. I have a written statement that I 
have submitted for the record.
    I would like to introduce FCA staff with me here today. To 
my right, Chief Operating Officer Robert Coleman; to my far 
left, Director of Regulatory Policy, David Grahn; and immediate 
left, General Counsel Charlie Rawls. And also behind me, I 
would like to introduce my fellow Board Member, Jeff Hall, who 
is Chairman of the Farm Credit System Insurance Corporation, 
and my wife, who is Fauzan.
    I became Chairman and CEO of FCA 4 months ago, after the 
unexpected passing of former Chairman Dallas Tonsager. His 
death was quite a shock to all of us at FCA, but his lifelong 
dedication to agriculture and rural America will serve as a 
great inspiration for us for years to come.
    The Farm Credit System is the nation's oldest government-
sponsored enterprise, GSE, established in 1916. It is a 
nationwide cooperative of four banks and 68 associations that 
provides 41.4 percent of the nation's agriculture credit. My 
highest priority as Chairman is to ensure the safety and 
soundness of the System, and I am pleased to report that the 
System is, in fact, safe and sound. Although we are very 
concerned and closely monitoring some weakening in credit 
quality, our institutions are well capitalized with solid 
current earnings.
    By structuring the System as a cooperative, Congress helped 
ensure that the System institutions would remain true to their 
mission. It later established provisions to protect the rights 
of System borrowers. As a regulator, we routinely examine 
institutions to ensure they comply with those provisions.
    Congress also established features to protect the System's 
safety and soundness, like joint and several liability among 
System banks, and requirements to ensure adequate capital. To 
implement these requirements, we established minimum capital 
levels that each bank and each association must hold. The 
requirement to hold capital at both the bank level and the 
association level is particularly reassuring to investors 
during difficult economic times in agriculture.
    This is very important, because as you know, the System 
does not obtain its funds from depositors, but relies on the 
sale of its securities to those investors in the financial 
markets. Protecting the good reputation of the System credit 
and obligations is extremely important in maintaining interest 
rates as reasonable and as low as possible to the American 
farmer and rancher.
    Congress continues to take measures to strengthen the 
System, and at this point, I would like to thank the House, and 
in particular this Committee, for granting FCA several much-
needed enforcement authorities in the last farm bill. It makes 
us that much more effective a regulator.
    This Committee also has provided valuable guidance to our 
agency. Mr. Chairman, I had the privilege to meet with you 
about a month ago, and we had a good conversation about your 
relationship with our former Chairman, Ken Spearman, and your 
mutual goals of improving the diversity and inclusion efforts 
at FCA. Mr. Spearman's legacy in those areas continues today, 
and I am proud to report that for our support of diversity last 
year, the Partnership for Public Service ranked FCA second 
among all small agencies in the Federal Government.
    I would like to conclude my remarks with one of my 
priorities at FCA, and it sounds like it parallels the 
Chairman's comments as well. That is the young beginning and 
small farmers, what we call our YBS programs. My wife and I 
started out as beginning farmers in Iowa 37 years ago. The 
difficulty and challenges that existed for us then are no 
different today. The advancing age, as the Chairman mentioned, 
of the American farmer and rancher is a concern of both 
Congress and us here at FCA. We need to do everything we can to 
encourage and help new entrants to agriculture, and our Board 
this year has initiated efforts to strengthen the System's YBS 
program. We look forward to reporting our progress in this area 
in years to come.
    This concludes my remarks, and I am happy to answer your 
questions.
    [The prepared statement of Mr. Smith follows:]

Prepared Statement of Hon. Glen R. Smith, Chairman and Chief Executive 
            Officer, Farm Credit Administration, McLean, VA
    Chairman Scott, Ranking Member Scott, and Members of the 
Subcommittee, I am Glen R. Smith, Board Chairman and CEO of the Farm 
Credit Administration (FCA or agency). On behalf of my board colleague, 
Jeffery S. Hall of Kentucky, and all the dedicated men and women of the 
agency, I am pleased to provide this testimony. Mr. Hall also serves as 
Chairman of the board of directors of the Farm Credit System Insurance 
Corporation (FCSIC).
    In my testimony today, I will discuss the agency's 
responsibilities, the current state of the farm economy, and the 
condition of the Farm Credit System (FCS or System) and Farmer Mac.\1\ 
I would also like to take a moment to thank the Subcommittee Members 
and staff for their assistance during the development of the 2018 Farm 
Bill. The provisions included in the credit title modernized our 
governing authorities and added to and enhanced our enforcement powers; 
the provisions also updated and clarified FCSIC's conservator and 
receiver authorities. Your efforts are very much appreciated and will 
help us in our oversight of the System and Farmer Mac.
---------------------------------------------------------------------------
    \1\ Although Farmer Mac is an FCS institution under the Farm Credit 
Act, we discuss Farmer Mac separately from the other institutions of 
the FCS. Therefore, in this testimony, unless Farmer Mac is explicitly 
mentioned, the Farm Credit System refers only to the banks and 
associations of the System.
---------------------------------------------------------------------------
FCA's Responsibilities
    FCA is an independent agency responsible for examining and 
regulating the banks, associations, and related entities of the System. 
The FCS is a government-sponsored enterprise 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. 
The System is currently made up of four banks, 68 associations, five 
service corporations, and the Federal Farm Credit Banks Funding 
Corporation. FCA is also responsible for the oversight of the Federal 
Agricultural Mortgage Corporation (Farmer Mac), which was established 
in 1988 under Title VIII of the Farm Credit Act.
    As directed by Congress, FCA's mission is to ensure that System 
institutions and Farmer Mac are safe, sound, and dependable sources 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 safety and soundness by examining and supervising 
all FCS institutions and 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 risks, 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 it serves 
all eligible borrowers. If an 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 and Farmer Mac conduct their business and interact with 
customers. Our policies and regulations protect 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.
Challenges Facing the Farm Economy
    Many U.S. farmers and ranchers are facing a more challenging 
economic environment than in past years. Trade uncertainties, large 
commodity supplies, and weather extremes have suppressed farm prices 
and producer returns for key commodities. USDA estimates net cash farm 
income in 2019 will remain well below record levels set 6 to 7 years 
ago. With the large payments provided by USDA's Market Facilitation 
Program, net cash farm income will likely be close to the average for 
the past 2 decades.
    Debt is also rising. U.S. farmers have taken on an estimated $41 
billion in additional farm debt over the past 3 years. Adjusted for 
inflation, total farm debt outstanding is nearing the record set almost 
40 years ago. Income shortfalls have cut working capital and elevated 
borrowing needs. With cash flows tight, the number of producers finding 
it difficult to repay their loans is growing, albeit at a modest pace. 
Increasingly, producers are restructuring their debts to improve their 
cash flow.
    High-cost producers and those with significant leverage are feeling 
financial pressure. Producers most vulnerable to financial stress are 
farmers with crop losses (particularly corn and soybeans in parts of 
the Midwest in 2019). The combination of low prices and crop losses is 
creating a significant challenge for some producers. Smaller or higher-
cost dairy farms represent another segment experiencing stress despite 
the improvement in milk prices.
    Crop insurance indemnities and disaster funds continue to provide 
financial support to farmers and ranchers as they strive to overcome 
the weather-related calamities of the past 18 months, including 
multiple hurricanes, wildfires in the West, and record-setting spring 
rainfall in the Midwest. Recently, heavy snow has affected fall harvest 
in the Northern Plains, while drought across parts of the South has 
damaged feed supplies and late-harvested crops.
    Despite production losses resulting from poor weather in these 
regions, supplies of corn, soybeans, wheat, and livestock commodities 
remain relatively high as markets await resolution of trade 
disruptions. Cotton production will likely exceed use for the third 
consecutive season, elevating stocks and weakening prices.
Trade Impacts
    Trade disruption from retaliatory tariffs has affected much of 
agriculture. The short-run impact has been negative for producers of 
export-dependent commodities, particularly soybeans, cotton, pork, 
dairy products, and tree nuts.
    Longer-term, the Administration expects the focus on trade policy 
will benefit the U.S. economy and international trade in general by 
addressing foreign practices that damage U.S. economic interests. 
Additional gains for U.S. agriculture are expected as trade agreements 
are implemented, such as the pacts with Japan and Mexico/Canada.
    The Market Facilitation Program compensates producers for economic 
shortfalls caused by temporary export losses. This compensation has 
been critical to shoring up profitability and underpinning the finances 
of producers impacted by market losses from trade disputes. Rolling out 
the remaining portions of the 2019 payments will further help producers 
meet their financial commitments and plan cash flows for next year.
Farmland Values
    Farmland values are generally holding up but with some notable 
regional weaknesses and strengths. While farmer interest and financial 
ability to purchase land have waned, the limited amount of land for 
sale, solid nonfarmer demand, and low interest rates have contributed 
to the stability in land markets. Farmland accounts for over 80% of 
total farm assets and hence serves as the primary source of collateral 
for farm lenders.
    Stability in farmland markets has enabled borrowers to restructure 
their balance sheets with longer-term debt and freed up working 
capital. It has also allowed some borrowers to sell land parcels, if 
needed, to shore up their finances.
    Amid the current stability in land values, however, lies a major 
concern. If larger amounts of land were to be put up for sale, greater 
downward pressure on land values would likely ensue. With declining 
land prices, farm balance sheets could deteriorate more quickly, and a 
farm borrower's ability to restructure debt or obtain additional 
financing could weaken.
    Today's government farm safety net authorized in the 2018 Farm Bill 
continues to provide a strong underpinning to the farm economy. The 
combination of farm commodity programs, disaster assistance, crop and 
livestock revenue insurance programs, and the 2018 and 2019 Market 
Facilitation Program payments puts a floor under farm income and helps 
stave off a potential collapse.
Credit Conditions
    Although overall farm finances have declined in recent years, most 
farms remain financially strong. Census of Agriculture data show only 
about \1/3\ of all U.S. farm operations owe debt during a given year. 
For small farms (those with less than $250,000 in annual farm sales), 
loan repayment often depends more on off-farm income than farm income. 
A strong economy and labor market are helping support the incomes of 
these producers as well as larger producers.
    Many producers continue to find ways to cut costs and make the most 
of the marketing opportunities when prices rise temporarily. Still, the 
financial pressure can be significant for individual producers, 
particularly those who suffered yield losses in recent years.
    Larger farms are more likely to carry debt. They owe most of the 
total U.S. farm debt. Some of these large operations are highly 
leveraged and more likely to experience financial stress following weak 
commodity prices or below-normal production. Because of their size, 
very large producers can have an outsized impact on local land markets 
and credit providers.
    Credit stress within the System's farm loan portfolio remains low, 
but loan weakness continues to creep up. Financial stress is 
regionalized and most prevalent in commodities such as dairy and grain 
(corn, soybeans, and wheat). Of the ten states with the highest levels 
of less-than-acceptable loans, six states are in the Midwest, and only 
Texas and California are outside key grain-production regions.
    Some farmers will continue to restructure their balance sheets (to 
the extent they are able) and/or make changes in their operations to 
reduce production costs. FCA encourages System lenders to work with 
borrowers to help navigate current financial conditions without 
jeopardizing the long-term viability of the borrower or the System 
institution.
    Fortunately, both the Farm Credit System and the Farm Credit 
Administration are laser-focused on cash flow and loan repayment. This 
approach contrasts with ``collateral lending,'' which contributed to 
the 1980s farm financial crisis. Lenders are also much more proactive 
with borrowers encountering difficulty, encouraging them to adjust 
their operations before it is too late. Importantly, in the most recent 
farmland price run-up, System institutions used lending caps and other 
practices to mitigate lending risks associated with higher land prices. 
Current FCA examination activities include a focus on institutions that 
have a higher risk profile based on the commodities produced in their 
territory.
    System institutions have indicated that, as lenders, they will work 
with customers if they are willing and able to make changes to their 
operations to restore profitability. Fortunately, System institutions 
have the financial capacity to work with their customers. Other lenders 
may not have this capacity, or some borrowers may have already used up 
their opportunities to restructure their balance sheets. Either case 
creates concern if farm stress intensifies in the coming years.
Condition of the FCS
    The System's agricultural financing capacity remains strong during 
this period of large commodity supplies, retaliatory tariffs, weak 
returns, and weather difficulties. Overall, the System is safe and 
financially sound. Through June of 2019, the System reported strong 
earnings and sound capital levels. While credit stress in the System's 
loan portfolio is increasing, System institutions have strong risk-
bearing ability and are well-positioned to respond to the credit needs 
of U.S. agriculture.
    The System's strong capital base enhances its risk-bearing capacity 
at a time when System borrowers in certain agricultural sectors face 
significant financial challenges. As of June 30, 2019, total System 
capital equaled $61.2 billion, up from $57.3 billion a year before. The 
System's total capital-to-assets ratio at June quarter-end was 17.4% as 
compared with 17.2% a year ago. Overall, almost 80% of total capital is 
in the form of retained earnings. Growth in System capital is due in 
large part to the System's strong earnings. For the 6 months ended June 
30, 2019, the System reported net income of $2.7 billion, up from $2.6 
billion for the same period a year ago. Net interest margin was 2.40% 
compared with 2.44% for the 6 months ended June 30, 2018.
    The System continues to grow at a manageable pace. Gross loans as 
of June 30, 2019, totaled $276.2 billion, up $14.2 billion or 5.4% year 
over year. Real estate mortgage lending was up $4.8 billion or 3.9%. 
Overall, real estate mortgage loans represent just over 46% of the 
System's loan portfolio. Production and intermediate-term lending 
increased by $3.2 billion or 6.5% from the year before, and 
agribusiness lending for processing and marketing increased by $3.5 
billion or 14.8%.
    Despite the challenges facing agriculture, loan credit quality is 
sound, and the System's portfolio continues to perform well. Non-
performing assets totaled $2.5 billion, or 0.92% of loans and other 
property owned as of June 30, 2019. This is up from $2.3 billion or 
0.83% at year-end 2018. Loan delinquencies (accruing loans that are 30 
days or more past due) increased to 0.36% of total accruing loans from 
0.31% at year-end 2018. While credit risk in the System's portfolio has 
increased, the System's risk-bearing capacity remains strong. The 
allowance for loan losses at June 30 was $1.8 billion and amounted to 
69% of the System's non-performing assets.
    The System continues to have reliable access to the debt capital 
markets. Investor demand for all System debt products remains positive, 
allowing the System to continue to issue debt on a wide maturity 
spectrum at competitive rates. Risk spreads and pricing on System debt 
securities remain favorable relative to corresponding U.S. Treasuries.
    With a balance of $5 billion as of June 30, the Farm Credit 
Insurance Fund further enhances the financial integrity of the System. 
Administered by FCSIC, 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 June 
30, the System's liquidity position equaled 178 days, significantly 
above the 90 day regulatory minimum required for each FCS bank.
Young, Beginning, and Small Farmers and Ranchers
    Congress requires each System association to have a program to 
provide credit and related services to young, beginning, and small 
(YBS) farmers and ranchers. In the late 1990s, FCA established a system 
to monitor the associations' YBS programs and activities and to receive 
reports regarding the associations' YBS lending. We compile data from 
these reports into our annual reports to Congress.
    Using some of the increased resources recently approved by 
Congress, we have examined the System's data on YBS farmers and 
ranchers in a more sophisticated manner and have found potential areas 
for improvement in data collection, quality, and granularity. We are 
working to identify ways to improve the accuracy of YBS data and 
reporting. We are also reviewing the definitions of the young, 
beginning, and small categories, which have not been updated since the 
1990s.
    On February 21, 2019, we published an advance notice of proposed 
rulemaking to seek public comment on ways to improve the YBS data 
collection process and definitions. Currently, we are reviewing and 
considering the comments received from the public, and we will use this 
input to help us improve our ability to measure service to YBS 
producers.
Condition of Farmer Mac
    Congress established Farmer Mac in 1988 to create a secondary 
market for agricultural real estate and single-family rural housing 
mortgage loans. Farmer Mac has authority to purchase agricultural real 
estate mortgages and rural home loans, USDA-guaranteed farm and rural 
development loans, and rural utility cooperative loans. It is also 
authorized to create and guarantee securities and other secondary 
market products that are backed by such loans.
    As a ready source of liquidity for primary lenders, Farmer Mac is 
committed to enhancing the availability of reasonably priced credit to 
agriculture and rural America through its secondary market activities. 
Farmer Mac provides wholesale portfolio funding, credit guarantees, and 
other products for its network of lenders, including agricultural 
banks, insurance companies, Farm Credit System institutions, non-bank 
lenders, and rural utility cooperative lenders. Since its inception, 
Farmer Mac has helped fund farmers, ranchers, rural electric 
cooperatives, and agribusinesses in all 50 states and has provided more 
than $53 billion of investment in rural America.
    As of June 30, 2019, Farmer Mac's outstanding program volume 
reached an all-time high of $20.7 billion. Net income available to 
common stockholders for the 6 months ended June 30, was $50.2 million, 
up 2.7% from the same period in 2018. Farmer Mac's core capital totaled 
$786.6 million as of June 30, which exceeded its statutory minimum 
requirement of $594.9 million by $192 million.
    Despite recent stress in the agriculture sector, Farmer Mac's 
credit quality remains sound. No delinquencies exist in Farmer Mac's 
institutional credit, USDA Guarantees, and rural utilities lines of 
business, which represent 65% of program volume. The Farm and Ranch 
portfolio represents the remaining 35% of outstanding volume. As of 
June 30, 2019, substandard loans were 3.3% of the total Farm & Ranch 
portfolio, up 0.2% from a year earlier, and loans more than 90 days 
delinquent decreased to 0.38% from 0.62% as of June 30, 2018.
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. We will continue our commitment 
to excellence, effectiveness, and cost efficiency and will remain 
focused on our mission of ensuring that System institutions and Farmer 
Mac are safe, sound, and dependable sources of credit for agriculture 
and rural America.
    This concludes my statement. On behalf of my colleagues and the 
staff at the agency, I thank you for the opportunity to share this 
information.

    The Chairman. Thank you very much, Chairman Smith. Now I 
would like recognize Chairman Peterson, our distinguished 
Chairman of the Agriculture Committee, to give us an opening 
statement.

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

    Mr. Peterson. Well, I don't know if I need to make an 
opening statement. Can I ask one question and then I will turn 
it back to you?
    The Chairman. Oh, please do.
    Mr. Peterson. Okay. What I am interested in is I get a lot 
of concern from the biofuels industry, both ethanol and 
biodiesel in terms of a bunch of plants that have shut down and 
I have talked to some of them. But, I would like your take on 
what you think the conditions of the industry are. There are 
concerns out there in the ethanol industry that what was 
promised in the RFS is not being followed through. And 
regarding biodiesel we have this tax credit issue.
    Are you folks following that pretty closely and what do you 
think about where this thing is at? What needs to be done to 
get it back on track?
    Mr. Smith. Thank you, Mr. Chairman. I am following that 
extremely closely, since 2 weeks ago I was in an 18-wheeler 
delivering corn at an ethanol plant that borders one of our 
farms in western Iowa. I have seen firsthand what that plant 
has done for the rural community, for the jobs, for the 
infrastructure, and certainly to keep that ethanol industry 
viable and growing as promised is critical. The significant 
part of our corn crop goes into those ethanol plants now, and 
that market is there and needs to be maintained.
    Mr. Peterson. What do you think about what is going on? Do 
you think the Administration revised their plan--and I am still 
getting a lot of pushback from just about everybody in the 
ethanol industry about what they have done.
    Mr. Smith. Yes.
    Mr. Peterson. Is that what you are hearing?
    Mr. Smith. Yes, certainly.
    Mr. Peterson. How much stress are these folks under? I have 
some plants that suspended operations because they are losing 
money and they just shut down until this thing gets stabilized 
back into some kind of reasonable shape.
    Where is the future here? Do you have a crystal ball?
    Mr. Smith. Crystal ball, no, but as far as feelings on the 
ethanol industry, Congress and this country called upon 
agriculture to serve a need, and that is a need for energy 
security. And agriculture responded to that need. The plant 
that borders one of our farms, the total cost was $140 million, 
a tremendous investment in that plant, and that is just a 
microcosm of what has happened in the industry.
    Agriculture has responded to that need, and to Congress' 
desire, and it is only fair that they return the favor to make 
sure that industry is maintained at a profitable level.
    Mr. Peterson. Do you have any plants that are in arrears, 
default, or close to default that you are aware of that you 
guys are financing? I mean, you financed a lot of these 
operations.
    Mr. Smith. We do finance. It is within our authority to 
finance ethanol plants. It is a small part of our portfolio, 
and to my knowledge--I will defer to our Chief Operating 
Officer--but to my knowledge, we currently do not have any 
loans that are in default in that area. But certainly, we are a 
player in that market.
    Mr. Peterson. That is good to hear. I hope it continues to 
be that way.
    Mr. Smith. I hope so too.
    Mr. Peterson. Thank you very much for being here and your 
testimony and for your leadership. Farm Credit is doing a great 
job out there, and keep it up.
    Mr. Smith. We will. We will, sir.
    Mr. Peterson. I yield back, Mr. Chairman.
    The Chairman. Thank you very much.
    I would like to open up with questions, and then recognize 
our Ranking Member.
    I, first of all, would like to hear from you on what do you 
feel that we in Congress can do, or should be doing to help 
increase capital opportunities? And if you could just explain 
why--I know we have Farm Credit in my part of the country. We 
call it Ag South. And they are really a life line. And so, I am 
trying to figure out what we here in Congress can do. What 
types of legislation should we be putting forward to address 
this issue of being able to increase the capitalization of our 
farmers?
    Mr. Smith. Well, Mr. Chairman, if I look ahead, my number 
one concern is profitability in agriculture. I think we would 
all agree, the agricultural trade, that restoring our markets 
would be critical to looking at a long-term solution to 
bringing us back to profitability.
    We received MFP payments, short-term payments, which have 
helped shore up short-term deficits. It has been welcome. Long-
term, though, we need those markets back. We need to depend on 
those markets and I know what is immediately in front of us. 
You asked what Congress can do. We have some trade issues out 
there right now, USMCA in front of us, possible bilateral with 
Japan. I think passage as soon as possible on those two issues 
would build a strong case and build a good situation for us----
    The Chairman. Could you repeat that again?
    Mr. Smith. I said the two big issues of trade that appear 
to be in front of agriculture right now is USMCA and a possible 
bilateral with Japan, and swift passage of those, I believe, 
would certainly assist us in our negotiations with China. The 
more allies we can bring into this whole trade negotiation, 
this global trade negotiation, the stronger our position is.
    Certainly, I would hope that is a goal of Congress.
    The Chairman. Okay, very good. You are saying quick passage 
of USMCA would be one of the things we can do.
    Mr. Smith. Yes, sir. It would be wonderful, sir.
    The Chairman. Now, I want to ask you, because we have had a 
series of suicides with our farmers.
    Mr. Smith. Yes.
    The Chairman. And from the information that I have been 
able to get so far, it is because they are losing their farms. 
Do you have any insight on what--how does this proceed? I am 
trying to find out where we could intercede in this chain to 
try to prevent this drastic ending? Is there some kind of 
function we can do here within our Agriculture Department that 
we can communicate out so people will have a help line that we 
could get something to them if there is some pattern that they 
are having difficulty? We have to stop the suicide and it is 
because they are losing their farms. What can we do?
    Mr. Smith. Well, FCA and the Farm Credit System needs to be 
an empathetic lender, and in a lot of cases, that loan officer, 
that lender is in the front line of recognizing potential 
problems that could lead to, as you say, the suicides. And of 
course, we started farming in the early 1980s. We had a lot of 
friends who lost their farms, and we saw first-hand a farm 
isn't just a job. Your whole identity is in that piece of land, 
and I saw first-hand what that will do to the psyche of that 
father, their son, or whoever that loses it.
    I know some of your Representatives today have been 
engaging in potential legislation that would assist in looking 
at this issue. My time is about up, but I know the Farm Credit 
Council has also contributed to grants to educate mental health 
providers on the challenges in agriculture.
    The Chairman. But do you think that if we established a 
help line here within the Agriculture Department and get it 
out, that that could be a help?
    Mr. Smith. Anything that could be done would be of help, 
and anything that FCA as regulator of the System in the way of 
guidelines to the System, if we could be of assistance, we 
would like to be part of that conversation.
    The Chairman. Right. Thank you, Chairman Smith.
    I yield 5 minutes to our distinguished Ranking Member, Mr. 
Austin Scott.
    Mr. Austin Scott of Georgia. Thank you, Chairman Scott.
    Gentlemen, thank you for being here, and I represent the 
8th District of Georgia, 24 counties. My family has farmed 
through that area for many generations. I suppose my generation 
is the first of the family that doesn't have anybody farming 
today, and that is one of my concerns. The risk of being in 
agriculture today has gone up. The profitability has gone down, 
and many people who have access to land and equipment are 
simply choosing a different way to make a living, I would say.
    We as a Committee, as we write the next farm bill, we have 
to find a way, while we can never eliminate all of the risk of 
involved in agriculture, we certainly need to find a way to 
help reduce the risk to make it a better investment for people 
who are from the farm to stay on the farm.
    We have had a downturn in farm income for the last several 
years. I get phone calls from people who I know are 
exceptionally good farmers who have--when they have called in 
the past, it has not been to express their concern about the 
future. And I have serious concerns, especially for my area, 
with cotton trading where it is, and if cotton futures come 
mid-February or December are in the 62 range, what that does 
to a tremendous amount of industry. Not just the cotton grower, 
but the ginners and the trucking industry and everybody else 
revolves around that.
    And so I agree with you. The trade agreements are important 
and the sooner they get done, the more likely the faster those 
crop prices will stabilize and that has an important function 
in our insurance system.
    My question for you specifically, we thought about 
capitalization. What steps have you taken under the 
authorization of this Committee to keep the Farm Credit System 
properly capitalized and diversified for the foreseeable 
future?
    Mr. Smith. Thank you. As far as capital, the System 
currently is well-poised to be able to deal with a struggling 
ag economy. Several years ago, new requirements for capital, 
new higher requirements of capital were instituted, and I am 
glad to report that on the average, associations are running 
considerably above what the minimum capital requirements are. 
So, that is a starting point to be able to weather some tougher 
times.
    Strong capital, I would equate to a savings account. It may 
not be as efficient use from a return standpoint of capital, 
but it is there in case you need it. And keep in mind we are a 
cooperative, and so the decision on capital levels is decided 
largely on the local level, local directors, and most of them 
are farmers and ag businessmen. And so, they believe in keeping 
that safety net. Capital, and our emphasis on capital, is a 
strong indication of the long-term viability of the System.
    Mr. Austin Scott of Georgia. Let me do this. I have 1 
minute left, and I assume we can come back for more questions, 
but the four of you up there, the issues that you worry about 
the most from the standpoint not just of the Farm Credit 
System, but the agriculture industry as a whole and rural 
America as a whole, would each of you simply give us the one 
thing that you worry about the most in the 40 seconds that I 
have left?
    Mr. Coleman, we will start with you and then we will go 
down that way.
    Mr. Coleman. Thank you. Trade and the policies for 
agricultural products, as the Chairman mentioned.
    Mr. Austin Scott of Georgia. Mr. Smith?
    Mr. Smith. Fragile land values.
    Mr. Austin Scott of Georgia. Mr. Rawls?
    Mr. Rawls. I wouldn't have anything to add, other than what 
has been said, trade and----
    Mr. Austin Scott of Georgia. I am sorry, I can't hear you.
    Mr. Rawls. I wouldn't have anything to add. I think trade 
is the most significant thing right now.
    Mr. Austin Scott of Georgia. Sir?
    Mr. Grahn. Interest rates.
    Mr. Austin Scott of Georgia. Interest rates?
    Mr. Grahn. Yes.
    Mr. Austin Scott of Georgia. The fact that they are as low 
as they are?
    Mr. Grahn. No, the fact that they could go up. One of the 
things that is helping right now in the ag community is the 
fact that unlike in other periods when we have had difficulty 
in the ag sector, our interest rates as a whole are generally 
very low. What I am concerned about is if that were to change.
    Mr. Austin Scott of Georgia. Gentlemen, thank you for your 
time, and I look forward to a second round of questions if we 
have time.
    The Chairman. Yes, we certainly will.
    And now I would like to recognize the distinguished 
Congresswoman from Iowa, Mrs. Axne, 5 minutes.
    Mrs. Axne. Thank you, Mr. Chairman and Ranking Member, and 
thank you for holding this Subcommittee hearing. And of course, 
to Mr. Smith, again, it was an honor to introduce you and I 
appreciate the great work you have done. We have had plenty of 
conversations, and I thank you for the conversation we had 
about holding capital to make sure that we could help farmers 
in need. I appreciate that.
    I am glad you are here today to inform us. You know as well 
as I do that it has been a really tough year, not just in Iowa, 
but farmers across the Midwest and the country, with low 
commodity prices, of course, the trade war that was just 
mentioned. We have harmed our export markets, devastating 
weather and flooding has occurred, and recently, the propane 
shortage that is preventing farmers in Iowa from drying their 
harvest. I have heard it time and time again. I visit every 
county every month, all 16. Whether I am there or sitting in my 
office in Des Moines, folks are coming and saying they just 
don't know if they are going to be able to hold out much 
longer.
    I have serious concerns about the debt that we are seeing. 
Farm debt is projected to hit $416 billion this year. 
Unfortunately, the $19 billion of farm debt that Iowans have is 
the highest in the nation, and this level of debt absolutely 
has consequences. The Farm Bureau reports that farm 
bankruptcies rose 24 percent compared to a year ago, and a 
recent study from Iowa State University classifies 44 percent 
of Iowa farms as financially vulnerable.
    And I am really grateful that you are here. I am glad for 
the good work that you do to make sure that the Farm Credit 
System is safe and sound. However, you noted in your testimony 
that the farmers who are at the most risk are farmers who are 
dealing with major crop losses, and especially corn and soybean 
farmers, like yourself and other Iowans. Those are my 
constituents, of course, and I am concerned about the stress 
they are facing.
    A little clarification: In your written testimony, Mr. 
Smith, you stated that the FCA encourages System lenders to 
work with borrowers to help navigate current financial 
conditions without jeopardizing long-term viability of borrower 
or the System institution. Identifying and working with farmers 
that are financially stressed is critically important, and I am 
glad that the FCA is encouraging that. Can you describe to us, 
though, what that assistance looks like? I would like a little 
more detail.
    Mr. Smith. Thank you, Congresswoman Axne. The actual loan 
decisions and the risks they are assuming are up to the 
individual associations. At FCA, we can offer guidance, but the 
actual decision is up to the associations. But you will recall, 
when there are natural disasters like the flooding, and we met 
for the first time last May to talk about the flooding that was 
in the western part of your district and how catastrophic that 
was to farmers in that area. No different from wildfires, 
hurricanes, other natural disasters that we have had in other 
areas of the country. And what we can do is through guidelines 
encourage those associations. As the regulator, we have a lot 
of influence. We can encourage those associations to be 
proactive in working with those farmers to come up with a plan, 
and for the best possible solution.
    You have heard of foreclosures being up percentage-wise, 
and percentages, the numbers aren't alarming, but the 
percentage increases are. Foreclosure should be a last resort. 
I mean, it is just a tremendously trying, terrible thing for a 
rural family to go through. And so, by exerting our influence 
through these guidelines, hopefully those associations will 
hang in there and maybe step up efforts, outreach, finance 
efforts to those troubled families. But mainly, encourage the 
associations to be proactive in working out a plan.
    Mrs. Axne. Okay. If you have an opportunity to provide us 
any more information down the road what those associations 
might be doing specifically, I would really appreciate that.
    Mr. Smith. Certainly, certainly.
    Mrs. Axne. Next, I just want to ask you real quick. I 
recently read an article in the Wall Street Journal that 
outlined how some farmers in the Midwest are turning to 
alternative lenders due to mounting financial stress, and one 
such lender has noted their volume has grown over 40 percent in 
the last 3 years.
    While in some cases these loans can provide what are 
essential life lines, I am concerned that these farmers are 
borrowing at unsustainable high interest rates. And based on 
your knowledge and expertise, or anyone here, have you seen an 
increase in farmers going outside of traditional banks or the 
FCS for loans?
    Mr. Smith. Yes, unfortunately we have, and I describe them 
as maybe payday lenders, because of some of the interest rates 
that have been charged are over half of prevailing rates.
    Right now, I feel we have a good balance. The System is at 
41 percent; which is less than one percent of the same market 
shares of what the commercial banks are. We have good 
alternatives out there between commercial banks and the System. 
FSA comes in there maybe at a lower level. FSA should be the 
lender of last resort. Unfortunately, it isn't always, and 
these operators are looking to alternative sources, as they 
have no choice. It is deeply concerning. It is deeply 
concerning the security interests that these alternative 
lenders are taking that might have an influence, impact on 
long-term lending that banks and the System might be holding as 
well.
    Yes, in answer to your question, we are seeing an increase 
and it is a concern.
    Mrs. Axne. Thank you.
    The Chairman. I will come back to that.
    And now, I would like to recognize the distinguished 
Congressman from Arkansas, Mr. Crawford.
    Mr. Crawford. Thank you, Mr. Scott.
    Mr. Smith, continuing on that, you used the term payday 
lenders. Who are some of those lenders that you reference?
    Mr. Smith. Specifically, I cannot name them right off the 
top of my head. I read some articles about them. I have seen 
some perspectives. We could possibly provide you some 
information at a later point, Mr. Crawford, on that.
    Mr. Crawford. Sure. That would be appreciated.
    You and I have had a chance to visit offline and had a good 
conversation about a topic that Chairman Scott referenced. 
Obviously, that is the young, beginning farmers and the 
programs available to them. Farm Credit lending associations, 
each one of them is supposed to have a program in place focused 
on serving the needs of young, beginning, and small farmers. 
What does FCA do to ensure that each institution has these 
programs and that they are actively serving these market 
segments?
    Mr. Smith. Well, you are correct in that FCA and the farm 
bill, the mission does provide that each association must have 
a YBS Program, and they report annually to FCA and we, in turn, 
report to Congress directly on those numbers. However, since I 
came to FCA and our board has decided we needed to step up the 
efforts on that, not only to improve the report writing, which 
needs to be improved, but also encourage more uniformity, 
sharing of best practices, and the third factor of the program 
is examination for effectiveness.
    Of course, our first step is to get the numbers right, and 
we are working on that with the new rulemaking that we just 
instituted here this past year.
    Mr. Crawford. To Chairman Scott's point, the trajectory is 
going in the wrong direction with regard to an aging farm 
population. These operators are getting older instead of 
younger, and so I don't know that it is necessarily enough. I 
appreciate the fact that you guys are sort of redoubling your 
efforts and stepping that up. That is appreciated.
    I am wondering if you can speak to some of the other things 
that we might be able to do, because it is not just about 
credit. In fact, the barrier to entry for young farmers, in 
many cases, is the basic element of land. How do you bridge 
that gap, number one? Number two, are we working with other 
institutions in the ag world to create mentorships and guidance 
for young farmers so they can get the best management practices 
and be sort of guided along? Because going in and asking for a 
loan can be a pretty daunting task in and of itself for 
something as big as an ag enterprise, even a small-scale ag 
enterprise. Can you comment on that?
    Mr. Smith. Yes. What you mentioned about collaboration with 
other programs, I had a trip to North Dakota, a tri-state 
conference they had with Mandan, North Dakota, and AgCountry. 
It will be a year in a couple weeks. I was a junior member of 
the board, so I drew the short straw to go to North Dakota in 
December. But it was a great conference, and I enjoyed--one of 
the things that struck me--and when I take these trips, I ask 
not to see the big, shiny, multi-generation operations. I want 
to see the young and beginning farmers out there, the ones that 
you are truly helping as entry-level farmers. It may not be 
quite as shiny. It may not be quite as impressive. They might 
not drive new trucks, but that is the future of agriculture and 
that is the future of the System, quite frankly.
    One thing that struck me that those associations were doing 
very well is collaborating the information that FSA, Farm 
Credit, and state agencies to help promote beginning farmers. 
There are a lot of programs out there, but there is not a lot 
of education on how to combine those programs.
    Mr. Crawford. Let me add this in the remaining time that I 
have. I would be remiss if we are talking about young and 
beginning farmers, if we didn't talk about student loan debt 
and what we are doing to address that. Broadly, I think it is a 
topic of discussion. What can we do in the ag industry to sort 
of, to take a different perspective on how we address student 
loan debt and how we can quickly liquidate student loan debt 
and get our young people in a more productive role on the farm 
as opposed to continuing to carry student loan debt for 10, 15, 
20 years?
    Mr. Smith. I guess my best answer to that question, Mr. 
Crawford, is I am not sure. It is as it stands a burden. It is 
a burden to the ability of that young operator to repay those 
loans. It is a consideration over making long-term commitments, 
which land, livestock, and machinery can be. I guess I am 
drawing a blank there on what the System can----
    Mr. Crawford. Well, and that really points to a problem, 
quite frankly, that we are all having. We are all kind of 
drawing blanks on what do we do to address what is going to be 
potentially the next financial bubble that this country faces, 
and that is certainly true as you mentioned the rate of 
defaults. This is going to be a contributing factor as we try 
to bring young people into agriculture, and we don't adequately 
address that underlying debt problem.
    I thank you for your time, and I look forward to working 
with you on those issues.
    Mr. Smith. Thank you.
    The Chairman. And now I would like to recognize the 
distinguished Member of Congress, Ms. Craig from Minnesota, who 
is doing great work in agriculture and helping out farmers. Ms. 
Craig?
    Ms. Craig. Thank you so much, Mr. Chairman, and Mr. Smith, 
thank you for being here. It was great to meet you last week.
    It is always a pleasure to talk about the important work of 
the Farm Credit System. As farm country continues to struggle 
through the trade war, a tough harvest, and record low farm 
incomes, the Farm Credit System is more important now than many 
of the previous years.
    However, Farm Credit also plays an important role in 
building the infrastructure that improves rural quality of 
life, and so that is what I would like to ask you here about 
this morning.
    Time and again, I hear from farmers about the need for 
accessible healthcare. Many of my farmers work off farm for 
subpar health insurance and drive long distances to see a 
doctor. In parallel, we continue to see a decline in the health 
infrastructure of our rural communities, jeopardizing access 
when families need it most. There is a need for healthcare 
facilities, hospitals, emergency services, and nursing homes 
across rural America.
    In my district, Compeer Farm Credit has joined with local 
banks, credit unions, and USDA to finance these facilities. We 
need more of these partnerships.
    What is FCA doing to encourage Farm Credit and other 
lenders to partner in support of these vital projects?
    Mr. Smith. Thank you, and what you are referring to is our 
authority and mission-related investment, and we feel that is a 
very important component of our service to rural America. And 
certainly, we have been active in your district, in your state, 
nursing homes, healthcare facilities, and so, it makes a lot of 
sense for the System. It makes a lot of sense for rural areas 
because there is a definite--there is a huge need for capital, 
and with the Farm Credit System, we are tapping into that 
global financial capital and doesn't it make sense to channel 
that? We want to make sure that those investments are sound, 
because it represents capital, and capital has to have quantity 
as well as quality from the safety and soundness standpoint.
    But certainly, we are quite proud, and our former Chairman, 
who was an Under Secretary for Rural Development, he was a 
strong advocate for our mission-related investments. And I have 
been to Minnesota and visited some of those facilities, and I 
believe in them.
    We were actually able to buy groceries and pay our light 
bill in the 1980s because my wife had a job in that local 
county hospital, so keeping those hospitals, keeping those 
schools, keeping those ag businesses viable is critical to our 
rural communities.
    Ms. Craig. That is really great to hear. I hope you visited 
Minnesota in the summer unlike North Dakota.
    Mr. Smith. I did.
    Ms. Craig. I understand that as the regulator, you have an 
obligation to make sure that institutions are being used 
appropriately. I would like to emphasize to this Committee that 
planning large healthcare infrastructure projects sometimes 
means the government needs to get out of the way and provide 
some regulatory certainty as well, so these projects can 
continue without delay.
    Thank you so much for being here. Mr. Chairman, I yield 
back.
    The Chairman. Thank you very much, and now we will 
recognize Mr. Rouzer from North Carolina, our distinguished 
colleague.
    Mr. Rouzer. Thank you, Mr. Chairman.
    I appreciate Mr. Smith and your colleagues being here 
today. In fact, as I look over the dais here, I see a couple 
former colleagues from a previous life, and Charlie, great to 
see you, and David, great to see you again. As I look at both 
of you, I have flashbacks to 20 years ago and 15 years ago 
respectively, to our various endeavors we were a part of, and 
it is hard to believe time moves that fast.
    Speaking of time moving fast, so I have a lot of farmers 
back home in my district. Obviously, it is a very difficult 
time, a lot of struggles. Oftentimes, they will mention this is 
just as bad as it was in the 1980s. And so, I would like for 
you to comment briefly, if you can, on the strength of the Farm 
Credit System now versus the situation in the 1980s. Obviously, 
interest rates were part of it, but there are other aspects of 
it, too.
    Mr. Smith. Certainly. Number one, and I guess I am going to 
continue to repeat myself because it is very important. The 
quantity and quality of our capital is so important for the 
continuing viability and strength of the System, and being able 
to serve borrowers in troubling times.
    I would say that is probably the number one factor, 
probably was not there in the 1980s.
    We had an interesting discussion with senior staff the 
other day, and maybe it was you, David, had said, ``Well, this 
isn't the 1980s.'' And I said, ``Which part of the 1980s?'' 
Because when we got to the mid 1980s and the late 1980s, we 
were in a crisis situation. But I made the comment that we are 
at a level that is comparable to the early 1980s. Decreasing 
farm incomes, decreasing margins, eroding current ratios. And 
at that time in the Midwest, we had lost 15 to 20 percent of 
our land values. Guess what? Today we have lost 15 to 20 
percent of our land values in the Midwest. There are a lot of, 
and the late 1970s and early 1980s were typified by trade wars, 
right? At that time it was the Soviet Union with the grain 
embargo.
    I think we have learned from the 1980s. A lot of us have 
been there, been around. We are getting fewer and fewer, but we 
have learned some lessons there, and again, getting back to the 
capital and conservative attitudes in our regulatory posture is 
extremely important.
    But back to your original question, how does it compare to 
the 1980s? There are some real similarities with the late 
1970s, early 1980s, without the high interest rates, but we 
have high land values, we have high machinery values, we have 
high principle payments as paid back with after-tax dollars.
    Mr. Rouzer. Yes, if I can interject. One of the 
observations that I have had is whenever the general economy is 
doing well, the ag economy usually is suffering. And usually 
when the agriculture economy is doing well, the general economy 
is suffering. A lot of that has to do with strength of the 
dollar, but there are other factors as well, obviously.
    If you look at the fundamentals of the economy today, I 
think this economy remains pretty strong. I am not talking 
about the ag economy; I am talking about the general economy.
    Mr. Smith. Right.
    Mr. Rouzer. Here is my question: Five years from now, the 
farm income remains at its current level. What type of 
financial situation are we in? How does your balance sheet look 
then? And of course, the follow up to that is what do we need 
to be doing now to help shore these things up? Obviously, trade 
is a big component, but I would like to throw that out.
    Mr. Smith. So, back to that crystal ball, right?
    But as a regulator, we do need to look forward, and we need 
to look at scenarios in our risk modeling. What if interest 
rates were higher 5 years from now? How would that affect the 
overall condition of the System? And we are safe and sound 
today, but what happens if credit continues to erode?
    The answer to that is we continue to have conservative 
attitudes towards lending. In some respects, we are making 
progress today in that we are having pay down of a lot of those 
maybe not great decisions that were made back in good times. 
And in some cases, we are making a little progress there, and 
if that was to continue, maybe that would help mitigate that 
unknown 5 years down the road.
    As far as crystal ball and knowing where we are at, I am 
sorry, I am not there. I am an optimist, and we own land. We 
own land not for one generation; we own land for many 
generations, and you learn to get by in the tough times so you 
can prosper in the good times. And I would say that 
characterizes ag in general.
    Mr. Rouzer. Mr. Chairman, I yield back. My time has 
expired.
    The Chairman. Thank you very much, and now I will recognize 
for 5 minutes the distinguished Congresslady from the Virgin 
Islands, Ms. Plaskett.
    Ms. Plaskett. Thank you very much, Mr. Chairman, and thank 
you, sir, for coming to speak with us and share the 
information. I was really grateful for the time that you and 
your staff came to my office. I thought it was very 
informative, and I am grateful for the support that you have 
given to farmers, particularly young farmers and those who 
have, in some ways, been forgotten.
    I wanted to ask you about something that I believe is very 
important to farming, to rural areas, and that is high-speed 
internet. Do you see an impact on the lack of affordable and 
reliable internet, both on your staff working in the field, as 
well as the ability of rural America to attract younger 
generations to live and work for American agriculture?
    Mr. Smith. It is critical. Broadband is critical for rural 
areas to maintain competitiveness.
    There was an article in the Washington Post, just this past 
weekend about how isolated rural areas that got into medical 
scenarios, a lot of times in a trauma emergency ward, that they 
didn't have access to the expertise needed to save lives, and 
via their internet, via high-speed internet, they were able to 
communicate with some of the better medical minds in the 
country. That is just one example.
    I look at our schools and the ability of our schools to 
stay competitive in rural areas as being critical also to 
broadband development, as well as our businesses and developing 
those cottage industries that are very, very able to survive in 
rural areas.
    I was in Colorado a month ago, and sampled a YBS operation 
that was producing bison sausage and specialty meats, and they 
live in the country. I don't know, it was about 60 miles from 
Fort Collins. And all their marketing, everything, was via the 
internet.
    Ms. Plaskett. Wow.
    Mr. Smith. Extremely valuable to that little cottage 
business that is going to grow. The sausage is pretty good.
    Ms. Plaskett. Yes, I think also about precision farming in 
some areas how important that is going to be for them, and the 
connectivity that these farmers need for the great apps that 
are available for them to support their agriculture and the 
marketing, as well as just recordkeeping.
    Mr. Smith. Yes, yes. It is, and in our operation in western 
Iowa, fortunately we have access to internet that runs a lot of 
our GPS equipment, but our GPS equipment allows us to precision 
apply fertilizer, exactly what we need. We have the economies 
available to that. It enables us to change our population with 
our seed to optimize each acre of corn. It allows us to see the 
areas that are productive and the areas that aren't.
    That access to broadband to enhance those technological 
capabilities that we are quite fortunate to have out there in 
ag, and a key to survivability is very important.
    Ms. Plaskett. Sure. I wanted to talk about a new area of 
the farm bill. We have done some work and now there are 
proposed rules on hemp. And I wanted to know, are there any 
challenges or restrictions that you have in lending to 
producers of hemp?
    Mr. Smith. Well, it seems like most of the country, we are 
excited about the potential for a new crop, because when I was 
a child in Iowa, soybeans were a new miracle crop.
    Ms. Plaskett. Okay. You are dating yourself, sir.
    Mr. Smith. Yes, ma'am, I am.
    There are challenges that go along with new crops. So far, 
as far as FCA's standpoint, we have put out guidelines that 
roughly parallel USDA's. As far as the actual loan decisions, 
it is up to the individual associations. And I know a lot of 
them are looking into it. The only cautionary statement, 
probably number one, is make sure there is a market, and we 
talked about value-added facilities and how important it is to 
develop those so there is a market for it. And possibly that 
can be a role that the System can fill.
    But just like any new crop, there is inherent risks with 
it, but as far as encouraging compliance with USDA, and what 
USDA has put out for guidelines, we closely parallel that.
    Ms. Plaskett. Okay, and one last thing.
    In the Farm Credit Act, it calls for ten or more producers 
to form a lending association that is certified. What does that 
mean for rural areas that cannot meet the demand for having ten 
or more producers under Section 2.0(b)(1)?
    Mr. Smith. I am sorry, I didn't quite get the question.
    Ms. Plaskett. Under the Farm Credit Act of 1971, Title II, 
Section 2.0(b)(1), it calls for ten or more producers to form a 
lending association that is certified. What if in certain rural 
areas they can't meet the demand of ten or more?
    Mr. Smith. I am not personally familiar with that.
    Ms. Plaskett. Is someone on your staff----
    Mr. Smith. Can I defer to counsel, please?
    Ms. Plaskett. Yes, please.
    Mr. Rawls. Well, I can comment on it just briefly. There is 
the provision in the Farm Credit Act, as you said, for 
producers to get together to form a lending institution that 
the Farm Credit Administration would then charter to operate. 
Honestly, that authority has not been utilized in many, many 
years, and I suppose part of that is due to the fact that the 
country is pretty well covered through the existing Farm Credit 
System and chartered institutions. But the provision is in the 
law, and is available if farmers wish to get together and have 
capital to try to charter an institution.
    Ms. Plaskett. Great, thank you.
    I yield back. Thank you for your indulgence, Mr. Chairman.
    The Chairman. Yes, thank you, Ms. Plaskett.
    Now I would like to recognize for 5 minutes our 
distinguished Congressman from Kansas, Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Chairman, and welcome, Mr. 
Smith.
    I want to talk about input costs for a second, and I am 
sure that that is something that you all are looking at when 
you are speaking to farmers and their loans. When I go out, and 
I have spoken to hundreds, probably thousands of farmers, one 
of the first things they talk to me as a line item is the cost 
of healthcare. And I am just wondering how much the cost of 
healthcare is impacting some of your folks you are lending 
money to, and what I see, Kansas Farm Bureau is rolling out an 
association health plan, Land O'Lakes is rolling out an 
association health plan that goes across state lines, which I 
sure am hopeful will start impacting that.
    Anything else going across the nation, other people trying 
to do it? And going back to the original question, just the 
impact of healthcare on producers today?
    Mr. Smith. Certainly, what you are hearing and what we are 
seeing, it is a major, major impact on an average farm family's 
budget. And many times, it almost forces one of the family 
members to work off-farm to support that. Certainly, our family 
had the advantage of that, of getting healthcare.
    As far as any solution, I know that the aspect of 
deductibility would be helpful. You mentioned input costs, and 
I know right now currently some operations can allow 
deductibility if they have an LLC or corporation or some other 
legal form, but I don't think that is probably available to 
individuals. But certainly, deductibility would be a help in 
offsetting those healthcare costs.
    But, it is a major item, major item out of that farm 
budget, and a major hurdle.
    Mr. Marshall. Okay. Talk about other input costs.
    I was looking at some of the information supplied to us, 
and farm income is down. The other input costs, what have they 
done over the past 5 or 10 years, fertilizer, seed, the cost of 
a tractor, the cost of a combine. What do those look like, and 
how are they impacting your portfolio?
    Mr. Smith. Generally, fertilizer costs, one of your primary 
costs, tends to be seasonal depending on supplies at the time. 
Right now you are hearing about propane shortage, and that 
potentially could affect anhydrous ammonia prices here next 
spring, which would be significant, as it is a significant 
input, as you know, for corn.
    Operators have become a little more astute at defensive 
buying, meaning when times are good--we had 10 years of 
unprecedented prices and profitability, and it seemed like the 
more you spent, the more you made. Not so much today, right? I 
think you are seeing them price competitively among seed corn 
companies. I have seen seed companies get much more competitive 
in the last several years, and certainly that astute farm 
operator is out there taking advantage of all the volumes, of 
all the combination, everything he can to keep those input 
costs.
    The trajectory is higher, particularly machinery input. If 
you price the cost of a new tractor----
    Mr. Marshall. Excuse me. Could you get us some type of a 
graph on the overall big picture of those input prices, what 
costs look like for the farmer over the past 20 years?
    Mr. Smith. I sure can, yes.
    Mr. Marshall. I think it has gone up significantly.
    Mr. Smith. Yes.
    Mr. Marshall. Certainly, the price of tractors never came 
down when the price of wheat went down, near as I can tell.
    Last, let's go back to Chairman Peterson's comments about 
the biofuels industry a little bit.
    Mr. Smith. Yes.
    Mr. Marshall. One of the things I hear over and over from 
the biofuels industry--and for any business, for that matter--
is a problem when there is uncertainty.
    Mr. Smith. Yes.
    Mr. Marshall. And the uncertainty that I am specifically 
talking about is whether you like biofuels or not, the mandate 
was for 15 million gallons of ethanol to be blended, and for 
what, the last 2 years we have not done that. How does that 
uncertainty impact the ethanol plants or biofuel plants?
    Mr. Smith. Well, that uncertainty means in looking at your 
budget for next year, might make the difference between 
profitability and not. When you don't have that market there 
for ethanol as was originally mandated by Congress, you can 
take many, many cents off that price that that bushel of corn 
sells for.
    Certainly, I think that is what the ag industry is looking 
for is some degree of certainty that that ethanol demand is 
going to be there year after year.
    Mr. Marshall. Okay. All right, thank you, and I yield back.
    The Chairman. Thank you very much, and now I would like to 
recognize for 5 minutes our distinguished Congressman from 
Florida, Mr. Dunn.
    Mr. Dunn. Thank you very much, Chairman Scott.
    Chairman Smith, I represent the second Congressional 
district of Florida. That is the panhandle and kind of over 
into the north central portion of the state. Very, very 
agricultural district, and it was ravaged by Hurricane Michael 
in 2018. Caused billions of dollars in ag damage, and most of 
it was to timber. About 83 percent of the Florida ag loss was 
timber. You mentioned in your testimony a lot about the 
Midwest. I would like to know if you are seeing some issues in 
the Southeast on the areas where they are recovering from the 
2018 hurricanes, specifically Michael and Florence most 
overwhelmingly. And what issues are you seeing? What advice do 
you have to offer the producers there, and vitally, what advice 
do you have to offer to Congress that we can be doing to help?
    Mr. Smith. Certainly the same issues that we faced most 
recently in the Midwest in the way of flooding you have 
experienced in the Southeast, and again, we don't have the 
ability to say yes or no work out on that loan, but we can 
encourage those local associations to work with people that 
have been damaged in the case of Hurricane Michael. And we did. 
We did put guidelines out to suggest that the associations work 
with those----
    Mr. Dunn. I am going to suggest loans don't really help 
much on timber. It is much better on annual crops, but if you 
have a 20 year crop you are wiped out.
    Mr. Smith. Yes.
    Mr. Dunn. I mean, so just a thought. I mean, loans help, 
but they don't make it if you have lost everything----
    Mr. Smith. I can't imagine waiting 50 years or buying an 
investment of 50 years and in a day it is wiped out. We saw a 
little of that with flooding, with the ravages of Missouri 
River that farms were destroyed from a production standpoint, 
but yes, from the timber aspect, I don't know what type of 
insurance is available.
    Mr. Dunn. There is no crop insurance.
    Mr. Smith. No crop insurance.
    Mr. Dunn. And nobody is insuring their forest. You can't do 
it. It is too expensive.
    Mr. Smith. Any degree of disaster insurance that helps 
cover that?
    Mr. Dunn. Very little. We did some novel things this year 
in the disaster bill for block grants to help them clean up the 
timber that is on the ground and replant in a much larger way 
than ever has happened before.
    Having said that, you have 3 million acres of timber on the 
ground, and a lot of it is still on the ground. We are looking 
for help to get that picked up so we don't have forest fires 
and beetle infestations.
    Mr. Smith. Well, and particularly, if that loan is based on 
collateral, on the value of that timber land.
    Mr. Dunn. I am at the wrong place here. We are talking 
about grants, not banks.
    Mr. Smith. Oh, yes, right. I am sorry, Congressman. I don't 
have a solution to it. I can't----
    Mr. Dunn. That's--Congress here. You represent the farmers 
all the time.
    Mr. Smith. Yes.
    Mr. Dunn. But you have some--have you ever seen any 
programs in Congress or seen programs you think Congress should 
do that could help people who have lost vast amounts of timber? 
A lot of it is family timber plots. You are looking at 100 
acre, 200, 300 acre plots. That was their IRA, if you will, 
they have been picking at it for 20 years, 30 years. All of a 
sudden, it is gone.
    Mr. Smith. The only thing that I think would possibly have 
relevance would be some long-term low interest loans, SBA. I 
don't know if FSA has that available to allow to repopulate and 
allow those timber lands to come back, but it is a long, long-
term solution. And unfortunately, Florida is extremely 
diversified, so the portfolio in general, is in pretty good 
shape in those associations due to that diversification. But in 
those isolated small areas, it has got to be devastating.
    Mr. Dunn. Well, you are right in your observation. I think 
you are right, by the way, with our diversifying. There is a 
lot of good news out there as well; but, we are struggling with 
this one.
    Mr. Smith. Yes.
    Mr. Dunn. I am learning a lot about disasters along the 
way. If you have any wisdom you think you could share with me 
and with some of the other victims like Austin Scott there, 
Dave Rouzer over in North Carolina, Florence got him. We would 
be all ears.
    Mr. Smith. Yes.
    Mr. Dunn. Thank you very much, Mr. Chairman.
    I yield back, Chairman Scott.
    The Chairman. Sure, thank you. And now I would like to 
recognize for 5 minutes our distinguished Congresslady from 
Virginia, Ms. Spanberger.
    Ms. Spanberger. Thank you so much, Mr. Chairman, and it is 
good to see you, Chairman Smith. Good to see you. Thank you for 
being here with us today before this Subcommittee.
    Last week, the U.S. Trade Representative and the U.S. 
Department of Agriculture announced that China will lift its 
ban on the import of U.S. poultry products. This bodes well for 
the long-term financial security of central Virginia poultry 
farmers. Poultry is Virginia's largest agricultural commodity 
and the Commonwealth's producers are well-positioned to service 
the expanding market as China accepts our imports.
    As poultry producers in Virginia and across the United 
States look to export their goods to China, what role do you 
expect the Farm Credit System will play in helping them 
navigate this process and best take advantage of this new 
business opportunity and market?
    Mr. Smith. Well, that is very exciting for the poultry 
producers, and the entire red meat complex, that is one bright 
spot of possibly filling that void in China's swine herds. I 
mean, the latest estimate is they are at 50 percent reduction 
in their swine production, expected to be 55 percent by the end 
of the year. And certainly, that demand for protein is a 
worldwide demand, and to be able to fill that need by direct 
exports to China is tremendous for our producers here.
    Hopefully beef can come close to maybe somewhat filling 
that void as well. The only dark swan and other side of this 
story, is if that African Swine Fever should happen to spread 
to this country, the results would be devastating and it 
wouldn't affect just the pork industry, but it would affect 
your corn producer, your soybean producer, the whole industry-
wide, if that was to make it to the U.S. I am glad for the 
short-term benefit for the poultry producers. I certainly hope 
it doesn't get to this country.
    Ms. Spanberger. And within the Farm Credit System, is there 
any role or expected aid that you all can lend both for those 
producers who are looking to find these new markets, but also 
to do so in a safe manner to ensure that, in fact, the concerns 
you mentioned related to ASF doesn't flow back to the United 
States?
    Mr. Smith. Yes. Well--and maybe backing up and answering 
your question as far as what we can do as a System in terms of 
encouraging those exports. We do have authority under Title III 
to loan, and it does include authority to finance exports. 
Certainly, that is a step in the right direction.
    As to the African Swine Fever, it is my understanding that 
we have expanded on our inspectors at the border. Certainly, 
increased scrutiny of products coming from China and those 
infected countries are measures that need to be undertaken, 
because there are many different means ranging from feed 
byproducts to pet food where potentially that virus could be 
spread. Certainly, stepping up efforts from the inspection 
standpoint and regulations on products coming into this country 
would be advisable.
    Ms. Spanberger. Across central Virginia, I have had the 
opportunity to meet with farmers and producers, some of them 
new to agriculture themselves. And while we are looking at 
reports that indicate that the current agriculture economy is 
having a particularly adverse effect on young and beginning 
producers. At the national level, is the Farm Credit 
Administration seeing this same trend, some of the challenges 
facing young farmers looking to get into the agriculture 
economy, and do you believe the current economy is potentially 
deterring young people from exploring a future in agriculture? 
What are some of the steps or some of the things you would want 
us to know about what you all are doing, what the Farm Credit 
Administration sees as the future in this landscape, and what 
you all are doing to help mitigate some of these economic 
challenges?
    Mr. Smith. Yes. In our meeting, we talked about that as a 
priority. And I have mentioned it before here earlier today, it 
is a priority. It is a need that we focus on young, beginning, 
and small farmers. And from FCA's standpoint, we have 
identified that need and as a regulator, I feel we can exert a 
strong influence on each of our 68 associations, and are in the 
process of doing so. Every opportunity I get to engage in the 
public, I mention the importance of YBS.
    Just a week ago, I attended a YBS conference in St. Louis 
that was hosted by Farm Credit Council, and also hosted by 
local associations. And almost half of the System's 
associations, 33 out of the 68 associations, were at this 
conference. And a lot of it was sharing best practices, best 
ideas, what is working. I mentioned the Dakotas and how the 
Farm Credit offices work as clearinghouses for information for 
different avenues of financing for young farmers. But it was a 
good learning experience for me. The group that I went with 
engaged in all the roundtable discussions, the break outs, and 
we continue to do that and will continue to exert our influence 
as a regulator in moving those programs along.
    Ultimately, examining each of those associations for 
effectiveness, because what program is good unless you 
eventually evaluate it for effectiveness? And fortunately with 
our examination team that makes up a majority of our agency, we 
are in a position to be able to do that.
    Ms. Spanberger. Excellent. Thank you so much for you time. 
Thank you for being here. Thank you for your accessibility for 
Members of Congress.
    Chairman Scott, thank you for letting me go over on time. I 
yield back.
    The Chairman. No problem. Thank you.
    Now I would like to recognize Mr. Johnson for 5 minutes 
from South Dakota.
    Mr. Johnson. The warmer, balmier Dakota. You have impugned 
North Dakota today, sir.
    Diversity used to be the hallmark 2 and 3 generations ago 
of almost any successful ag operation, and then obviously in 
the last couple of generations, there has been more of a push 
toward a focus. In the eastern half of South Dakota, that would 
be a corn and beans rotation. In the western part of South 
Dakota, that would be beef. That doesn't come as any surprise 
to you. You have seen a certain amount of that in Iowa as well.
    I get the sense, just anecdotally and talking to my friends 
in production agriculture, that diversity is coming on strong 
again. Producers in recent years, particularly in the livestock 
arena, got more into swine, more into cattle.
    First off, sir and Mr. Chairman, have you seen that in the 
portfolios of those entities you regulate?
    Mr. Smith. Yes, sir, we have, and I mentioned being 
proactive in areas that are having duress, like corn and beans. 
And part of that is coming up with a plan of diversification. 
Whether it means bringing some other enterprises, like 
livestock, into it, or working off the farm. And I hate to keep 
repeating myself on our young, beginning, and small farmers, 
but again, I would rather have ten small loans than one large 
one from a risk orientation, and those operations that are 
diversified in a number of different enterprises, or working 
off the farm, from a risk factor are preferable.
    Yes, sir, I am, and yes, we do encourage that.
    Mr. Johnson. And so it seems to me that kind of buy down 
the risk profile in two ways. First, it is a hedge against corn 
and beans, right? If you can't sell for a good price, you can 
put in the animals and try to add some value. And of course, 
any time you have multiple products coming off the assembly 
line or off an ag production, if you have two different 
products, if the price for one is high and the other is low, 
well then that balances out.
    Are there other aspects that I should keep in mind, either 
beneficial or detrimental, to this push into greater livestock 
diversification?
    Mr. Smith. Well, you shouldn't focus entirely on livestock, 
because sometimes that involves significant investment and 
capital. And that is what a lot of young and small producers 
may not have access to.
    If I was encouraging your young operators, I would 
encourage them to put in as many tools in their tool-belt as 
they can. If they are a good mechanic, to get a part-time job 
as a mechanic, and that--we need a good dealership close to be 
able to do that. But it isn't just livestock. It is taking your 
strengths and leverage those strengths to help diversify your 
operation.
    And when you speak of diversity, really the System is an 
example of diversity. Right now, cash grains make up about 16 
percent of our portfolio. Dairy makes up about seven percent of 
our portfolio. All told, 23 percent of our portfolio, but that 
is the strength of the System. It doesn't dominate the whole 
System, either geographically or from an enterprise standpoint.
    To encourage diversification is certainly encouraging risk 
mitigation.
    Mr. Johnson. Yes, that is a good point. I mean, I was sort 
of thinking about on-farm diversification.
    Mr. Smith. Sure.
    Mr. Johnson. You are talking about the value of off-farm 
diversification as well.
    As I was preparing for the hearing, a lot of the data that 
you have spoken about is not a shock to me, right? People who 
are connected to ag country know that so much of what you are 
saying is accurate, because they are hearing it elsewhere.
    One thing that was a surprise to me, the memo that staff 
had put together, and I don't expect you to see it from here, 
Mr. Chairman, but the green bars are on-farm income and then 
the tannish-beige ones are off-farm income.
    Mr. Smith. Yes.
    Mr. Johnson. I will admit to being a little surprised at 
how much bigger the off-farm piece of the pie is. Obviously 
that is one way to diversity. Are there down sides to having 
producers that are maybe focusing that much more attention off-
farm?
    Mr. Smith. Well, there is, and certainly as you look ahead 
to concerns and worries about the general economy, that affects 
the off-farm income component of that. And we have seen that. 
Associations right now with the general economy going well, and 
associations that have a high level of part-time farming are 
doing quite well. Ten years ago during the financial crisis and 
housing crisis, it was the opposite and agriculture tended to 
carry the risk within the association.
    Your observation is very astute on that.
    Mr. Johnson. My time has expired. Thank you, Mr. Chairman.
    The Chairman. Thank you, and now we will recognize Mr. 
Baird, from Indiana, for 5 minutes.
    Mr. Baird. Thank you, Mr. Chairman, Ranking Member Scott, 
and Mr. Smith, thank you and all your staff for being here.
    I represent Indiana's 4th District, which is the northwest 
or west side of the state, and I just couldn't help when my 
colleague was talking about warm weather. If you are planning a 
trip to bring low interest loans or loan applications, Indiana 
is usually warmer than South Dakota.
    Mr. Smith. Okay.
    Mr. Baird. But, you mentioned something else that I found 
interesting that is--I went through the 1980s and you mentioned 
that. One of the things or maybe two of the things that I think 
we did much better as a result of going through that, we kept 
our loan or debt-to-asset ratios less than 36 percent when we 
came out of that. We tried to do that, and I see some agreement 
there.
    Mr. Smith. Yes.
    Mr. Baird. And we placed an increased emphasis on cash-flow 
and financial analysis, significantly more than we had done 
prior to that maybe.
    I thought that was a good thing, and so maybe to help get 
through the current times, we ought to find some of us old 
folks that went through that period, and we could help out.
    And then the other area that you mentioned and has been 
talked about a couple of times, the African Swine Fever 
certainly impactful on the Chinese pork industry. And the 
civilian population needs to be interested and concerned about 
that, because as you mentioned, pet food or pigs ears or some 
of those kind of things can bring that virus. It is a virus. It 
can survive freezing. It doesn't survive cooking. It is not a 
real danger to humans, per se, but it sure could be devastating 
to the livestock industry.
    And so, I am finally going to get around to a question 
here, my colleague. But I am concerned about the credit quality 
of the portfolio that we are maintaining, because a lot of 
times I do think young farmers tend to be in livestock and 
poultry as another option. My question really is to you and any 
of your staff, deals with what is the credit quality for those 
livestock producers, livestock and poultry? And what is your 
perception of how they stand?
    Mr. Smith. As far as overall credit quality, and we track 
it very closely on a quarterly basis, if you were to look at 
third quarter, we just had information last week in the third 
quarter, and the percentage of total loans within the System 
that are non-performing, 90 days overdue, acquire property, 
couple other categories in there, it is at .92 percent, less 
than one percent. Which in itself doesn't seem alarming, given 
our levels of capital and given our costs as regulatory 
attitude. What concerns me is in 2018, that number was .83. In 
2017, that number was .67. I call it the creep, the creep of 
deteriorating financial quality. The numbers aren't alarming. 
We are not at a crisis situation, but it is not improving.
    As far as the livestock sector, and when you see situations 
in the poultry where the export markets have opened up, the 
livestock sector has done pretty well. And one thing that you 
look at the valuable entry into agriculture, a lot of times for 
that next generation is to put up a poultry building, hog 
building with a contract that pays for that building in 10 
years. And I had posed the question to staff, because I know in 
my home area, that vertical integrated enterprise is very 
important, and that Farm Credit finances a lot of those 
buildings. But what would be the situation if the African Swine 
Fever were to reach our shores and those buildings, what type 
of allegiance does that contractor have to that farmer if they 
should contract it? I don't know. It is a good question, but it 
is certainly a cautionary statement to make out there on it.
    But as a general rule, livestock has performed pretty well 
in the whole portfolio.
    Mr. Baird. Thank you. My time is up. I yield back.
    The Chairman. Thank you very much, Mr. Baird. And now, as 
we approach the closing, and you have been very informative. I 
would like to recognize our Ranking Member, Mr. Scott, for any 
closing comments he would like to have.
    Mr. Austin Scott of Georgia. Gentlemen, I am going to make 
a brief closing comment, and then I have another appointment 
and will slip out.
    But first, I want to thank you for being here and what you 
do for rural America. Second, I want to reiterate a comment 
that Ms. Craig was trying to hit on with regard to the cost of 
healthcare in rural America. As someone who represents 24 
counties, and in over half of the counties that I represent, 
there is only one health insurance carrier available. In many 
cases, they don't have contracts with the providers, and while 
insurance carriers cannot underwrite the individual citizen, 
they can underwrite a ZIP Code. And I am not sure that 
discrimination against rural America is necessarily the right 
term at this stage, but in large parts of rural America, we 
don't have access to health insurance because carriers have, 
for some reason or another, found a way not to underwrite in 
those ZIP Codes.
    And so, as we talk about how we get young people back to 
the farm and we talk about the cash-flow of the farm, the truth 
is, it is the cash-flow of the farm family. And so, farm 
families are forced to pay thousands of dollars a month more 
for health insurance because they don't have competition in 
their markets for that product. And obviously, that drives 
people into other areas. Many of the farmers in my area, their 
spouses now work for a school system or some other entity where 
that is the only access they have to health insurance, which is 
something that is important to keep in mind with rural America, 
because if we are going to have farmers, then the farm family, 
not just the farm, has to be able to cash-flow.
    And so, I want to thank you for what you do. You play an 
important role in it. I think we have some bumps ahead, 
hopefully not too bad. Hopefully we will learn from them, and 
hopefully we will find ways in the next farm bill through crop 
insurance and lending and other areas to actually reduce the 
risk of being in farming, and hopefully allow our farmers to 
find ways to increase their revenue.
    Thank you for what you do, and Mr. Chairman, as always, a 
pleasure to see you, and I look forward to working with you.
    Mr. Smith. Yes.
    The Chairman. Thank you, Mr. Scott.
    Chairman Smith, thank you. You have indeed opened our eyes 
to much of what we were only dimly aware, and I thank you for 
that.
    And I want you to know that as you could see from the 
Committee on both sides of the aisle, we are very concerned 
about improving the credit status of our farmers. And I would 
hope that you would look to our Committee as your spear to make 
sure that we in Congress are doing everything we can. And when 
I say at the point of the spear, I mean that, because this is 
the Subcommittee for agriculture dealing with credit. Well, as 
Doc Holliday said it at the gun fight at the O.K. Corral, he 
said when he looked at the bad guys, he said, ``I am your 
huckleberry.'' So, look to us as that.
    Now, I just want to ask you a series of questions. First of 
all, are you getting the budget from us that you need to do the 
job?
    Mr. Smith. Yes, Mr. Chairman. What we have requested and 
the current needs that we see, as far as our labor force, we 
are a FIRREA institution so we feel we have a great pool of 
very talented people that work for FCA. Certainly, as people in 
my age group, two of these gentlemen here at the table are new 
to our senior management team as of the last year, so 
retirements can be a challenge. And our examination force makes 
up 55 percent of our total workforce. We had mentioned in our 
previous conversations that we interview at 30 different 
colleges and universities, many of them land-grant 
universities, and we talked about the importance of that, the 
importance of diversity with that.
    I believe yes, we do have the resources, but if we see 
continued deterioration, we need to see a continued involvement 
of FCA and what is going on out there. We appreciate the 
opportunity to expand on that at some point.
    The Chairman. Yes, please let us know. As you know, you 
mentioned the land-grant colleges and universities. That is one 
of the areas that we have expanded on, and with the last farm 
bill, we were able to get $80 million put in there for 
scholarships, and we want that to grow, and we want it to be 
permanent. Secretary Perdue and I worked very closely on that, 
as you know, and the Agriculture Department. That will start in 
2020.
    And finally, our job is to really get funding out, and I 
want to ask you to give us your opinion on Congress' 
performance given the emergency funding process. I really want 
you to give us some answer to what did we do? What did we do to 
contribute to the additional hardship of our farmers by 
dragging our feet up here and not getting the emergency funding 
down to our farmers in time? What role did that play in our 
farmers not having the capital to succeed? What role did that 
play, as you and I talked about the mental anguish of not 
getting?
    You see, I know that several of those suicides, they had 
nothing, and then the storms came. They are going to come 
again.
    Mr. Smith. Yes.
    The Chairman. We don't know. We have not done what we 
should be doing in getting the professionals, the scientists, 
the people who have the information of what is going on. And 
so, I would love for you to just give me your opinion on how 
devastating an impact we had in not getting this aid to our 
farmers in time as a result of this series of hurricanes.
    Mr. Smith. Well, Mr. Chairman, disaster situations like 
that with farmers that are in a bad position anyway just 
exponentially catapults it. And certainly, every day that that 
is delayed gets closer to that operation failing, which nobody 
wants. I mentioned that we try to be proactive in working with 
our borrowers. We send out guidelines to the associations to be 
proactive, to enlist the help of additional loan staff, 
financial staff to help these farmers with plans to get over 
these deficiencies. But the clock is ticking, and a lot of 
times, that interest bill continues to tick.
    Certainly, it is a bad situation and it is a bad situation 
on top of a situation that may not be that stable anyway.
    The Chairman. Yes. Well, several of us are very determined 
that that never happens again.
    Mr. Smith. Yes.
    The Chairman. We need to, as Members of Congress, know what 
we are doing to not only help the problem, but are there things 
that we are doing and not doing that exacerbate it as well? And 
that was one of them, and we hope it doesn't happen again.
    Well, we got your marching orders on what we need to do 
most, and as I understand it, it is get these trade deals 
moving, particularly USMCA and the China trade. And Mr. David 
Grahn spoke eloquently of the interest rates, and we will see 
what we can do on that. I think somebody also mentioned the 
fragile land values. I don't know what we can do about that 
one, but we can certainly do all we can.
    But, you have my commitment as Chairman of this Committee, 
and I think I speak for all of us, that we will use every 
energy we have to get these trade deals moving. Because that is 
something that is in our ballpark. We will do it.
    With that, I believe now, I am to thank you, my dear, Ms. 
Ashley Smith. I would say give her a hand. She is my long-time 
partner, and as we know, with child, and I am doing all I can 
to get her home, but she won't go. She is so dedicated to her 
work. So, thank you, Ashley.
    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 witness to any questions posed by a Member.
    This hearing of the Subcommittee on Commodity Exchanges, 
Energy, and Credit is adjourned. Thank you all.
    [Whereupon, at 11:46 a.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
                          Submitted Questions
Response from Hon. Glen R. Smith, Chairman and Chief Executive Officer, 
        Farm Credit Administration
Questions Submitted by Hon. David Scott, a Representative in Congress 
        from Georgia
    Question 1. I'm wondering, what has FCA done to encourage diversity 
in its own ranks and among lenders? Do you see increased diversity 
among lenders as a possible step to ensuring more inclusive 
agricultural lending practices?
    Answer. Diversity and inclusion are critical business imperatives 
directly linked to achieving our mission. We provide direction to our 
management and staff for acting in this critical area. For example,

   Tone At the Top--The FCA Board annually reaffirms its 
        commitment to EEO and diversity by reissuing policy statements 
        related to equal employment opportunity.

   Strategic Plan--Created with a goal of cultivating an 
        environment that fosters a well-trained, motivated, and diverse 
        staff while providing an effective plan for leadership 
        succession.

   Employee Programs--Robust employee run special emphasis 
        programs which provide diversity-related awareness programs and 
        aid with targeted recruiting and outreach efforts.

   Accountability--performance evaluations include EEO/
        diversity element for all employees.

   Recruiting--we strive to increase the diversity of our 
        applicant pool through targeted outreach efforts at selected 
        universities and events. FCA regularly recruits from 1890 Land 
        Grant Institutions, Historically Black Colleges and 
        Universities, Hispanic Serving Institutions, and high minority 
        enrollment schools.

   Recognition--a diversity leadership award is given annually 
        to recognize an individual who demonstrates a significant 
        commitment to enhancing diversity and inclusion

    With regard to System diversity, a diverse workforce could aid in 
the effort to ensure more inclusive agricultural lending practices. Our 
regulation require and we examine to ensure that each System board has 
adopted a strategic business plan to include, among other things, 
outreach toward diversity and inclusion.
    Each business plan must contain a:

   Human Capital Plan--that describes the institution's 
        workforce and management and assesses their strengths and 
        weaknesses; describes succession programs; and includes 
        strategies and actions to strive for diversity and inclusion 
        within its workforce.

   Marketing Plan--that discusses how the institution will 
        further the objective that the System be responsive to the 
        credit needs of all eligible and creditworthy agricultural 
        producers and other eligible persons, with specific outreach 
        toward diversity and inclusion.

    The regulation also requires annual reporting to the board on 
progress.

    Question 2. I recently introduced H.R. 4257, a bill to improve the 
Office of Minority and Women inclusion at the CFTC and bring it up to 
standards set in Dodd-Frank. Does the Farm Credit Administration have 
an Office of Minority and Women Inclusion?
    Answer. FCA has a full-time Director of the Office of Equal 
Employment Opportunity and Inclusion that reports only to the Chairman 
to ensure independence. The Director provides counsel and leadership to 
the Chairman and management on carrying out our continuing policy and 
program of nondiscrimination, affirmative action, and diversity. While 
not called by the same name, the functions of FCA's Office of Equal 
Employment Opportunity and Inclusion are very similar to the functions 
of an Office of Minority and Women Inclusion. It is worth noting that 
in 2018, we continued to rank near the top among the Best Place to Work 
in the Federal Government. For our support of diversity, we ranked 
second for small agencies.
Questions Submitted by Hon. Collin C. Peterson, a Representative in 
        Congress from Minnesota
    Question 1. The Market Facilitation Program is not a 
Congressionally-mandated program and as such could be discontinued or 
modified at any time. Does that uncertainty factor into how the Farm 
Credit System assesses the quality of agricultural credit? Is FCA 
including MFP in their farm income projections and if so, does FCA's 
modeling assume continued MFP payments into the future?
    Answer. Because the MFP payments are viewed as temporary until 
trade issues are resolved, we have not seen institutions including any 
future MFP payments (beyond what has already been announced and paid by 
USDA). While institutions typically factor in government program 
payments that are part of the farm bill and designed to be ongoing 
(e.g., ARC and PLC in the current program), the MFP payments have not 
been handled in that way. While the MFP has had a significant effect on 
actual 2019 income, System institutions have considered MFP as part of 
farm income as tranches have been authorized by the Administration. 
Forward-looking analysis does not assume a new round of MFP payments 
for 2020 production, nor for subsequent years. Therefore, MFP payments 
are not being included in 2020 borrower income projections.

    Question 2. Can you remind me of the options available under the 
Farm Credit Act and related regulations regarding forbearance or loan 
restructuring options?
    Answer. The Farm Credit Act and related regulations grant 
considerable flexibility to Farm Credit System institutions to provide 
restructuring assistance to System borrowers, including forbearance of 
borrower loans. The Act has very few specific restrictions regarding an 
institution's loan servicing authority. Among them are placing 
limitations on when distressed loans may be foreclosed upon and 
requiring safe and sound decision making. Additionally, FCA regulations 
require that loans be serviced fairly and equitably in compliance with 
an institution's underwriting standards, but also in a manner 
minimizing the risk of loss for the lender.
    System farm borrowers are provided further protections when their 
loans are identified as distressed. The Act and our regulations require 
that on determination that a loan is or has become a distressed loan, 
the borrower must be sent written notice explaining: (1) the loan is 
distressed and may be suitable for restructuring, (2) how to file an 
application for restructuring, and (3) the borrower may ask to meet 
with the lender to discuss the situation. The Act also specifically 
provides that a System lender may present a proposed restructuring plan 
to the borrower, whether or not the borrower has filed an application. 
Once there is a final restructuring plan, the lender must conduct a 
credit analysis to determine if the cost of restructuring the loan is 
less than or equal to the potential cost of foreclosure. The Act 
requires the loan to be restructured in accordance with the restructure 
plan if that is the least cost alternative to foreclosure. If the 
restructuring plan is denied, the Act and our regulations provide the 
opportunity for the decision to be reviewed by a Credit Review 
Committee (CRC). The CRC is composed of members of the System 
institution, including one stockholder-elected member of the board of 
directors who is a farmer-borrower of the institution. Those involved 
in making the credit decision under review may not serve on the CRC but 
may be present at the CRC meeting to answer questions. The Act and our 
regulations also provide that the borrower may also attend the CRC 
meeting to present his or her reasons why the decision should be 
reversed. The CRC decision on the matter is the final decision.
    FCA encourages institutions to work with borrowers experiencing 
financial stress.
    For example, FCA Board Policy Statement 71--Disaster Relief Efforts 
by Farm Credit Institutions * states that the efforts of institutions 
to work with borrowers in disaster areas will be considered consistent 
with safe and sound business practices. Also, the Policy Statement 
encourages institutions to use their considerable flexibility under the 
existing regulations to provide appropriate disaster relief. Such 
relief efforts may include, but would not necessarily be limited to, 
extending the terms of loan repayment or restructuring a borrower's 
debt obligations. In addition, a Farm Credit institution may consider 
temporarily easing some loan documentation or credit-extension terms 
for new loans to certain borrowers or requesting the FCA to grant 
temporary relief from specific regulatory requirements. Our January 21, 
2016, Informational Memorandum on Servicing Loans to Borrowers in 
Distressed Industries * further explains that we expect institutions 
will work with borrowers consistent with the System's mission to 
furnish sound, adequate, and constructive credit.
---------------------------------------------------------------------------
    * Editor's note: the documents referred to are retained in 
Committee file.
---------------------------------------------------------------------------
Distressed Borrower Loan Restructuring Rights Under the Farm Credit Act
   The Farm Credit Act uniquely mandates that System lenders 
        work with distressed System borrowers by providing the right to 
        restructure distressed loans.

   Under FCA regulations, the restructuring of a loan allows a 
        re-amortization, renewal, deferral of principal or interest, 
        monetary concessions, or the taking of any other action to 
        modify the terms of, or forebear on, a loan.

   System institutions must notify a borrower when it 
        determines that a loan is a distressed loan and that the loan 
        may be suitable for restructuring--at least 45 days before 
        foreclosure proceedings begin.

   Institutions must address a request for restructuring before 
        continuing with foreclosure.

   Least-Cost Test: Must restructure if the cost of 
        restructuring is less than or equal to the cost of foreclosure.

   Borrowers have the right for a secondary review (Credit 
        Review Committee) of an adverse restructuring decision.

   Borrowers also have the right of first refusal to repurchase 
        a foreclosed property.

   FCA reviews borrower rights complaints and investigates each 
        complaint made to us to ensure that the System institutions 
        follow the law. Borrower complaints received by the Agency have 
        increased marginally.
Question Submitted by Hon. Cynthia Axne, a Representative in Congress 
        from Iowa
    Question. In your written testimony, Mr. Smith, you stated that the 
FCA encourages System lenders to work with borrowers to help navigate 
current financial conditions without jeopardizing long-term viability 
of borrower or the System institution. Identifying and working with 
farmers that are financially stressed is critically important and I am 
glad that the FCA is encouraging that. Can you describe to us, in more 
detail, what that assistance looks like? Also, what are the 
associations that you mentioned in your testimony doing specifically?
    Answer. The System has used a wide range of approaches to assist 
borrowers navigate the current financial environment. The most common 
approach we have seen used is ``rebalancing'' debt to move short-term 
debt (which may involve the purchase of longer-term assets that were 
financed through an operating line or losses from operations) to term 
debt and borrowing against longer-term assets. This has been used to 
provide additional working capital in situations where debt levels were 
not already high, and the additional term debt could be adequately 
serviced. Other methods have included interest-only payments, covenant 
waivers or adjustments; principal deferments; term debt re-
amortizations; and operating loan extensions. In distressed situations, 
institutions will compare the cost of granting concessions and formally 
restructuring the loan to foreclosure and restructure the loan if the 
cost is lower.
    Institutions have also increasingly provided consulting services to 
borrowers regarding important considerations for the borrower such as 
need for off-farm employment, selling of excess or under-utilized 
assets, and competitiveness comparisons to peers. Additionally, FSA 
guarantees have been used to reduce institution risk while providing 
time for borrowers to implement changes improving the viability of 
their operations. In cases where maintaining the current operation is 
not a reasonable alternative, institutions have worked with borrowers 
in finding alternative approaches to improve viability including 
selling assets to downsize operations and reducing debt to a 
sustainable level. Regardless of the servicing action taken, 
institutions first complete an evaluation of the borrower's financial 
condition and performance and prospects for repayment using realistic 
projections.
Questions Submitted by Hon. Austin Scott, a Representative in Congress 
        from Georgia
    Question 1. Earlier this year, your agency submitted a report to 
this Committee in response to Section 5414 for the Agriculture 
Improvement Act of 2018. Your report found that the ``1,000 acre rule'' 
established for Farmer Mac in the Agricultural Credit Act of 1987 added 
transaction costs for borrowers and concluded that the rule ``does not 
provide any safety and soundness protections for Farmer Mac.'' Your 
report suggested that Congress direct the agency to use its regulatory 
authorities to adequately address safety and soundness concerns.
    How would the agency adequately address safety and soundness 
concerns without the statutory limitation?
    Answer. As noted in the report submitted to the Committee, the 
1,000 Acre Rule is a two-part test to determine if a loan can be 
accepted by Farmer Mac. The first part of the test is whether the loan 
is under the established dollar limit ($2.5 million indexed for 
inflation since 1987 or $12.9 million for calendar year 2018). If the 
loan exceeds that amount, then a determination is made whether the 
acreage that is pledged to secure the loan exceeds 1,000 acres (revised 
to 2,000 in the 2018 Farm Bill). If the loan does not exceed the 
acreage exception, it is still subject to an internal policy-based 
limitation set by Farmer Mac but is not constrained by the 1,000 Acre 
Rule.
    Because of the interplay between the dollar limitation and acreage 
exception in the 1,000 Acre Rule, Farmer Mac's larger \1\ individual 
loan exposures are sometimes concentrated in farms with aggregate 
acreage at or under 1,000 acres, which effectively creates highly 
localized geographic credit risk concentrations, as well as potentially 
large individual borrower concentrations. Many high-value crops are 
grown on acreage with valuations that are more than $50,000 per acre 
and some above $100,000 per acre (e.g., permanent planting crops 
including wine grapes and certain berries and nuts). The table below 
provides examples of four borrowers seeking mortgage loans at 50% of 
their property values.
---------------------------------------------------------------------------
    \1\ In this study, we use the terms ``large'' and ``larger'' in 
reference to acreage solely as a concise way to identify farms and 
farmers large enough to be subject to the acreage exception. 
Importantly, we do not intend to imply that such farms are inordinately 
large or risky. FCA does not consider 2,000 acres to be an unusually 
large farm in today's agricultural economy.

                                  Application of 1,000 Acre Rule to Four Farms
----------------------------------------------------------------------------------------------------------------
                                    Scenario A Napa   Scenario B Georgia  Scenario C NW Iowa  Scenario D SW Iowa
                                    County Vineyard       Timberland             Corn                Corn
----------------------------------------------------------------------------------------------------------------
    Aggregate acres pledged as                1,000              13,000               3,000               3,000
                       security
                    Value/acre             $300,000              $2,000             $10,000              $8,000
                                 -------------------------------------------------------------------------------
  Total value...................       $300,000,000         $26,000,000         $30,000,000         $24,000,000
----------------------------------------------------------------------------------------------------------------
                                                Loan Application
----------------------------------------------------------------------------------------------------------------
                              Loan-to-value rati50%                 50%                 50%                 50%
                              Loan amou$150,000,000         $13,000,000         $15,000,000         $12,000,000
         Under 1,000 Acre Rule            Permitted       Not permitted       Not permitted           Permitted
Reason permitted, or not ($ in         51,000 acres    >1,000 acres and    >1,000 acres and    >1,000 acres but
                      millions)                                  >$12.9              >$12.9              <$12.9
----------------------------------------------------------------------------------------------------------------

    As the table shows, the 1,000 Acre Rule can allow very large 
individual borrower exposures. The vineyard loan at $150 million 
(scenario A) would be greater than 20% of Farmer Mac's core capital at 
year-end 2017 and yet be permitted under the Act. Further, according to 
the rule, if the vineyard loan were secured by just 1 additional acre, 
the loan would not be permitted.
    The 1,000 Acre Rule can also prohibit more moderate exposures, such 
as the Georgia timberland loan (scenario B) and the northwest Iowa corn 
loan (scenario C). Conversely, the rule would permit the southwest Iowa 
loan (scenario D), which is secured by farmland of lower value than in 
scenario C, but it is not clear why the scenario C loan would present a 
greater challenge to safety and soundness than the loan for the 
northwest Iowa cropland.\2\
---------------------------------------------------------------------------
    \2\ The cropland prices used in Table 2 * are reasonably 
representative of values in these areas as published in the following: 
``Trends in Agricultural Land Lease Values,'' 2018,** by the California 
Chapter of American Society of Farm Managers and Rural Appraisers (Napa 
Vineyard); National Council of Real Estate Investment Fiduciaries 
Timberland Index third quarter 2018,** Oct. 24, 2018, release (Georgia 
Timberland); and 2018 Farmland Value Survey,** Iowa State University 
Extension Service, Wendong Zhang, https://www.extension.iastate.edu/
agdm/wholefarm/html/c2-70.html (Iowa Corn).
    * Editor's note: the table referred to was not included in the 
FCA's responses to the Committee's question.
    * Editor's note: the documents referred to are retained in 
Committee file.
---------------------------------------------------------------------------
    These scenarios, taken together, illustrate the basis for the 
conclusion of this study that the 1,000 Acre Rule does not provide any 
safety and soundness risk protections for Farmer Mac because the risk 
inherent in loans is rarely, if ever, based solely on the number of 
acres involved in the activity. The 1,000 acre rule provides a barrier 
to large-acreage financing for Farmer Mac but does not prevent large-
acreage or large-dollar exposure concentrations in a single borrower. 
This is true both because (1) many farms under 1,000 acres are very 
high-value farms with eligible financing needs well above the $12.9 
million inflation-adjusted loan limit today and (2) some borrowers with 
more than 2,000 acres are willing to accept multiple loans on less than 
1,000 acres that cumulates to more than $12.9 million to take advantage 
of Farmer Mac's financing options.
    In the absence of the statutory ``1,000 acre rule,'' the agency 
could address safety and soundness through its rulemaking authorities 
and the direct examination and oversight of Farmer Mac. Through the 
rulemaking process we would consider alternative credit concentration 
exposure limits relative to capital as replacement for the dollar limit 
and acreage exception to the limit.
    FCA oversees Farmer Mac's safety and soundness through its Office 
of Secondary Market Oversight. As part of our ongoing examination and 
oversight of Farmer Mac's underwriting, servicing, and loan portfolio 
risk management, we evaluate the effectiveness of Farmer Mac's credit 
exposure policy limits relative to its regulatory capital base and 
overall risk-bearing capacity. More specifically, we evaluate Farmer's 
Mac's effectiveness at managing risk concentrations to single 
borrowers, industry segments and geographic regions. Farmer Mac's 
current loan underwriting policy limitations have been effective in 
mitigating credit risk as indicated by relatively low historical loan 
loss rates. In addition, FCA's annual examination of Farmer Mac 
includes the analysis of credit risk in large loans by the agency's 
credit specialists.

    Question 2. The FCA withdrew a proposed ``Rural Community 
Investments'' pilot project program and a related proposed rule in 
2013. But in September of 2014, the FCA released an informational memo 
providing guidance for investment requests.
    As I understand it, a key question relating to the investments 
issue is whether the financing is labeled as a loan or as an 
``investment.'' Can you explain the distinctions between loans and 
investments
    Answer. Correct. FCA concluded the Rural Community Investments 
pilot programs in 2013. In September 2014, the FCA provided guidance to 
System institutions for case-by-case investment requests. This guidance 
communicated a return to the approval process authorized by FCA 
regulations, which were followed prior to the pilot programs.
    Investments are fundamentally different from loans. Under the Farm 
Credit Act of 1971 (1971 Act) and FCA regulations, System institutions 
may make investments in a variety of instruments for the purpose of 
holding capital and maintaining the liquidity of the institution. 
Separately, the 1971 Act and FCA regulations authorize System 
institutions to make loans for farmers, ranchers, agricultural 
cooperatives and other related enterprises to support agricultural-
based activities, and in some cases the activities of rural utilities. 
The loan making activities represent the predominate share of the 
System's assets. Rural Community Investments are a small subset of the 
investments of the System.
    As part of our analysis of each investment request presented under 
the case-by-case authority, we evaluate whether the requested 
investment would be considered an investment from legal, accounting, 
and market perspectives. The vast majority of the investments approved 
by FCA (on a case-by-case basis) have been in the form of bonds issued 
to support the construction, renovation, acquisition, or expansion of 
healthcare facilities (hospitals or medical clinics) and senior living 
facilities (skilled nursing or assisted living facilities, and 
continuum of care campuses for seniors).
    Bonds are distinguishable from loans from a legal standpoint, with 
case law support; from an accounting standpoint under Generally 
Accepted Accounting Standards; and from a marketplace perspective, 
specifically regarding the rights and privileges of lenders compared to 
investors.
    Each case-by-case investment approved was subject to about 13 
conditions of approval, including that the bond issuer also offer 
commercial banks the opportunity to invest in the project. Prior to 
investing in a bond issuance, the FCS institution must certify that the 
investment bond meets the legal, accounting, and marketplace 
definitions of a bond investment.

    Question 2a. Can you provide examples of the investment projects 
FCA has approved?
    Answer. The vast majority of the 14 case-by-case investments 
approved by FCA (since conclusion of the pilot programs in late 2014) 
were bonds issued by not-for-profit entities or municipalities. These 
bonds were issued for healthcare-related and senior and assisted living 
facilities that fall within the definition of essential community 
facility under the U.S. Department of Agriculture (USDA) rules and 
regulations. Most projects were assigned a USDA guarantee following 
construction.
    Since the conclusion of the pilot programs, the FCA Board has 
approved investment requests from six FCS institutions to purchase 
investment bonds issued by 11 rural healthcare entities, two 
agribusinesses, and one for rural home mortgage-backed securities.

    The following are summaries of the investments in rural healthcare 
projects approved:

   Bonds issued by Critical Access Hospital and Skilled Nursing 
        Facility, serving the needs of a rural Minnesota area. The next 
        closest critical access hospital is located 83 miles away and 
        the nearest tertiary hospital is 110 miles away. The hospital 
        also operates a home health agency and an ambulance service. 
        The bonds were to fund the cost for constructing additional 
        space and to make facility improvements to the existing 
        hospital and nursing facility to meet the growing demand of the 
        county's population. Bonds issued carry a USDA guarantee under 
        the Essential Community Facility program.

   Bonds issued by a Regional Healthcare Center providing 
        clinical care to residents in rural South Dakota with limited 
        healthcare options within a 100 mile radius. The bonds provided 
        financing for facility renovations and expansion and carry a 
        USDA guarantee under the Community Facilities program.

   Bonds issued by a Community Medical Center in rural 
        California, which would provide financing for relocating and 
        replacing the existing outdated hospital. The bonds would carry 
        a USDA guarantee under the Community Facilities program 
        following construction.

   Bonds to provide funds for construction and permanent 
        financing for the development of senior independent living 
        units added to an existing senior living campus in rural 
        Wisconsin. The existing campus includes a skilled nursing 
        facility, two senior care or assisted living facilities, and a 
        children's learning center.

   Bonds issued for construction and permanent financing for 
        the expansion of an existing continuous care facility in rural 
        Texas. The existing campus includes a skilled nursing facility 
        and assisted- and independent-living facilities. The bonds 
        financed rehabilitation space for therapy; space for the 
        hospice staff; office space for management and nursing staff; 
        and several independent- and assisted-living units. The bonds 
        carry a USDA guarantee under the Community Facilities program.

   Bonds issued for renovations to update a nursing home and 
        provide 16 additional memory care units in rural Minnesota. On 
        two separate campuses the bonds would add 21 assisted living 
        units, a new ten unit assisted living facility and a ten unit 
        memory care building. The bonds carry a USDA guarantee under 
        the Community Facilities program.

   Bonds issued by a Community Hospital in rural Colorado to 
        acquire an adjacent financially struggling senior health care 
        and living service provider to maintain quality care for 
        residents. While the facility would quality as an essential 
        community facility, the small amount of bonds were not USDA-
        guaranteed.

   Investment securities issued by a rural South Dakota 
        Healthcare Center and the rural community in the form of 
        Certificates of Participation. The funds were to provide the 
        rural community with a new medical clinic and renovate the 
        existing hospital and nursing home facility.

   Bonds issued to provide permanent financing and construction 
        funding for a local community organization to acquire an 
        existing medical center in rural Illinois and to make 
        improvements to the existing hospital and highway entry points. 
        The bonds would carry a USDA guarantee under the Community 
        Facilities program following construction.

   Bonds issued by a nonprofit rural hospital corporation that 
        owns and operates a 25 bed Critical Access Hospital and two 
        medical clinics in northwestern Wisconsin. While the current 
        facility had been adequately maintained, it did not meet the 
        modern healthcare requirements of residents in and near the 
        rural community. The bond proceeds were to finance the 
        construction of a new hospital on a new site and refinance 
        existing debt. The bonds were to be guaranteed under the USDA 
        Community Facilities Program.

   Bonds issued by a skilled nursing and rehabilitation 
        facility in rural Wyoming. Bond proceeds would renovate the 
        existing 60 bed senior care facility to update patient rooms 
        for enhanced accessibility, including a roll-in shower; provide 
        24-hour skilled nursing care; and replace the fire and 
        sprinkler system along with the building's HVAC system. The 
        bonds would carry a USDA guarantee under the Community 
        Facilities program following construction.



                      REVIEW OF CREDIT CONDITIONS

                   (REPORT FROM AGRICULTURAL LENDERS)

                              ----------                              


                      WEDNESDAY, DECEMBER 11, 2019

                  House of Representatives,
   Subcommittee on Commodity Exchanges, Energy, and Credit,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 2:45 p.m., in 
Room 1300 of the Longworth House Office Building, Hon. David 
Scott [Chairman of the Subcommittee] presiding.
    Members present: Representatives David Scott of Georgia, 
Van Drew, Vela, Spanberger, Delgado, Craig, Kirkpatrick, Axne, 
Austin Scott of Georgia, Crawford, Marshall, Dunn, Johnson, and 
Baird.
    Staff present: Emily German, Isabel Rosa, Lisa Shelton, 
Luke Theriot, Josh Maxwell, Ricki Schroeder, Patricia Straughn, 
Dana Sandman, and Jennifer Yezak.

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

    The Chairman. This hearing of the Subcommittee on Commodity 
Exchanges, Energy, and Credit entitled, Review of Credit 
Conditions: Report From Agricultural Leaders, will come to 
order.
    Good morning, and thank you for being here today as we 
continue our review of credit conditions. Our farmers are 
facing challenging times, from trade wars to weather events, 
low commodity prices, and general uncertainty. Rural America is 
indeed being tested. Access to credit is critical for farmers' 
success, and it is important for us to understand how 
traditional agricultural lenders, commercial banks, the Farm 
Credit System, Farmer Mac, and the Farm Service Agency work, 
both independently and collaboratively, to address the needs of 
our farmers and ranchers. Therefore, it is imperative that all 
lenders work with farmers and rural America during these tough 
times. Earlier today, Farm Credit announced a new program that 
will train individuals who work with farmers and ranchers to 
recognize signs of stress, and connect those farmers with 
professional help.
    Uncertainties regarding foreign market access and higher 
ending commodity stocks, among other factors, have contributed 
to lower prices for many agricultural commodities in recent 
years. While delinquency rates on residential and all 
commercial loans have steadily decreased since the 2008 
financial crisis, agriculture-related commercial loan rates are 
experiencing an increasing trend. The witnesses before us today 
know the pulse of rural America, and work with farmers on the 
ground every day. They can speak to the face to face 
interactions they have had with farmers, and how that has 
changed in the last several months with the ongoing low 
commodity prices, and the trade uncertainties.
    How much longer can farmers continue under these 
conditions? What happens if there isn't a trade deal with China 
until after next year's election, as President Trump alluded to 
the other day? Our distinguished panel here today works with 
farmers to offer the absolute best assistance to help continue 
their businesses, and I am very much looking forward to this 
discussion about how we all can best help rural America.
    And, in consultation with the Ranking Member, pursuant to 
Rule XI(e), I want to make Members of the Subcommittee aware 
that other Members of the full Committee may join us today for 
this very important hearing.
    [The prepared statement of Mr. David Scott of Georgia 
follows:]

 Prepared Statement of Hon. David Scott, a Representative in Congress 
                              from Georgia
    Good morning and thank you for being here today as we look to 
review credit conditions.
    Our farmers are facing challenging times. From trade wars, weather 
events, low commodity prices and general uncertainty, rural America is 
being tested.
    Credit is critical for farmers' success. It is important for us to 
understand how they work both independently and together.
    It is also important for all lenders to work with farmers and rural 
America during this tough time. Earlier today Farm Credit announced a 
new program that will train individuals who work with farmers and 
ranchers to recognize signs of stress and connect those farmers with 
professional help.
    Uncertainties regarding foreign market access and higher ending 
commodity stocks, among other factors, have contributed to lower prices 
for many agricultural commodities in recent years. While delinquency 
rates on residential and all commercial loans have steadily decreased 
since the 2008 financial crisis, agriculture related commercial loans 
rates are experiencing an increasing trend.
    The witnesses before us today know the pulse of rural America, and 
work with farmers on the ground every day. They can speak to the face 
to face interactions they've had with farmers and how that has changed 
in the last several months with the ongoing low commodity prices and 
trade uncertainties.
    How much longer can our farmers continue under these conditions? 
What happens if there isn't a trade deal with China until after the 
election, as President Trump alluded to the other day?
    You all work with farmers to offer the best assistance to help 
continue their businesses and I am very much looking forward to this 
discussion today about how we all can best help rural America.

    The Chairman. And now I recognize the Ranking Member, 
Austin Scott, for his opening statement.

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

    Mr. Austin Scott of Georgia. Thank you, Chairman Scott, for 
calling today's hearing, and allowing the Subcommittee to 
continue its review of credit conditions in rural America. Last 
month we had the opportunity hear from the Farm Credit 
Administration, who reviewed the safety and soundness of the 
Farm Credit System. We heard that farm debt is forecasted to 
climb to near all-time highs, reminiscent of the 1980s farm 
financial crisis. We heard about the dire situation for 
farmers' incomes and cash flow. Despite this, we learned from 
the Farm Credit Administration that the System remains strong, 
and continues to be a source of credit to farmers and ranchers 
during these tough economic times.
    Due to the state of the rural economy, access to credit is 
even more essential to keep farmers and ranchers producing a 
safe, affordable, and abundant supply of food and fiber for 
America, and the rest of the world. It is in times like these 
that our farmers and ranchers are most in need of reliable 
sources of credit at competitive rates. Thankfully, we have a 
network of commercial and community banks and the Farm Credit 
System each playing a crucial role in providing that access. I 
might add that after Hurricane Michael, our ag lenders in 
Georgia worked hard to help keep our farmers afloat. I want to 
thank the financial regulators for providing flexibility to our 
lenders during the disaster, and those tough times.
    The Farm Services Agency operates as a lender of first 
opportunity, as well as a direct lender for producers in good 
standing, who may have trouble qualifying for credit elsewhere. 
FSA is not represented here today, however, it is important to 
highlight the USDA loan programs, which provide targeted 
funding for beginning and socially disadvantaged farmers and 
ranchers to assist in developing the next generation of 
producers. FSA direct and guaranteed loans enable farmers and 
ranchers to gain or continue financing, despite volatile 
commodity markets.
    Our farmers and ranchers in the United States borrow more 
money each year to produce a crop than most Americans will 
borrow in a lifetime. It is impossible to overstate their need 
for capital, and the investment and return that it brings to 
rural America. In addition to ensuring access to credit, the 
2018 Farm Bill improves the credit title by updating credit 
authorities to meet the capital needs of modern production 
agriculture, with an emphasis on beginning farmers and 
ranchers. The need for agricultural credit, given the status of 
the farm economy, is clear. Net farm income has fallen over $44 
billion in inflation-adjusted dollars from its peak in 2013 due 
to lagging prices and growing world supplies. The crop 
insurance safety net is in place to help farmers recover from 
many losses, but it is not designed to address the current 
issue of multiple years of low prices. Further, while MFP 
payments that farmers receive are much needed, given the unfair 
trade practices from other countries, farmers would rather be 
able to sell their crops simply for a fair price. With current 
economic conditions, I am encouraged that Speaker Pelosi is 
going to allow the consideration of the USMCA. I hope this 
comes next week. It is an important trade agreement that will 
bring more certainty, and open new markets to American farmers 
and ranchers.
    I want to take a second to thank Ambassador Lighthizer for 
working with those of us from the Southeast to address the 
unfair trade practices that we have seen impact the fruit and 
vegetable industries in Georgia, Florida, and some other states 
around the United States, and I am glad that we will hear from 
several of the financiers who work with producers every day. 
They can give us valuable insight of the credit conditions that 
exist today, and I thank each of you for being here, and look 
forward to hearing your testimony.
    The Chairman. The chair would request that other Members 
submit their opening statements for the record so the witnesses 
may begin their testimony, and to ensure that we have ample 
time for questions.
    And I would like to welcome our witnesses, and thank you 
for being here, but first I want to recognize Representative 
Roger Marshall from Kansas, who will introduce our first 
witness. Representative Marshall?
    Mr. Marshall. Thank you so much, Chairman Scott. Today I am 
very proud and honored to welcome a fellow Kansan, a close 
friend of mine, and the pride of Elkhart, Kansas, Shan Hanes, 
as a witness today. I remember the very first day I met Shan. 
It was an icy, cold, wintry Kansas day. I was still delivering 
babies. I had people in labor, and Shan asked if he could come 
up and see me, drove some 3 or 4 hours on icy roads. He should 
have been in trouble for driving in such bad conditions. And 
what impressed me with the conversation was Shan and I talked 
about the struggles of rural America, and where Shan lives down 
there, in the very southwest corner, several hours away from 
any major metropolitan area. And, of course, we all know the 
struggles of rural America are the same challenges that any 
community bank would have, and I look forward to his testimony.
    Shan has 25 years of experience as a banker in rural 
Kansas. He brings a deep knowledge and understanding of the 
unique challenges facing small rural communities and 
agricultural producers. Since 1993, Mr. Hanes has worked at 
First National Bank in Elkhart, a town of just 2,000 people 
located, as I said, in the very tip of southwest Kansas, just 
north of that Oklahoma panhandle area. The bank works closely 
with ag producers and small businesses in the region, 
facilitating both private, government guaranteed, and 
residential real estate loans, as well as crop insurance 
products. His experience in this role taught him firsthand 
about the need for strong consumer protections, especially in 
rural America, where options for financial service providers 
are limited.
    In addition to his many years of service at First National 
Bank in Elkhart, Mr. Hanes has been an active member of the 
Kansas Bankers' Association, serving on various Kansas Banker 
Association committees related to agricultural, rural 
development, and education. He is a strong voice for rural and 
under-served areas at the Federal level, often joining the 
American Bankers' Associations fly-ins to advocate for policies 
and regulations that impact financial institutions in his 
community, and similar communities across the state. Shan, I 
want to thank you again for being here today, and I look 
forward to your heartfelt testimony, and I yield back.
    The Chairman. Thank you very much, Representative Marshall. 
Our second witness is Mr. Steven J. Handke--I hope I got that 
correct, good--the Chief Administrative Officer of First Option 
Bank in Horton, Kansas, and he is testifying today on behalf of 
the Independent Community Bankers of America. Mr. Handke's 
family has been farming in Kansas for four generations. He 
holds a bachelor's degree in agriculture economics from Kansas 
State University, yes, give him a hand, and a master's degree 
in economics from Oklahoma State University.
    And our final witness is Mr. Marc Knisely--what a name--
President and CEO of AgCountry Farm Credit Services in Fargo, 
North Dakota, and he is testifying on behalf of the Farm Credit 
System. Mr. Knisely began his Farm Credit career in the spring 
of 1981 as a loan officer with the Production Credit 
Association in Michigan. He is a graduate of Michigan State 
University, where he obtained a bachelor's degree from the 
College of Agriculture and Natural Resources.
    We will now proceed to hearing the testimony. Each of you 
will have 5 minutes to present your testimony, and when 1 
minute is left, the light will turn yellow, signaling time to 
close is nearing. Mr. Hanes, please begin when you are ready.

         STATEMENT OF SHAN HANES, PRESIDENT AND CHIEF 
         EXECUTIVE OFFICER, HEARTLAND TRI-STATE BANK; 
         MEMBER, BOARD OF DIRECTORS, AMERICAN BANKERS 
                    ASSOCIATION, ELKHART, KS

    Mr. Hanes. Chairman Scott, Ranking Member Scott, and 
Members of the Subcommittee, I would first like to start out by 
saying your information was very well done, and very accurate, 
so that was very helpful. My name is Shan Hanes, President and 
CEO. We were First National Bank, we changed charters, we are 
now Heartland Tri-State Bank. Same bank, different name. We are 
a $125 million locally owned community bank in southwest 
Kansas. We have $51 million in ag loans, however, by 
comparison, that represents 78 percent of the bank's loan 
portfolio. I appreciate the opportunity to present the views of 
ABA, our customers, and ag bankers on ag credit conditions in 
rural America.
    Ag credit conditions depend heavily on weather. If you guys 
could control weather, let it rain when it needs to, dry up 
when it needs to, that would be helpful. However, since that is 
not the case, I would say that weather has amplified an already 
tenuous ag situation. Today I would like to outline the current 
credit situation as it relates to our customers, and 
opportunities in which Congress could offer solutions which 
would reduce stress on all borrowers and lenders.
    The ag economy has been slowing since 2012. According to 
the FINBIN database at the University of Minnesota, the median 
gross farm income in 2012 was $189,000. Now, bear in mind that 
is before taxes, living, debt, service, and such. However, by 
contrast, that same median farm income in 2018, using the same 
farm database, was $189,000 in 2012 was $28,600 in 2018. Over a 
6 year timespan, those farmers' net farm income declined an 
average of 85 percent. I dare say many of us could not survive 
if our paychecks were cut by 85 percent. This drop continues to 
cause considerable stress within the industry.
    While interest rates continue to be near record lows, of 
great concern is a comparison of total debt to earnings before 
interest, taxes, and capital, which is as high as it was in the 
1980s. However, in the 1980s interest rates were at all-time 
highs, thus, when rates began to fall, repayment became easier, 
and cash flows stronger. The opposite is the case now. This is 
important because ag borrowers have a limited number of tools 
in which to lower debt and cash flow requirements without 
negatively affecting their overall operation. However, this 
Committee has an opportunity to assist the entire ag industry, 
and provide another tool to ag borrowers.
    I would encourage Congress to hold hearings and approve 
H.R. 1872, Enhancing Credit Opportunities in Rural America Act, 
also known as ECORA. ECORA would lower the cost for borrowers 
to get an ag real estate loan. This will help them make it 
through the slow times in agriculture. I would like to 
personally thank Mr. Marshall and Congressman Van Drew for 
cosponsoring this bill. This bill will directly help all ag 
borrowers. It would allow banks to lower interest rates on ag 
real estate loans to borrowers, and help ease cash flow during 
these most stressful times.
    I would like to remind this Committee of the importance of 
banks and serving the financial needs of America's farmers. In 
2018 farm banks, as defined by ABA, as any bank with more than 
16 percent of their loans to farmers or ranchers, those loans 
increased by 5.3 percent, and now banks provide over $108 
billion in total farm loans, which makes banks the largest ag 
lender in the industry. Small farmers also rely on banks for 
funding, as farm banks hold $50 billion in small farm loans. 
Farm banks are healthy, and continue to be forward-looking, 
growing capital, and increasing reserves. This provides 
flexibility to serve our nation's farmers, and manage risks 
associated with any downturn in the ag sector.
    I would like to thank Congress, especially the Agriculture 
Committees, for increasing borrower limits on USDA FSA 
guaranteed loans in the last farm bill. Banks work closely with 
the USDA to make additional credit available by utilizing the 
guaranteed farm loan programs. Lenders would agree that the 
increased limits help, but farm operating needs continue to 
increase. While we are confident these low prices will 
eventually improve, the reality is lenders must work with 
borrowers through extended low prices.
    I would also like to thank Congress for the changes made in 
ARC and PLC in the last farm bill. Congress should support any 
programs that help producers become better business managers. 
Banks like mine are proud of the work we do to support our 
nation's farmers and ranchers. The ag community is a critical 
part of our economy, and America's banks remain committed to 
serve it through good times and bad. Thank you, and I would be 
happy to answer any questions you might have.
    [The prepared statement of Mr. Hanes follows:]

    Prepared Statement of Shan Hanes, President and Chief Executive 
Officer, Heartland Tri-State Bank; Member, Board of Directors, American 
                    Bankers Association, Elkhart, KS
    Chairman Scott, Ranking Member Scott, and Members of the 
Subcommittee, my name is Shan Hanes, and I am the President and CEO of 
Heartland Tri-State Bank in Elkhart, KS. Heartland Tri-State Bank is a 
family owned and locally controlled community bank with $125 million in 
assets and $51 million in agricultural lending. We have 28 employees 
and have four locations serving Kansas.
    I am also a past Chairman of the American Bankers Association's 
Agricultural and Rural Bankers Committee. I appreciate the opportunity 
to present the views of rural bankers on credit issues in rural America
    The American Bankers Association is the voice of the nation's $18 
trillion banking industry, which is composed of small, regional and 
large banks that together employ more than two million people, 
safeguard $14 trillion in deposits and extend over $10 trillion in 
loans. ABA is uniquely qualified to comment on agricultural credit 
issues as banks have provided credit to the agriculture industry since 
the founding of our country. Nearly 5,000 banks--83 percent of all 
banks nationwide--reported agricultural loans on their books at year-
end 2018 with a total outstanding portfolio of more than $186 billion.
    The topic of today's hearing is very timely. There have been many 
successes within the 2018 Farm Bill that have directly affected 
agricultural lenders. However, the agricultural landscaped has changed 
considerably since the passage of the last farm bill. Agricultural 
lenders have often been the first group to feel the effects of the 
changing agricultural landscape, and the role that public policy has 
played in shaping that landscape.
    The agricultural economy has been slowing, with farm sector 
profitability expected to decline further in 2019. However, farm and 
ranch incomes have been some of the best in history. ABA would like to 
thank the Committee for it's hard work and dedication to completing the 
2018 Farm Bill. With the 2018 Farm Bill in place, farmers, ranchers, 
and their bankers achieved a level of 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 sustain through the 
turbulence in the agricultural economy.
    Banks continue to be one of the first places that farmers and 
ranchers turn when looking for agricultural loans. Our agricultural 
credit portfolio is very diverse--we finance large and small farms, 
urban farmers, beginning farmers, women farmers and minority farmers. 
To bankers, agricultural lending is good business and we make credit 
available to all who can demonstrate they have a sound business plan 
and the ability to repay.
    In 2018, farm banks--banks with more than 16.07 percent of their 
loans made to farmers or ranchers--increased lending by 5.3 percent to 
meet the rising needs of farmers and ranchers, and now provide over 
$108 billion in total farm loans. Farm banks are an essential resource 
for small farmers, holding more than $50.1 billion in small farm loans, 
with $12.4 billion in micro-small farm loans (loans with origination 
values less than $100,000). Farm banks are healthy, 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, 
mine included.
    Banks work closely with the USDA's Farm Service Agency (FSA) 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 like mine as they grow, ensuring credit access for farmers across 
the country.
    Entities like Farmer Mac provide another avenue for banks to 
increase credit availability. By purchasing guaranteed loans from 
banks, Farmer Mac allows banks to lower interest rates for their 
customers and provide better loan products.
    We remain concerned with certain areas of the agricultural credit 
market. In particular, we are worried that the Farm Credit System--a 
government sponsored entity--has veered away from its intended mission 
and now represents 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. It has since grown into a 
$352 billion behemoth offering complex financial services. To put this 
in 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.
    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.
    In my testimony today I would like to elaborate on the following 
points:

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

  b In addition to protecting crop insurance, the 2018 Farm Bill 
        provided a much-needed change to Farm Service Agency (FSA) 
        guaranteed loan programs, changes to ARC and PLC, and a small 
        change to Farmer Mac;

  b There are some much needed changes needed in the agricultural 
        credit space. The most important are the passage of the 
        Enhancing Credit Opportunities in Rural America Act (ECORA), 
        increasing staffing within FSA loan programs, and monitoring 
        NEPA regulations within agricultural loans[; and]

  b The Farm Credit System continues to grow in size and scope, while 
        not having to adhere to the same regulatory frameworks as 
        banks[.]
I. Banks Are a Primary Source of Credit to Farmers and Ranchers in the 
        U.S.
    For my bank and for many of ABA's members, agricultural lending is 
a significant component of their business activities. 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. ABA defines a farm 
bank as one with more than 16.07 percent farm or ranch loans (to all 
loans).
    At the end of 2018, there were 1,772 banks that met this 
definition. Farm lending posted solid growth during 2018. Total farm 
loans at farm banks increased by 5.3 percent to $108 billion in 2018 up 
from $102.1 billion for these banks in 2017. Approximately $1 in every 
$3 lent by a farm bank is an agricultural loan.
Farm Banks Exhibit Solid Farm Loan Growth

[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 2.8 
percent, or $1.6 billion, to a total of $58 billion. Farm production 
loans rose by 0.24 percent, or $120 million, to $50 billion. Farm banks 
are a major source of credit to small farmers--holding more than $50.1 
billion in small farm loans (origination value less than $500,000) with 
$12.4 billion in micro-small farm loans (origination value less than 
$100,000) at the end of 2018. The number of outstanding small farm 
loans at farm banks totaled 771,641 with the vast majority--over 
497,574 loans--with origination values less than $100,000. Farm banks 
are healthy, 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 by 0.2 percent to $48.7 billion in 2018. Since 
the end of 2008, farm banks have added $22.2 billion in equity capital, 
building strong high-quality capital reserves. These capital reserves 
will enable flexibility amongst farm banks, as the agricultural sector 
adjusts to lower commodity prices--allowing bankers to work with and 
serve the needs of our nation's famers--and will also act as a buffer, 
proving insulation from the risks associated with any downturn in the 
agricultural sector.
Farm Banks Increase High-Quality Capital


[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 for 
several years was rapid appreciation in farmland values in some areas 
of the country. The run up in farmland values was not a credit-driven 
event. 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.
    After several years of large increases in farmland values, the 
consensus view among bankers, through ABA surveys, is that the increase 
in farmland values has slowed. ABA continues to watch the farm real 
estate market very closely. In recent years, over \4/5\ of the 
agriculture sector's asset values were held in real estate. Farm land 
values rose slightly in 2018 and the USDA ERS projects farm land values 
to rise again slightly in 2019. However, in the most recent ABA 
Agricultural Lenders Survey, a higher segment of respondents indicated 
expectation that farm land values will begin to decline in coming 
years.
II. The Agricultural Improvement Act of 2018 Had Many Successful 
        Components
    One success of the 2018 Farm Bill was the continued support of crop 
insurance programs. Agricultural lenders use crop insurance as a 
guarantee to help secure financing for operating credit. With crop 
insurance, a lender has the ability to provide support based on 
individual producers' proven crop yields. This allows lenders to tailor 
a loan to a producer's operation and allow for year-to-year adjustments 
within that operation. Without crop insurance acting as a safety net, 
producers would be in a much more challenging financial situation in 
the event of disaster. Crop insurance has allowed lenders to provide 
the best possible terms for operating loans because it helps to lower 
the risk for the lender. ABA has been a long-time supporter of crop 
insurance programs and would like to see the programs expanded to help 
as many producers as possible, including industrial hemp.
    I would like to thank Congress, especially the Agricultural 
Committees, for increasing borrower limits on USDA Farm Service Agency 
guaranteed loans in the 2018 Farm Bill. The prior borrower limits 
restricted farmer access to capital, and the limits did not reflect the 
growing cost of agriculture in the United States. 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 like my bank and are guaranteed by the USDA. There are 
nearly 43,000 loans outstanding--of course some farmers have more than 
one guaranteed loan, so this number is not to be confused with the 
number of individual farmers and ranchers, but the numbers of 
individuals accessing credit under this program is very significant.
    The loans made by banks like mine under this program are modest in 
size. The average outstanding guaranteed real estate loan is $517,000 
and the average outstanding guaranteed non-real estate secured loan is 
$289,000. Clearly, we 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 set-back. 
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 1.6 percent in FY19 to a low of 1.1 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. We urge you 
to continue to support this very worthwhile program.
    Another success of the 2018 Farm Bill are the changes to ARC and 
PLC programs. Being able to use Risk Management Agency data has given 
us a much better platform to work from when determining potential ARC 
and PLC payments for producers. Additionally, by changing the producer 
election on whether to be ARC or PLC, there is much more flexibility 
for producers to use the program that makes the most sense in their 
operation. Lastly, using the physical location of ARC-County payments 
will provide a more accurate read on production.
    Last, I would like to thank Congress for allowing changes to be 
considered within Farmer Mac. Farmer Mac is a valuable tool in the 
toolbox for agricultural bankers because it provides another avenue for 
banks to increase credit availability. By purchasing guaranteed loans 
from banks, Farmer Mac allows banks to lower interest rates for their 
customers and provide better loan products.
    ABA still believes the most needed change is the removal of the 
current 1,000 acre limitation. The 1,000 acre limitation was put in 
place in the 1987 Farm Credit Act and has become outdated with the 
increasing size and scope of modern agriculture. Other bankers and I 
have been working with the Farm Credit Administration on the best 
possible path forward for potential changes to Farmer Mac.
III. Changes Needed in Agricultural Credit
    Agricultural credit provided by the banking industry often has very 
different set of rules than the Farm Credit System, which serves the 
same customers as banks. The most striking difference is within 
taxation levels between the Farm Credit System and banks. When a farm 
real estate loan is made, the Farm Credit System will pay no tax on the 
income from that loan. Banks, however, will pay a 21 percent Federal 
tax and various state and local taxes across the country. This means a 
farm real estate loan will cost more for a producer from a bank than 
the Farm Credit System. I am encouraging all Members of Congress to 
support H.R. 1872, the Enhancing Credit Opportunities in Rural America 
Act (ECORA). ECORA would allow banks like mine to provide farm real 
estate loans at a lower interest rate. This is good for the farmer, 
plain and simple.
    Another example of differences between banks and the Farm Credit 
System is when interest only loans are made. Within the Farm Credit 
System, their regulator, the Farm Credit Administration, has ruled that 
Farm Credit System institutions can make interest only loans without 
any punishment. When a bank changes a loan to interest only, it is 
filed as a troubled asset. This is a serious black mark on a bank and 
too many troubled assets can force the regulators hand on punishing a 
bank.
    There needs to be serious consideration for increasing staff levels 
at FSA. As veteran staff retires, there isn't enough new staff being 
trained to take over their loan portfolios. This is creating a 
knowledge gap within FSA loan programs and is making it much harder to 
turn around loans in a timely fashion. When it comes to financing 
agriculture, especially operating loans, loans need to be made as 
quickly as possible so farmers can get back into the field. As the 
Agriculture Committee is aware, windows for planting or harvesting can 
close very quickly and our loan programs need to keep pace.
    Last, the Agriculture Committee should examine the National 
Environmental Policy Act (NEPA) regulations that have been put in place 
for Confined Animal Feeding Operations (CAFO) for FSA loan programs. I 
fully understand why the regulations have been put in place, but there 
needs to be serious examination on potential changes to the 
regulations. Additionally, I have found that the regulations can vary 
from state to state and county to county, making it very difficult to 
properly put together the loan. The Agriculture Committee should 
consider offering changes to the NEPA regulations on CAFOs so lenders 
can better serve this constituency into the future.
IV. The Farm Credit System Is a Large Government Entity That No Longer 
        Serves Its Primary Mission
    I mentioned earlier in my testimony that the market for 
agricultural credit is very competitive. I compete with several other 
banks in my service area, finance companies from all of the major farm 
equipment manufacturers, several international banks, credit unions, 
life insurance companies and finance companies owned by seed and other 
supply companies, to name a few. The most troublesome competitor I 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.
    Today the FCS is a large and complex financial services business 
with $352 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 2018 of only 2.3 percent 
(a significant decrease from the effective tax rate of 4.5 percent just 
5 years prior). Additionally, FCS had a net income of $5.332 billion in 
2018.
    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 farm lender 
providing credit to customers who would be able to easily borrow from 
taxpaying institutions like mine. In fact, the heavily subsidized 
credit that FCS lends 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 percent of total new loan volume in 2003 \1\ to just 14.4 percent in 
2018. 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.
---------------------------------------------------------------------------
    \1\ ``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.
---------------------------------------------------------------------------
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. However, the banking industry remains cautious 
as it looks forward to the next few years. There is a very real concern 
that declining commodity prices will negatively affect the farm economy 
and make credit situations tighter. This is why the banking industry 
will continue to offer assistance to Congress as we work through these 
economic times. With the changes that have been outlined earlier, the 
banking industry will continue to help producers be strong into the 
future. Bankers still see great opportunities in agriculture, and they 
will stand with their partners in agriculture going forward.
    Thank you for the opportunity to express the views of the American 
Bankers Association. I would be happy to answer any questions that you 
may have.

    The Chairman. Thank you very much. And now, Mr. Handke, you 
are next.

  STATEMENT OF STEVEN J. HANDKE, REGIONAL PRESIDENT AND CHIEF 
     ADMINISTRATIVE OFFICER, FIRST OPTION BANK; CHAIRMAN, 
                   AGRICULTURE-RURAL AMERICA 
COMMITTEE, INDEPENDENT COMMUNITY BANKERS OF AMERICA, HORTON, KS

    Mr. Handke. Chairman Scott, Ranking Member Scott, and 
Committee Members, thank you for the opportunity to appear 
before you today. I am Steven Handke, Regional President and 
Chief Administrative Officer for First Option Bank in 
Osawatomie, Kansas. We are a nearly 100 year old institution, 
and we have nine locations across the eastern counties of 
Kansas and northwest Missouri.
    Community bank credit is critical to the ag economy. Banks 
provide 42 percent of all ag credit, more than any other type 
of lender, and the 1,315 farm banks across Kansas, which is 
really only \1/4\ of the FDIC insured institutions, hold 70 
percent of ag credit of the $184 billion in ag loans. Community 
banks like mine are four times more likely to operate in rural 
counties than other lenders, and in 600 counties across the 
United States, nearly 20 percent are the only lender in those 
counties.
    We recently surveyed nearly two dozen ag bankers who serve 
on the Agriculture-Rural Community Committee for ICBA, and we 
asked them four important questions. The first question is, 
have you seen deterioration in the portfolios, and if so, to 
what degree? Second, have the Market Facilitation Payments 
helped, and how long should they continue? And third, will you 
rely more on USDA guaranteed loans? And finally, the fourth 
question, beyond the ag trade agreements, beyond the farm bill, 
beyond crop insurance, what can Congress do? The results of the 
survey, and my personal observations, will be the basis of my 
testimony today.
    First, ag portfolios do remain stable, but are 
deteriorating. Net farm income should improve ten percent this 
year, and should climb up to $92.5 billion, but \1/4\ of that, 
$22.4 billion, is coming from government payments. Credit is 
plentiful, competition is intense, interest rates near 
historically low levels, are all benefitting our farm 
customers. Banks are restructuring loans with real estate, but 
bad weather has reduced real estate values locally in some 
markets, and that makes it difficult to restructure and inject 
working capital. Banks are starting the loan renewal process 
this spring, and the outlook will be better known as we work 
through all these renewals in the spring.
    Second, on the Market Facilitation Payments, yes, they are 
helpful. Often it is the difference between losing money versus 
a slight profit, difference between making all their payments 
and not. There should be a predictability in the planning 
process so that we can incorporate those payments into farmers' 
cash flows for regulatory purposes next year, and they should 
continue until prices become stable and rebound. My written 
statement also highlights a recent article of how community 
banks have kept one Wisconsin dairy family back on the farm.
    Third, the USDA guaranteed loan programs have been critical 
to the farm economy. One banker on our committee stated, 
without the USDA guarantees, we would've had to liquidate 25 
percent of our ag real estate portfolio. However, demonstrating 
positive cash flow is difficult in today's prices. 
Unfortunately, this has limited access to some of our farmers 
to the USDA programs, even when they have equity in their real 
estate. The new loan limit of $1.75 million is helpful, but 
with the farm debt increasing to $416 billion, and the average 
cost of a farm crop acre at $4,000, we would encourage that 
that limit be increased modestly.
    Community bankers still say the greatest threat to the farm 
is the Farm Credit System. This government-sponsored enterprise 
enjoys significant tax and funding advantages over community 
banks. FCS cherry picks their best loans, increasing risk 
profiles for the bank's remaining loan portfolio. In a ten-
state survey conducted by Creighton University, it still lists 
Farm Credit Service's competition as banks' biggest challenge 
of the next 5 years, greater than negative or slow growth, 
greater than farm loan delinquencies.
    FCS continues to introduce products and services that 
exceed their statutory authority. For example, FCS now offers a 
so-called Work Smart line of credit, a checking account with 
remote deposit features that allows customers to ``avoid taking 
checks to the local bank''. FCS was not supposed to be offering 
checking account products, or take deposits. Doing so threatens 
the existence and the charter value of community banks in rural 
America. My written testimony also lists some of the other 
issues that we have with the Farm Credit Services. We strongly 
urge your vote for the Enhancing Credit Opportunities of Rural 
America, the ECORA Act, which creates a tax exemption for 
interest on bank loans secured by real estate and home 
mortgages in rural America. This will lower the cost of 
interest for farmers.
    In conclusion, community banks work with their producers, 
both in good times and bad, and let's work creatively to 
enhance solutions that assist our nation's rural communities. 
Thank you, and I look forward for your questions.
    [The prepared statement of Mr. Handke follows:]

 Prepared Statement of Steven J. Handke, Regional President and Chief 
Administrative Officer, First Option Bank; Chairman, Agriculture-Rural 
America Committee, Independent Community Bankers of America, Horton, KS
Introduction
    My name is Steve Handke. I serve as the Regional President and 
Chief Administrative Officer of the First Option Bank. I am testifying 
today on behalf of the Independent Community Bankers of America (ICBA) 
where I serve as the Chairman of ICBA's Agriculture-Rural America 
Committee.
    On behalf of the more than 52,000 community bank locations across 
the nation represented by ICBA, we thank you Chairman Scott and Ranking 
Member Scott and the Members of this Subcommittee for convening today's 
hearing: ``Review of Credit Conditions: Report from Agricultural 
Lenders.''
    The nation's community bankers have been closely monitoring the 
ongoing challenges facing our agriculture sector. The availability of 
credit to rural America is vital for our nation's farmers and ranchers 
and the thousands of community banks that serve rural America.
First Option Bank
    First Option Bank was chartered nearly 100 years ago in Osawatomie 
Kansas and today has nine locations offering a variety of financial 
products to the communities we serve. We offer livestock and crop 
loans, operating lines of credit, and equipment and agricultural real 
estate loans. We are a $425 million asset bank in eastern Kansas and 
northwestern Missouri.
    Since the moment we opened our doors in 1923, First Option Bank's 
top priority has been to serve our customers by providing them with the 
best banking services while serving as a steward of the community. We 
believe it's our job to help our customers thrive financially and to 
make the communities we serve a better place to call home. There have 
been many changes in the banking industry during our decades of 
existence. But even with all the changes, First Option Bank has thrived 
with the dedication of the owners and staff and the support of our 
customers. Community involvement, superior customer service, honesty 
and integrity are long-standing traditions of First Option Bank. Those 
traditions will continue as we look forward to serving our communities 
both during these difficult times in agriculture and into the future.
    Mr. Chairman, on a personal level, agriculture and the availability 
of credit is very important to me. I was born and raised on a farm in 
northeast Kansas near Atchison. Our family farm raised crops and 
livestock, specifically a small cattle feedlot. I worked on the farm 
while attending college at Kansas State University and the farm remains 
in our family today.
Community Banks' Presence in Rural America
    You may be surprised to know the banking industry, fueled by 
community banks, is the largest ag lender supplying about 42 percent of 
all ag credit. The Farm Credit System (FCS, System) supplies slightly 
over 41 percent as of year-end 2018. The FCS is the largest ag real 
estate lender due to their tax exemption on income from real estate 
loans allowing FCS to choose predominantly the very best loans while 
ignoring lower quality credits. Banks are the largest non-real estate 
lender (production loans).
    To emphasize the important role community banks play in serving 
agriculture, as of the first quarter 2019, there were 1,315 farm banks 
representing nearly \1/4\ of all FDIC-insured institutions. Agriculture 
loans held by FDIC-insured institutions totaled $184 billion. Community 
banks hold nearly 70 percent ($127 billion) \1\ of total agriculture 
loans from the banking sector. When including all community banks of 
less than $10 billion in asset size, these banks hold approximately 80 
percent of all ag loans from the banking sector.
---------------------------------------------------------------------------
    \1\ FDIC 2019 Annual Risk Review--Section III--Key Bank Risk 
Issues: Agriculture; page 17.
---------------------------------------------------------------------------
    There are thousands of community banks in rural areas. Community 
banks are four times more likely to operate offices in rural 
counties.\2\ Community banks remain the only banking presence in more 
than 600 counties (nearly 20 percent of all U.S. counties) and they 
hold the majority of banking deposits in rural counties and small 
cities.\3\
---------------------------------------------------------------------------
    \2\ FDIC Community Bank Study, December 2012, page 4.
    \3\ Federal Reserve Bank of St. Louis Review, May/June 2013, page 
201.
---------------------------------------------------------------------------
    The bottom line is community banks are vital to the health of 
hundreds of thousands of farmers and ranchers as well as millions of 
other customers in rural America. It is vital to ensure these banks 
survive to ensure our rural communities survive. Congressional actions 
can play an important role in determining the fate of community banks 
in rural areas.
Focus of Testimony
    We recently asked our Agriculture-Rural America Committee, 
comprised of two-dozen bankers from across the nation, four general 
questions:

  (1)  Have you seen deterioration in your ag loan portfolio over the 
            past year? Is this causing you to deny financing and if so, 
            to what degree?

  (2)  Have Market Facilitation Payments (MFP) kept your farmers in 
            business and how long should these payments continue?

  (3)  Will you rely more on USDA guaranteed loans to keep producers in 
            business?

  (4)  In addition to agricultural trade agreements and maintaining a 
            robust farm bill, are there other actions Congress can take 
            to keep farmers afloat? What is your greatest worry?

    The results of this survey inform the content of this statement.
Ongoing Concern Regarding the Farm Economy
    With the farm economy now in its sixth year of low commodity prices 
and reduced farm incomes from the 2013 peak and with ag exports under 
pressure from the China trade dispute, it is extremely important to 
have the 2018 Farm Bill's safety net in place including commodity price 
protections and crop insurance.
    USDA's November forecasts \4\ of net farm income suggests net farm 
income will increase $8.5 billion (slightly over ten percent) to $92.5 
billion in 2019, after increasing in both 2017 and 2018. In inflation-
adjusted 2019 dollars, net farm income is forecast to increase $7.0 
billion (8.2 percent) from 2018. If realized, in inflation-adjusted 
terms, net farm income in 2019 would be 32.3 percent below its peak of 
$136.6 billion in 2013.
---------------------------------------------------------------------------
    \4\ https://www.ers.usda.gov/topics/farm-economy/farm-sector-
income-finances/farm-sector-income-forecast/.
---------------------------------------------------------------------------
Net Farm Income and Net Cash Farm Income, 2000-19F

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          F = forecast. Values are adjusted for inflation using the 
        chain-type GDP deflator, 2019 = 100.
          Source: USDA Economic Research Service, Farm Income and 
        Wealth Statistics.
          Data as of November 27, 2019.

    The 2019 net farm income level is slightly above its 2000-18 
average of $90 billion. A significant portion--$22.4 billion--of farm 
income in 2019 is being driven by government payments which may be 
unsustainable.
    Regarding whether ag lending portfolios are deteriorating, many 
community banks are concerned about the negative impact of low 
commodity prices. Most bankers have found ag portfolios remaining 
stable but with some deterioration. Credit is plentiful, competition 
for loans intense, and interest rates remain near historically low 
levels, benefitting farmers.
    We may be witnessing the beginning of an uptick in the number of 
farm loans being considered sub-standard. Banks have been able to lend 
using real estate as collateral. But the impact of catastrophic weather 
conditions in several states may reduce real estate values locally 
making it more difficult to restructure debt or inject working capital 
into the operation. According to the FDIC, the number of ag banks 
considered unprofitable has reached 3.5 percent as of Sept. 30, up from 
2.19 percent during the same period a year ago.
    Many producers who have been hit hard by the flooding in the 
Midwest and weather calamities in other regions have found it difficult 
or impossible to plant all of their crop acreage or fully breed for 
cow/calf herds. As a North Dakota banker commented, ``We currently have 
the majority of our corn crop still in the field. Wet conditions, poor 
grain quality and excessive drying costs have many contemplating 
leaving the crop in the field until spring conditions dry the crop 
further. We anticipate a sharp reduction in net farm income for 2019 
with uncertain abilities to underwrite some 2020 farm operations.'' 
Many banks are just starting their loan renewals so the true outlook 
for ag loans will be better known in coming months.
    The MFP payments have been very helpful to many producers and their 
local communities, but not all producers. Farmers who are small grain 
producers, for example, receive less than producers of other crops and 
producers of some commodities will not qualify although they believe 
their markets have been impacted. For farmers who do qualify, bankers 
have stated these payments should be more predictable for planning 
purposes so they can be included into cash-flow projections.
    Many bankers suggest these payments should continue until prices 
impacted by reduced trade with China rebound as there could be a lag 
between any agreement with China and the time it takes for certain 
commodity markets to respond. Bankers suggest that MFPs for many 
customers have been the difference between losing money versus making a 
slight profit and paying bills.
    Reducing debt loads, delaying new purchases, controlling production 
costs, utilizing wise marketing strategies and ensuring overall sound 
management practices are keys to producers' long-term success.
    Make no mistake, community banks are making every effort to keep 
their farm and ranch customers in business. An article from the 
Milwaukee Journal Sentinel,\5\ for example, depicts how a Wisconsin 
community banker worked with a dairy farm to keep it operating so the 
family could pass the farm on to the next generation. The family had 
invested more than 3 decades of hard work into the operation. The bank 
helped them restructure the farm instead of selling out. The banker's 
actions ensured the dairy farm would be transferred from one generation 
to the next instead of witnessing the loss of another Wisconsin dairy.
---------------------------------------------------------------------------
    \5\ Milwaukee Journal Sentinel, Nov. 15, 2019, Glauber, https://
pulitzercenter.org/reporting/wisconsin-leads-nation-dairy-farm-
closures-meet-banker-who-tries-help-her-fellow-farmers.
---------------------------------------------------------------------------
USDA Guaranteed Farm Lending Programs
    Generally stable farmland prices in many states have allowed 
producers to restructure their loans and shore up working capital. 
USDA's guaranteed farm loan programs have also assisted in allowing 
community banks to continue working with family farmers and ranchers. 
However, in some cases borrowers will need to liquidate a portion of 
their assets to continue farming and we could witness an increase in 
farmland sales due to financial stress.
    Bankers emphasize the difficulty in restructuring debt with an FSA 
economic emergency loans or guarantees will be in proving a positive 
cash flow at today's commodity prices. Even if farmland collateral is 
available, cash flow will often be negative. Bankers have commented 
there needs to be some flexibility in cash flow determination.
    We expect community banks will increase their use of USDA 
guaranteed loans. The farm bill's increased loan limits to $1.75 
million will be helpful but given the rise in farm debt to $416 billion 
(up \1/3\ in the last 7 years) and the average cost of cropland at 
$4,000 per acre, we believe this limit may need to be increased 
modestly. Additionally, new producers also need guaranteed loans as 
they begin their farming operations or grow in size.
    As one banker noted, ``without USDA guarantees we would have been 
in liquidation with 25 percent of our ag portfolio!'' In some 
geographical areas that suffered flooding, payment deferrals will be 
necessary due to the lack of planted acres and poor yields. The loan 
guarantees allow bankers and their customer additional time to work 
through these temporary setbacks.
    Some producers seek to avoid using USDA guarantees due to paperwork 
burdens and slow approval times. In some counties, bankers report that 
USDA is very ``picky'' about which loan applications get approved and 
won't approve loans of struggling farmers. One banker stated, ``a young 
farmer with no net worth and little cash flow can obtain a guarantee 
with ease, but an established farmer going through a tough cash flow 
situation will be denied.''
    Bankers are concerned about the decline in USDA field office staff 
which could grow much worse in the next few years as many USDA field 
office employees become eligible for retirement. Could some of these 
retirees be rehired temporarily to deal with seasonal peak workloads? 
Funding for USDA staffing needs to be adequate to ensure enough 
employees are available to administer programs.
FCS Expansion Threatens Rural Communities
    For a healthy rural America, we must have a competitive environment 
based on a level playing field among lenders, one which allows 
community banks to remain viable. It is particularly important to 
ensure that community banks are not disadvantaged vis a vis the 
competitive landscape with institutions such as the FCS. The FCS is a 
huge financial conglomerate with over $276 billion in total loans and 
$354 billion in total assets.
    As a government sponsored enterprise (GSE), the System enjoys 
significant tax and cost of funds advantages over private-sector, tax-
paying community banks. Although commercial banks hold slightly more of 
the overall agricultural credit (42 percent versus 41 percent) compared 
to the FCS, the FCS has a significantly higher percent of the farm real 
estate loan volume. The latter reality is due to the FCS's tax 
exemptions on income from real estate/mortgage loans which allow FCS 
lenders a huge advantage when competing to lend money to the same 
borrowers for the same financial purposes.
    The FCS often utilizes these advantages to cherry pick the best 
customers from community banks' loan portfolios. This weakens community 
banks' ongoing viability. A recent survey \6\ of bankers in a ten-state 
region conducted by Creighton University's Heider College of Business 
lists the threat of FCS competition as banks most significant challenge 
over the next 5 years. The threat of FCS competition was a larger 
challenge than `negative or slow growth' or `farm loan delinquencies.'
---------------------------------------------------------------------------
    \6\ October Rural Mainstreet Index Climbs Again: Trade War and 
Stalled USMCA Batters Economic Confidence; https://www.creighton.edu/
economicoutlook/mainstreeteconomy/; Chart from Farm Journal's AgWeb: 
https://www.agweb.com/article/rural-bankers-economic-confidence-dips-
two-year-low.
---------------------------------------------------------------------------
The Biggest Economic Challenges

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Due to FCS's significant competitive advantages as a unique 
governmentally privileged retail GSE, ICBA opposes expansion of the FCS 
into non-farm lending, realizing such expansion comes at the expense of 
community banks and the viability of our rural communities. Members 
have introduced legislation to allow banks some, but not all, of the 
tax benefits the FCS and credit unions enjoy.
    The ``Enhancing Credit Opportunities in Rural America (ECORA)'' Act 
(S. 1641 and H.R. 1872) exempts from taxation interest income on farm 
real estate loans and also rural home mortgages in towns of less than 
2,500 residents. We urge you to cosponsor this legislation which would 
allow community banks to continue working with their farm and ranch 
customers in these perilous times.
A Few Key Issues Pertaining to the FCS
    FCS lenders apparently wish to become the equivalent of commercial 
banks but with a much-reduced regulatory burden.
    Checking Account Product Offering. A recent example is the offering 
of a checking account product by Farm Credit Services of America, which 
promotes a ``WorkSmart Line of Credit'' or LOC. Their website \7\ 
features videos stating the LOC offers a checking account product with 
a remote deposit feature allowing customers to ``avoid taking a check 
to the local bank'' and then transferring funds into the LOC. The 
financial product also provides a Mastercard feature with a one percent 
``cash-back'' benefit drawn from the LOC and a patronage-related 
dividend of 0.90 percent of a customer's eligible daily loan balance. 
FCS institutions are not supposed to offer checking accounts or take 
deposits. The FCS's venture into the world of banking products 
threatens the future existence of many community banks.
---------------------------------------------------------------------------
    \7\ https://www.fcsamerica.com/products-services/ag-loans-leases/
worksmart-line-of-credit.
---------------------------------------------------------------------------
    This Committee is concerned with the question of how to keep 
farmers in business and ensure credit access to rural Americans. If FCS 
lenders become the equivalent of commercial banks then our rural 
communities will see a further decline in the number of community banks 
and many rural Americans could lose access to banking services. All 
because the FCA is being given too much latitude in allowing the 
unbridled expansion of the FCS. Ultimately, this is not good for 
farmers and ranchers or for rural America.
    Young-Beginning-Small (YBS) Farmers. The FCA recently published a 
Notice of Proposed Rule Making regarding the FCS's YBS programs. The 
FCA asked numerous questions regarding how to best design the metrics 
for determining YBS access to FCS lending. ICBA pointed out the FCA's 
current methodology allows numerous ways to inflate the YBS lending 
statistics.
    ICBA recommends that the methodology be revised to clarify the 
actual number of individual YBS borrowers, regardless of how many 
categories each borrower may qualify in. Under the current methodology, 
if two FCS lenders share a YBS loan, the same borrower can be counted 
three times by each lender. Thus, one YBS borrower can be counted at 
least six times in the FCA's YBS numbers if the loan is shared between 
two FCS institutions.
    This type of distortion for YBS lending activity doesn't give 
Congress a meaningful yardstick to measure FCS's YBS lending. As FCS 
institutions consolidate and merge, how great will the decline be if 
YBS numbers are reported accurately without multi-counting? We suspect 
the decline, if recorded accurately, could be considerable.
    Buying, Selling or Holding USDA Guaranteed Loans from Non-FCS 
Lenders. FCA recently published a proposed rule to allow FCS lenders to 
buy, sell and hold the guaranteed portion of USDA loans.
    ICBA opposes this proposal and believes it needs to be withdrawn or 
limited. We believe it allows FCS to duplicate the secondary market 
activities of Farmer Mac, the actual secondary market created by 
Congress to increase liquidity in rural America. We do not believe 
Congress intended for FCS to create a duplicate secondary market that 
could undermine Farmer Mac's ability to serve this sector of the 
market.
    We question whether the statute actually allows FCS to engage in 
such transactions with non-FCS lenders as the statute doesn't reference 
non-FCS lenders. We have asked FCA to withdraw the proposal or allow 
such transactions only between FCS lenders and ensure such transactions 
occur only with USDA and Farmer Mac. Limiting these transactions to FCS 
lenders selling to or buying from Farmer Mac will actually enhance the 
secondary market as it would increase business volume conducted by 
Farmer Mac rather than undermine Farmer Mac's business by duplicating 
their mission.
    FCS Proposal for Blanket Self-Approval of Investments. The FCS 
seeks to skirt the case-by-case oversight of the FCA for approving 
``investments.'' Although Congressional Agriculture Committees wisely 
rejected such proposals during the 2018 Farm Bill debate, the FCS has 
appealed to the Appropriations Committees seeking report language 
urging such laxity.
    ICBA opposes removal of the FCA's up-front case-by-case approval 
and oversight of risky FCS investment activities. Further, we oppose 
the investment scheme generally as it allows lending for non-
agricultural purposes if labeled as ``investments.'' We believe FCS 
investments need to be limited to the lending constraints of the Farm 
Credit Act (Act).
Conclusion
    A strong farm bill and well-funded crop insurance program are 
essential to help farmers survive. Bankers are concerned the growing 
world supply of grain stocks will keep downward pressure on grain 
prices. It is important for Congress to pass the USMCA trade agreement.
    Congress should help ensure the efficient functioning of USDA 
guaranteed farm loan programs and consider increasing loan limits above 
the $1.75 million level. Bankers are concerned that banking examiners 
will be too strict when examining farm loans.
    Thankfully, community banks are not fair-weather lenders but seek 
to work with their producers in both good times and bad. Community 
banks have worked with their farm and ranch customers in past economic 
downturns and have excellent skills at risk mitigation as they work to 
keep producers in business.
    Mr. Chairman and Members of the Subcommittee, thank you once again 
for conducting this hearing. Let's work together creatively to enhance 
solutions to assist our nation's farmers and ranchers and the community 
banks that serve them.

    The Chairman. Thank you very much, Mr. Hanes, we appreciate 
your comments. Mr. Handke, please proceed. I am sorry, my 
mistake. Mr. Knisely.

 STATEMENT OF MARCUS L. KNISELY, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, AgCountry FARM CREDIT SERVICES, FARGO, ND; ON BEHALF 
                     OF FARM CREDIT SYSTEM

    Mr. Knisely. Mr. Chairman, Ranking Member Scott, and other 
distinguished Members of the Subcommittee, thank you for 
calling this hearing today to discuss credit conditions for 
U.S. agricultural producers, and for allowing me to testify on 
behalf of the Farm Credit System, and, most importantly, 
advocate for our members. My name is Marc Knisely. I am 
President and CEO of AgCountry Farm Credit Services based in 
Fargo, North Dakota. AgCountry Farm Credit Services is a 
financial services cooperative providing financing, crop 
insurance, related services to more than 18,000 ranchers, 
farmers, agribusinesses, and rural homeowners across 
northeastern North Dakota, western Minnesota, and central 
Wisconsin. We currently provide $7.6 billion in loans through 
our 37 branch office locations, and have nearly 600 employees 
across the three states.
    The impact of trade disputes, disastrous weather, and low 
commodity prices are being felt by farmers everywhere. Many 
producers are struggling to even make a small profit, and many 
others are unprofitable at current commodity price levels. Net 
farm income, although projected to be up in 2019, remained far 
too dependent on direct government payments, and with the 
amount of crop we still have in the field up in the Northern 
Plains, that projection is far from a done deal at this point. 
We greatly appreciate the Committee's efforts to pass a strong 
farm bill, including improvements to the Federal Crop Insurance 
Program. Crop insurance is underpinning the farm economy today. 
That is especially true this year, as farmers had difficult 
times planting, faced very challenging growing conditions, and 
have unprecedented harvest issues this fall.
    Similarly, we would like to thank you for your help in 
enacting disaster assistance earlier this year. Disaster 
payments are helping many farmers in areas hit by hurricanes, 
fires, flooding, snow, and other natural disasters. Farm 
balance sheets that were strong in 2013 are far weaker today. 
Most worrisome, after 6 difficult years, working capital has 
declined sharply. Working capital is the cushion against tough 
times for producers. For many farm producers today, that 
cushion no longer exists, and increasing debt and decreasing 
cash flow is not a sustainable model in rural America for 
farmers.
    Producers across the board have seen their share of 
challenges, but perhaps none more than dairy producers. Since 
the beginning of 2017 Wisconsin has lost nearly 1,700 dairy 
operations. In Minnesota, one in ten dairies went out of 
business in 2018 alone. As we speak, AgCountry is working with 
a third-generation family dairy in Minnesota. We are doing 
everything within our power to help out, but if markets 
continue to struggle, two families on this farm will lose their 
livelihood, an older generation will see their retirement nest 
egg disappear, and 20 part-time employees will have to look for 
employment elsewhere. This is the reality facing farmers today.
    Farmers are becoming more financially stressed, and Farm 
Credit loan portfolios are beginning to show it. Fortunately, 
three important factors are combining to give farmers and 
ranchers a chance to survive this downturn, low interest rates, 
stable land values, and a non-farm economy that continues to 
provide job opportunities outside the farm gate. Farmers are 
proving to be highly skilled at cutting costs and taking 
advantage of narrow marketing windows to keep their operations 
going. Extending the life of their equipment, managing input 
costs, cutting family living expenses, are all helping farmers 
continue, despite low commodity prices. This expert management 
by farmers only goes so far, however, and soon many farmers 
will need to see better price levels to survive.
    Farm Credit is leaning in to support farmers and ranchers. 
Since the beginning of the downturn in 2014, Farm Credit has 
increased its real estate and farm production lending by more 
than $36 billion. We are working with our farm and ranch 
operations and customers to provide the time and space they 
need to stabilize their operation and adapt to the reality of 
an extended downturn in the commodity prices. Our loan officers 
proactively reach out to customers on their farms to work 
through options that provide the best possible outcomes.
    The continuing low commodity price environment is impacting 
young beginning and small farmers as well. Young and beginning 
operators especially are likely to have much lower equity 
levels, and be more vulnerable to market volatility, and the 
swings and cycles in agriculture. Like the producers we serve, 
Farm Credit builds financial strength in anticipation of 
challenging economic cycles by being proactive. We have been 
fulfilling our mission for more than 100 years, and have deep 
experience in the economic cycles of agriculture. The bottom 
line is that farmers and ranchers across our three states, and 
the country, are struggling, regardless of the commodity, 
experience level, or size of the farm operation.
    Again, thank you for calling this important hearing. I look 
forward to your questions.
    [The prepared statement of Mr. Knisely follows:]

Prepared Statement of Marcus L. Knisely, President and Chief Executive 
 Officer, AgCountry Farm Credit Services, Fargo, ND; on Behalf of Farm 
                             Credit System
    Mr. Chairman, Ranking Member Scott, and other distinguished Members 
of the Subcommittee, thank you for calling this hearing today to 
discuss credit conditions for U.S. agricultural producers and for 
allowing me to testify on behalf of the Farm Credit System. My name is 
Marc Knisely. I am the President and Chief Executive Officer of 
AgCountry Farm Credit Services, based in Fargo, North Dakota.
    AgCountry Farm Credit Services is a financial cooperative providing 
financing, crop insurance and related services to more than 18,000 
farmers, ranchers, agribusinesses, and rural homeowners in eastern 
North Dakota, western Minnesota, and central Wisconsin. We provide $7.6 
billion in loans through our 37 locations throughout our territory and 
have nearly 600 employees. So far this year, AgCountry made 6,700 loans 
to farmers and ranchers for over $2.1 billion.
    Most importantly, we are a member-owned, locally-governed 
cooperative and a proud member of the Farm Credit System. Along with 71 
other Farm Credit institutions, AgCountry shares a critical mission to 
support rural communities and agriculture with reliable, constructive 
credit and financial services, today and tomorrow.
    Farm Credit is a nationwide network of borrower-owned lending 
institutions that share a critical mission assigned to them by Congress 
a century ago. These independent institutions include four wholesale 
banks and 68 retail lending associations, all of which are 
cooperatively owned by their customers: farmers, ranchers, 
cooperatives, agribusinesses, rural utilities and others in rural 
America.
    Our mission is to ensure that rural communities and agriculture 
have a reliable, constructive source of financing irrespective of 
cycles in the economy or vagaries of the financial markets. Hundreds of 
thousands of farmers around the country developed a farm operating plan 
this year knowing that Farm Credit has the financial strength to 
finance that plan and the strong desire and ability to help them 
succeed.
    Farm Credit's unique cooperative structure means that the customer-
owners who sit on our boards of directors are living, working, and 
raising their families in rural communities. They are deeply invested 
in the success of those communities and are interested in finding more 
ways for Farm Credit to contribute to that success.
    Farm Credit reverses the normal flow of capital, raising money in 
urban financial centers and bringing it to rural communities.
    There is no Federal funding provided to Farm Credit. Instead, the 
four Farm Credit System banks own the Federal Farm Credit Banks Funding 
Corporation, which markets debt securities to the investing public that 
fund the lending operations of all Farm Credit institutions. 
Diversification of lending portfolios is a source of Farm Credit's 
financial strength. Through diversification of our lending--by 
geography, industry and loan size--Farm Credit manages risk and 
insulates itself against the cyclical nature of the industries we 
serve.
    We believe we can play a more significant role in rural 
development, revitalizing rural infrastructure, strengthening the rural 
economy and creating good jobs for rural families. We are prepared to 
continue working with the Committee and our partners in the community 
banking sector to find ways that all of us can contribute more to the 
vitality and success of our rural communities.
Credit Conditions Update
    Today's Subcommittee hearing is timely. Farmers across the country 
continue to feel the impact of trade disputes, disastrous weather, and 
low commodity prices. Many producers are struggling to make even a 
small profit and many others are unprofitable at current price levels. 
Net farm income, although projected to be up this year from 2018, 
remains far too dependent on direct government payments, which might 
not continue. I will also note that due to harvest delays, there is a 
lot of crop still remaining in the fields making this projection far 
from a done deal.
Farmer's Net Cash Income, 2007-2019



          ** Forecast Dec. 2019.
          Source: USDA.

    We greatly appreciate this Committee's efforts to pass a strong 
farm bill, including improvements to the Federal Crop Insurance 
Program. Crop insurance clearly is underpinning the farm economy today.
    The program is functioning as intended. Farmers pay for coverage 
they can count on when weather decreases production and cushions the 
impact of falling commodity prices--to a degree. Thank you for your 
work to provide this vital tool to U.S. farmers and ranchers.
    Last spring we had thousands of acres in Minnesota, North Dakota 
and Wisconsin that could not be planted due to excess moisture from 
persistent spring rains. The prevented planting coverage of the crop 
insurance policy paid claims on those acres to help farmers cover some 
of their fixed costs and input costs already committed to those acres. 
This fall we have had unprecedented harvest conditions of snowstorms, 
fall flooding and more persistent rains. Thousands of acres of good 
crops in northern Minnesota and northern North Dakota were flooded and 
destroyed by the rising Red River and its tributaries. Over 100,000 
acres of sugar beets were left frozen in the fields because the ground 
was too wet to get in with harvesting equipment. Crop insurance will 
help to reduce the losses by covering much of the input expenses and 
cost of production. However, crop insurance will not make those acres 
or the farm profitable. Unfortunately, most of these farmerswill 
experience net operating losses this year.
    Similarly, thank you for helping to enact disaster assistance 
earlier this year. Disaster payments are helping many farmers in areas 
hit by hurricanes, fires, and other natural disasters survive to plant 
another year. The recent trade adjustment assistance payments are 
helping farmers who have no other alternative to cope with trade 
interruptions brought on by ongoing tariff disputes. We hope that the 
President, with support from Congress, will continue to make these 
payments so long as the present trade situation continues.
    While disaster assistance and trade adjustment assistance are very 
welcome, farmers and ranchers need markets they can plan for and on 
which they can depend. We strongly support swift passage of the U.S.-
Mexico-Canada trade agreement. USMCA will provide certainty for trade 
with our two largest agricultural trade partners. We urge your support 
for passage this year.
Farmers' Working Capital

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          ** Forecast Dec. 2019.
          Source: USDA.

    Since farm income peaked in 2013, profitability for most farmers 
and ranchers has been on a long decline. Despite some stabilizing over 
the past 2 years, most farmers are feeling the compounding effects of 
multiple years of low profits or even losses. As a result, the farm 
balance sheets that were strong in 2013 today are far weaker. Most 
worrisome, after 6 difficult years, working capital levels--the 
difference between current assets and current liabilities--have 
declined sharply. Working capital is the cushion against tough times. 
For many producers today, that cushion no longer exists.
    Similarly, debt-to-asset ratios for most farmers are climbing. 
Overall, farm balance sheets remain leveraged at a comparably low rate, 
with USDA's 2019 forecast predicting an overall debt-to-asset ratio of 
just less than 13.5%. Farm sector debt-to-asset ratio, however, is 
climbing rapidly, up from just over 11% in 2013.
    These debt ratio figures are somewhat misleading however, as most 
farms--and most of the farm real estate--carry no debt. As a result, 
the industry leverage ratio, which represents the overall average, does 
not reflect the uneven distribution of debt and its impact on 
commercial producers. For those producers with debt, who make up most 
of the farms that produce most of the food and fiber in the U.S., debt 
ratios are climbing perilously high.
    USDA forecasts agree with most private forecasts that commodity 
prices likely will remain at or near current levels for several years 
to come. In this price environment, it will be very difficult for 
farmers to recover the economic losses of the past few years and 
rebuild their financial strength. That's even more reason that we 
encourage Congress and the Administration to settle trade disputes, 
pass USMCA, and pursue other advantageous trade agreements so markets 
can recover, and farmers can rebuild from the current difficulties.
    Media stories over the past year noted a rise in farm bankruptcies 
and those reports are true--although perhaps a bit misleading. While 
the bankruptcies are rising, the actual number of farm bankruptcies 
remains very low. Continuing strong land values, low interest rates, 
and aggressive cost cutting by farmers all help avoid more 
bankruptcies. For now, farmers have options, lenders like Farm Credit 
and community banks, are proactively working with farmers to rebalance 
loans. Farmers are selling some assets voluntarily and taking other 
steps to position their operations to withstand the low-price 
environment.
    Despite these efforts, however, financial stress is rising for many 
producers. An analysis of Farm Credit's loan portfolio demonstrates the 
current financial stress under which many farm families operate today.
    There is little question that commodities across that board have 
seen their share of challenges, but perhaps no other commodity has 
suffered as much as the dairy industry in the past few years. Since the 
beginning of 2017, the state of Wisconsin--which is commonly referred 
to as America's Dairyland--has lost nearly 1,700 dairy operations. In 
neighboring Minnesota, one in ten dairies went out of business in 2018 
alone.
Farm Credit Loan Probability of Default Ratings

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Farm Credit, like most lenders, assigns a credit risk rating for 
each of its loans. The ratings, on a 1-14 scale, are an accumulation of 
the many factors impacting the financial standing of a farm operation. 
The higher the numerical rating, the more stressed the operation. The 
chart adjacent shows how these risk ratings--which measure the 
probability that a loan will default--are migrating upward across the 
past 5 years. Loans that were rated as 6--a very strong rating--are now 
rated as 8--still good but weaker. Loans that were an 8 are now pushing 
toward 10--the beginning of the troubled loan category. Loans rated 10 
and above increased from 4.2% in 2014 to 7% at the end of 2018.
    As difficult economic conditions continue, farmers are becoming 
more financially stressed and Farm Credit loan portfolios are beginning 
to show that stress. Fortunately, three important factors are combining 
to give farmers and ranchers a chance to survive this downturn--low 
interest rates, continuing strong land values, and a non-farm economy 
that continues to provide job opportunities outside the farm gate.
FCS Non-Performing Loans % of Total Loans

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Probably most importantly, farmers themselves are proving to be 
highly skilled at cutting costs and taking advantage of narrow 
marketing windows to keep their operations going. Extending the life of 
equipment, precisely targeting input supplies, and cutting family 
living expenses all are helping farmers continue despite low prices. 
This expert management by farmers only goes so far, however, and soon 
many farmers will need to see better price levels to survive.
    We are also seeing a rise in voluntary exits from farming, 
particularly among older farm operators. As the outlook for prices 
remains low, many older farmers are selling or renting land and pulling 
out of direct operation. Continuing strong land prices are providing 
much flexibility, both to exiting farmers and to farmers rebalancing 
their operations.
Fulfilling Farm Credit's Mission During a Downturn
    We have a simple philosophy as we approach difficult economic 
circumstances farmers are experiencing now--we know our customers well, 
understand and respond to their needs and work cooperatively with them 
to analyze and structure our transactions to provide them with the best 
possible outcome.
Farm Credit System Loans, 2014-2019

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Farm Credit is a responsible lender. We understand that credit 
cannot be a substitute for income. We work proactively with customers 
to explore a wide range of options to give them the best possible 
chance to succeed.
    Farm Credit is leaning-in to support farmers and ranchers. While 
overall loan growth slowed somewhat this year, we continue to increase 
our lending to farmers. Since the beginning of the downturn in 2014, 
Farm Credit increased its farm real estate and farm production lending 
by more than $36 billion.
    Today, Farm Credit provides about 40% of the financing for 
production agriculture and serves nearly 500,000 customers across all 
our lines of business, including agribusiness, rural infrastructure, 
rural housing, and agricultural export finance.
    We are working with our farm and rancher customers to provide the 
time and space they need to stabilize their operations and adapt to the 
reality of a long-term downturn in commodity prices. Our loan officers 
proactively reach out to customers--on their farms--to work through 
options that might provide an opportunity to succeed.
    As we speak, AgCountry is working with a third generation family 
farm in Minnesota. This particular dairy farm has been extremely 
successful in the past, but the tough economic environment of the last 
4 years has led to yearly losses reaching as high as $500,000. We are 
doing everything in our power to help out, including working with the 
Farm Service Agency, allowing interest-only payments and extending the 
repayment terms. The reality of this situation, and many situations 
like it, is that our options are starting to run low. If markets 
continue to struggle, two families on this farm will lose their 
livelihood, an older generation will see their retirement nest egg 
disappear, and 20 part-time workers will have to look for other 
employment.
    I want to expand a little more on Farm Service Agency guarantees, 
which help us work with troubled customers and provide an opportunity 
for young and beginning farmers. A guarantee on an existing loan 
strengthens the loan, making FCA examiners less wary of us continuing 
with the loan, and providing additional time for a customer to find a 
way to operate profitably. We rarely collect on these guarantees. The 
value of the guarantee for these customers is the regulatory relief it 
provides us so we can continue to seek that best possible outcome for 
our customer. We are grateful that this Committee changed the FSA loan 
limits in the last farm bill. We are using that new authority to 
farmers' benefit as intended. We also strongly support The BALE Act, 
H.R. 2797, introduced by Representative Mike Bost. The bill would 
further raise the caps on FSA loan guarantees providing greater 
flexibility to serve farmers.
    Farm Credit is fortunate that our independent Federal regulator, 
FCA, 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.
    While the focus of our testimony today is the financial stress many 
producers face, we cannot ignore the emotional and mental stress 
building in among farm families and rural communities resulting from 6 
long, difficult economic years in agriculture. Farm Credit is working 
to provide resources to help farm families cope with these kinds of 
stress as well.
    Unfortunately, mental health resources in rural communities are 
lacking and, in many areas, there remains some level of stigma 
associated with seeking help with mental health issues. Farm Credit is 
partnering with Michigan State University (MSU) to create an online 
training course focused on mental and emotional health. It will help 
provide support and advice for loan officers having difficult or 
stressful conversations, while also offering tips for strengthening 
their own mental well-being. The training will also help Farm Credit 
System employees identify signs of stress in customers and provide 
techniques to get customers the help they might need to manage that 
stress.
    The Farm Credit training curriculum is modeled on a successful 
program funded by Congress and created by MSU for USDA's Farm Service 
Agency personnel. It will be made available to all Farm Credit 
institutions beginning next February. The training is made possible by 
a grant to MSU from Farm Credit.
    Farm Credit will provide a version of this program to regional and 
state leaders at the American Farm Bureau Federation and National 
Farmers Union at their respective annual conventions. These trainings 
offer additional resources to rural communities across the country to 
help reach additional individual farmers and ranchers. We hope to make 
the program available to more farm and rural organizations in 2020.
    The training builds on other Farm Credit System efforts to support 
rural mental health. We are partnering with AgriSafe Network to educate 
rural health professionals on the mental health risks faced by farmers 
and ranchers and trains them to integrate basic mental health 
screenings into their primary care practices. The ``Total Farmer 
Health'' campaign helps address the limited mental health services in 
many rural areas and trains primary care practitioners to better 
understand and recognize the challenges agricultural producers face and 
how they might manifest. Farm Credit also is partnering with the 
Progressive Agriculture Foundation to develop a new curriculum focused 
on the mental well-being of rural youth ages 4-13, as part of ``Ag 
Safety Days'' it hosts across rural America. This curriculum launches 
in January 2020.
    In addition, we and several other Farm Credit institutions are 
offering our customers access to a free, confidential resource service 
that had previously been available to Farm Credit employees. We felt it 
right that given the struggles our customers are facing, they, too, 
could benefit from the support and guidance of trained professionals 
when facing increased challenges and the emotional difficulties that 
follow.
    The stress that our customers are facing right now can be further 
reflected in the faces of our employees. There have been times over the 
course of the past few years where you can walk into one of our offices 
and see the emotional weight our staff is carrying with them. As the 
CEO, this greatly pains me.
    We are also concerned that the continuing low commodity price 
environment is impacting young, beginning, and small farmers. Young and 
beginning operators especially are likely to have lower equity and be 
more vulnerable to profitability swings. Smaller operations oftentimes 
have fewer options for cost-cutting and other managerial changes to 
help the bottom line. Offsetting this somewhat is the continuing strong 
non-farm economy that is providing off-farm employment.
    Farm Credit's service to young, beginning, and small farmers is 
increasing. FCA's 2018 annual report reveals that overall volume of 
Farm Credit lending to YBS farmers increased from 2017 to 2018. In 
addition, the number of Farm Credit loans made to young, beginning, or 
small farmers as a percentage of total Farm Credit loans made increased 
from 2017 to 2018.
    Farm Credit makes extraordinary efforts to support young, beginning 
and small (YBS) farmers and ranchers. Each year, the FCA, our 
independent Federal regulator, compiles data on Farm Credit YBS lending 
and reports it to Congress. Based on FCA's report:

   Farm Credit made 46,680 loans to young producers (under age 
        36) in 2018 for a total of $9.7 billion, up from $9.07 billion 
        of loans made in 2017.

   Farm Credit made 62,323 loans to beginning producers (10 
        years or less experience) for $13.3 billion in 2018, up from 
        $12.45 billion of loans made in 2017.

   Farm Credit institutions made 114,817 loans to small 
        producers (less than $250,000 in annual sales) for $12.5 
        billion in 2018, up from $11.69 billion of loans made in 2017.

    To put Farm Credit's lending to small farmers and ranchers into 
perspective, at year-end 2018 Farm Credit had 910,113 loans of all 
kinds outstanding, and just over \1/2\ (456,305) were to small farmers 
and ranchers.

          Note: 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. Our regulator, the Farm 
        Credit Administration, is engaged now to better define data 
        requirements surrounding YBS lending.
          Note: The number of loans made to YBS farmers during 2018 
        cannot be directly compared to the number of loans made to YBS 
        farmers in prior years due to a change in the technical 
        counting procedures used in multi-lender loan participations. 
        The change in counting procedure does not impact the counting 
        of $ volume of loans made and, as a result, $ volume figures 
        are comparable year-over-year. The Farm Credit Administration's 
        2018 annual report explains this in more detail.

    Farm Credit institutions have a deep commitment to YBS farmers 
beyond providing loans. At AgCountry, we provide scholarships to young 
farmers and their spouses for farm-related education programs, 
marketing classes and conferences. We provide succession and retirement 
planning to help young farmers develop transition plans with their 
parents. We greatly reduce or waive fees for farm accounting and tax 
planning services. In addition, we host a young and beginning farmer 
advisory committee to help provide feedback to our association and 
identify areas to better meet the needs of those within this 
demographic.
    We engage across the spectrum with those entering agriculture, 
whether they are focused on conventional, organic, sustainable, indoor, 
farm-to-market operations, or other emerging business models.
    As I mentioned earlier, Farm Credit is a customer-owned 
cooperative. Significant amounts of our operating expenses go toward 
better serving our customers through new technology, helping them grow 
their businesses through educational programs and supporting our 
communities through charitable giving. The net income we 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 
paid to customer-owners by way of cooperative dividends, which 
effectively lowers the cost of borrowing for our customers. In 2018, 
Farm Credit returned $2.3 billion in patronage dividends to our 
customers and over the past 5 years, Farm Credit returned nearly $9 
billion to our customers. At AgCountry, we returned $42.5 million last 
year, lowering our customers' average interest expense by just more 
than \1/2\ of a percentage point (54 basis points).
    Farm Credit's mission extends well beyond the farm gate. Our 
mission includes financing for farmer-owned cooperatives and other 
agribusinesses that farmers depend on to succeed. Farm Credit has 
financed more than $6 billion in exports of U.S. agricultural products. 
We also make nearly $12 billion in loans for families to buy homes in 
very rural areas. Because a steady flow of credit means more jobs and 
economic growth, Farm Credit helps ensure the vibrancy of communities 
throughout rural America.
    Strong, reliable and resilient rural infrastructure is critical to 
the success of rural communities and a key component of Farm Credit's 
mission. Farm Credit finances more than $29 billion in rural 
infrastructure, including rural electric cooperatives, water systems, 
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's mission is as vital today as it has ever 
been. We support rural communities and agriculture with reliable, 
constructive credit and financial services. We provide farmers, 
ranchers and agribusinesses with the capital needed to make their 
businesses grow and succeed.
    Like 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, we could not 
predict with accuracy when this cycle would begin, nor can we predict 
when it will end. But experience told us it was coming, and our 
institutions proactively prepared for it.
    When it comes to the present conditions facing agriculture, the 
bottom line is this: farmers and ranchers across our three states and 
the country are struggling. This holds true regardless of the 
commodity, experience level of the farmer or size of the operation. To 
their credit, and the credit of financial lenders, all parties are 
working hard to do the things necessary to survive this economic cycle 
and ensure the vibrancy of communities throughout rural America.
    Thank you again for calling this important hearing. I would be 
pleased to respond to your questions.

    The Chairman. Thank you very much. Thank you for all of 
your views. Members 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 in order of 
arrival, and I will start off. I recognize myself for 5 
minutes.
    Earlier today several Members of Congress joined with me in 
getting a very impressive and very informative hearing of the 
effort by Farm Credit to provide mental health assistance to 
our farmers, our ag producers, and I would like to start out by 
giving each of you a little time to talk about this effort by 
Farm Credit, who are working to support farmers as they suffer 
multiple elements of stress. The weather, the prices, China and 
other unknown uncertainties with the trade conditions. If you 
could just tell the Committee about the initiative, as you see 
it, and how Farm Credit is grappling with this, and just what 
is the American Bankers' Association doing to help this mental 
health situation that we see a record number of suicides among 
our farmers. It is just absolutely heartbreaking.
    And so I wanted, to start, to give each of you a little 
time to talk about that, because I really think we need to lay 
this on the table. This Committee is determined to help the 
farmers with the stress that they are going through. And may I 
start with you, Mr. Knisely, because Farm Credit is initiating 
this, and we are determined to make sure this word gets out, 
what is happening, and I would like to hear from each of you on 
how the community banks can get involved with this. How can 
the, we had the community banks, who was the other group we 
had--and the American Bankers' Association? Yes, go ahead.
    Mr. Knisely. Mr. Chairman, Farm Credit, obviously, lending 
to agriculture is our primary and sole business. We are a 
farmer-owned cooperative. We are deeply passionate about what 
we do in serving agriculture in rural America. We are really 
going at this from a two-pronged approach. We think it is 
important for our staff to be well trained, and recognize 
financial stress and mental health, opportunities to help with 
mental health as they meet with their customers and their 
clients, and also providing--a number of the Farm Credits are 
under a collaboration where we are actually offering third 
party confidential services for our customers to access free of 
charge, to just deal with the stigma of mental health, and 
making sure that we are reducing any barriers.
    We often talk with our staff and our customers, when we 
have meetings, around the fact that physical health--
everybody's kind of focused on physical health, and we actually 
want to make sure that we have as much focus on mental health 
because of the stress that is out there in agriculture today. 
We just think that is an important role that we can play, and 
we have enough interaction, and do enough with our customers 
that hopefully we can recognize that.
    The Chairman. Thank you very much. Mr. Handke?
    Mr. Handke. Chairman Scott, that is a great question. I am 
a farm family, and I went through the 1980s, started my career 
in banking, and so a good deal--at least we haven't got to the 
stress that we did in the 1980s, but I can speak from 
experience on that, and it starts first with relationship 
banking. And you are a loan officer, you had relationships with 
your customers. We have deep relationships with those 
customers, and those families, as you exited from agriculture. 
At the time we had great resources from the universities, 
Kansas State University. We also are privileged in northeast 
Kansas to have Kansas Mental Health, and that when we had 
borrowers that were having stress, we sent them to those 
services, but more important, we were a compassionate lender. 
And it is that relationship.
    As you get into large banks, and it becomes less 
relational, you will have more problems with that creditor and 
the harshness, but I can just speak from the community banking 
presence. And I, you know what I am really proud of is when I 
go to family events in my community. When we lose one of our 
elders, at a funeral, and that is a person that I helped 
through agriculture to exit, and we still bank with all of his 
children, his grandchildren, and his friends. I really think 
the answer is in relationships. And then we do have robust 
land-grant universities that helped us through that. But it 
starts with the lender.
    The Chairman. Yes. Thank you very much. We have that. My 
time has gone.
    Mr. Hanes. Could I offer a quick part to that?
    The Chairman. Yes, please.
    Mr. Hanes. What you are really talking about is the non-
financial factors that go into an operation. We can look at the 
numbers, and what Steve was talking about is we spend time with 
each customer, we figure out their break-even, we figure out 
what direction they are going, as far as an earned network 
process and progress. What ABA started a year ago is an ag 
lending school. There are a number of ag lending schools around 
the country that focus on these non-financial factors, the 
mental side of it, the emotional side of it, and train lenders 
to recognize that, to see that, and to then be able to send 
them to someplace that--hey, talk--let's get together with 
somebody.
    What we don't have a national program like Farm Credit. 
What we do is we have a Farmer Focus Day once a year. 
Cooperative with crop insurance and a farm equipment dealer, we 
bring in a number--well over 100 farmers. This last year we 
actually brought the middle school kids, and so dads got to eat 
lunch with their middle school kids. And we bring in a speaker, 
whether it is an economist, last year we brought in a weather 
guy. And so you are bringing generations together to learn 
together, and so that communication is important, and so it is 
between the education of the lenders, and the communication 
with the borrowers, is what will help us work through that in a 
relationship.
    The Chairman. Well, that is really good to hear, and we are 
going to get back to that. I am going to be very lenient with 
time with everyone, because we really want to get to some 
answers to this. We want to solve this. Our farmers are 
suffering drastically, and the suicide rate is off the chart, 
so thank you for that. And now let me yield for his questions, 
our Ranking Member, Mr. Scott.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman, when 
Hurricane Michael hit our state, the first phone calls were 
from the farmers. The next phone calls were from the banks. And 
in our part of the world, we have a lot of irrigated cropland, 
and if you are irrigated, you know you are going to be able to 
grow the crop. We have not seen the scenarios in the past where 
we were not able to harvest the crop. We have dealt with price 
fluctuations and other things, but the last couple of years the 
combination of not being able to harvest the crop and the price 
fluctuations have certainly taken its toll, and our lenders are 
feeling the pressure. And had there not been some flexibility 
granted from the Feds on some of the lending, I think that 
there are a lot of our people that would not be able to farm 
this year, and they were able to farm because of a couple of 
things. The state legislature, and former Governor Deal, now 
Governor Kemp, through the Georgia Development Authority, 
loaned some money to some farmers that allowed the banks to 
reduce the debt that was on their books, and that helped with 
the interest rates with the farmers, and obviously that has--
when you are talking about big numbers, small percentages end 
up making a difference.
    But, my question gets back to the collateral, and how we 
are going to handle things, going forward. Do you expect 
changes in what banks require, from the standpoint of crop 
insurance, to be carried by the producer, or other types of 
products that provide cash protection? Because the banks don't 
want the land. But what changes do you expect with regard to 
requirements on the loans with crop insurance and other things?
    Mr. Hanes. Crop insurance is a huge part of the puzzle, and 
I appreciate Congress keeping crop insurance whole in the last 
farm bill. It is--that is a huge component, and so I can't 
underestimate and understate that. What I would say is, because 
there is that number there, we know that number before we know 
the base acres, we know the base price, so those producers that 
have crop insurance--and that is something they had bought 
prior to the commodity being put in the ground. They can come 
to the bank, and they can say, here is my guarantee. Here is 
the bottom line. Regardless of what else happens, I can get 
that. Our bank, we put that as a part of the collateral.
    Now, there is still a lending percentage there, but if you 
don't come to the bank, you may still be able to get a loan, 
but your collateral's going to be shorter, because there is no 
guarantee there. And so that is something that a farmer can 
make a responsible business decision, take that crop insurance, 
bring that to the bank, and then that is exactly what it is. It 
is loanable collateral to our borrowers.
    Mr. Austin Scott of Georgia. How are you calculating--
obviously, I mean, you all testified that farm income is up 
this past year, but without the MFP payments, farm income would 
not be up for this past year, and expenses are also up on the 
farm. If income is up, and expenses are up, the net can be 
down, but income's only up because of the MFP. My question is, 
if there is going to be an MFP payment next year, can you use 
that calculation in a revenue calculation for the loan?
    Mr. Hanes. No, you can't, and those ad hoc programs are 
very challenging. From a standpoint of a cash flow and an 
operating note, I can tell you what the number is that we are--
we can put in. It is zero. Regulators would get pretty excited. 
We use FSA. We are proud of our relationship with them. They 
would kick it out, because we don't know. And so it kind of 
created a two-fold problem, especially this year, in that we 
couldn't put it in there, we can't put it in going in for next 
year. The payments came, and, as was testified by the other 
gentleman, necessary, but it also created a tax hit this year, 
because that is going to be taxable this year, can't be rolled 
into next year, where sometimes they would roll their grain 
sales into next year. And so, while necessary, one, we can't 
put anything on next year's cash flow, and we have a tax 
liability situation.
    Mr. Austin Scott of Georgia. Sure. Mr. Chairman, my time 
has expired. I have two things I want to mention. One is, as 
someone who represents 24\1/2\ counties, that I represent, 
there is only one health insurance company, and in many cases 
they don't have a contract with the local health care 
providers. What we are paying rural America for health care, in 
comparison to what is paid in the metropolitan areas, is a--it 
is a significant disadvantage to the farm families.
    And the fact that we are forced to purchase individual 
products, and that product does not--in most cases forced to 
purchase individual products, and the tax law that surrounds 
that product is not equitable for the farmer, in--meaning we 
have to pay that premium with after tax income, that is 
something that I hope we can look at from a cash flow 
standpoint. I realize it is not in our jurisdiction as a 
Committee, but in the 30--next 30 seconds that I have gone 
over, 1 minute, I am going--but you went over 2\1/2\, I want to 
say this.
    The Chairman. Go right ahead.
    Mr. Austin Scott of Georgia. I do believe that when we 
write the next farm bill, we need to take a serious look at a 
step-up provision on the poundage that the farmer is able to 
insure, because right now you are only able to insure to your 
10 year average. Well, when you have a bumper crop, there is no 
reason that we should not allow the farmer to have that 
poundage appraised, and allow that farmer 4 weeks, 6 weeks 
before the harvest to insure, at their option, the additional 
poundage that has actually been grown. And if we could do that, 
I believe that might get us out of some of these disaster 
payments. But, you know as well as I do it is unacceptable.
    My farmers waited over 12 months, our farmers waited over 
12 months, to receive any type of disaster payment at all after 
Hurricane Michael hit the State of Georgia. They can't survive 
that.
    The Chairman. Yes.
    Mr. Austin Scott of Georgia. They can't survive that. 
Gentlemen, I appreciate you being here, and I look forward to 
continuing the hearing.
    The Chairman. Well, thank you for that point, and I would 
think that Committee, while I wish it was ours, we could move 
with it. But if I am correct, it will probably be Ways and 
Means, is that correct? I would think Ways and Means, and we 
can talk to Chairman Richard Neal about that. There is so much 
we want to get over, so many other points I want to make, but I 
have others that want to go first, but we will go for another 
round, if anybody would like that, as we go forward, because we 
really want to get all of our Members' positions out on that.
    And you see, gentlemen, our Committee is very determined to 
deal with mental health, and stressors, and suicides. There is 
no reason for this, and the answer rests with us right here, 
with what we are doing in this room right now. And, with that, 
I would like to recognize the gentlelady from Arizona, Mrs. 
Kirkpatrick, for 5 minutes.
    Mrs. Kirkpatrick. Thank you, Mr. Chairman.
    The Chairman. If you need more time, please feel free.
    Mrs. Kirkpatrick. Thank you.
    And I thank the panel for being here. I grew up on Apache 
Tribal land in Arizona. I am not Native American, but my 
father's family came to that part of Arizona in the early 
1900s, initially to grow food for the cavalry at Fort Apache, 
and then my mother's family were ranchers in the area, so I 
have a long family history with farming and ranching. But my 
question, because of my Tribal connection, is have any of you 
worked with Native American farmers, or Native-owned lenders? 
Or just what has been your experience, with any, with Native 
Americans?
    Mr. Knisely. If I could, Congresswoman, Farm Credit does 
have, and has made loans to Native Americans. It oftentimes 
depends on the reservation, whether they are an open or closed 
reservation. It depends sometimes on whether the property is 
located on the reservation, or on Tribal lands, or off Tribal 
lands. We make an effort to lend every eligible farm customer 
that is out there--farmer out there, and we continue to work in 
a work group with a number of other Farm Credits across the 
country, trying to make sure that we are taking down whatever 
barriers we can, and making sure that we are getting word out 
as to what can be done to make it easier to lend money to 
farmers and farm producers, Native Americans.
    And we have also really tried to get involved with various 
conferences, and that type of thing. And I know last year we 
were a cosponsor, along with Compeer Financial, of an 
indigenous agricultural conference on the White Earth 
reservation in Minnesota. And just, again, trying to 
investigate and do whatever we can to break down those 
barriers, and make sure that we have availability of credit on 
the Tribal lands.
    Mrs. Kirkpatrick. Thank you. Any other comments?
    Mr. Handke. In northeast Kansas we have three Native 
American reservations. One of the reservations is the Kickapoo 
Tribe, which is right next to our location. That Tribe does 
their farming collectively, and so, in the 35 years I have been 
an ag banker, and truly we are the town right next to the 
reservation, I have never seen an ag loan application. Lots of 
consumer housing and consumer loans; but, it is probably 
because the Tribe collectively does the farming.
    Mrs. Kirkpatrick. Thank you. One of the problems we have in 
Arizona--we have 22 Tribes, and there is very little fee simple 
land on Tribal land. Most of it is held in trust by the Federal 
Government, so finding the collateral for the loans has been a 
real barrier for the Native American farmers. Any thoughts on 
how we can address that?
    Mr. Knisely. Congresswoman, the jurisdiction over the 
collateral is kind of an important issue, although I will tell 
you that, in Farm Credit, collateral's not the first thing we 
look at, from a credit factor standpoint, but it does become 
potentially an issue with Tribal land. There are ways that 
financial institutions can work with various trusts and various 
Tribal entities, possibly, to provide funding at that level, 
and allow them to administer programs within the Tribe. I do 
think there are ways around this, we just need to get creative, 
and really try and put our minds to it. And, working together 
collaboratively with others in the Farm Credit System, and our 
banking friends, we can continue to make progress in that area.
    Mrs. Kirkpatrick. Thank you. Yes?
    Mr. Hanes. I have not personally made one. One of my loan 
officers did work with Tribal lands for a while, and one of the 
things that I think would be helpful, and if I understood it 
correctly from him, different Tribes have different rules, and 
that is really what makes it difficult for any lending 
institution to walk in there, when you are not sure what are 
the rules, and I don't know how to fix that, but I do know that 
sometimes becomes a barrier, when you are not sure what the 
rules you are going to be playing by when you get in there.
    Mrs. Kirkpatrick. It is a unique problem. In Arizona, the 
Tribes are considered sovereign nations, so you are doing a 
government to government kind of loan on building that kind of 
relationship, which is very unique. Mr. Chairman, I just want 
you to know that this is a special area of interest to me, and 
I yield back.
    The Chairman. And I thank you for that interest, Mrs. 
Kirkpatrick. As so many Members of this Committee have 
expressed, we are determined to help our farmers with this 
mental stress, and the many other issues that they are facing. 
With that, let me now recognize for 5 minutes Mr. Marshall, the 
distinguished gentleman from Kansas.
    Mr. Marshall. Thank you again, Mr. Chairman. I will start 
with Mr. Hanes. Mr. Hanes, how would the ECORA Act assist your 
ag borrowers during these very challenging times with prolonged 
commodity price down cycles?
    Mr. Hanes. Thank you for that. The ECORA Act is a very 
simple Act that would lower the borrowing cost for all 
borrowers, regardless of who they choose to bank with. What it 
would do is it would make the income earned from--on interest 
from ag real estate loans and residential real estate loans in 
communities less than 2,500, that interest would then be 
income-tax free. While that sounds like a specific carve-out, 
it is, it just matches what Farm Credit has, and so we are not 
asking for anything in addition to. We are just asking for the 
same, because this would allow our borrowers to have the same 
borrowing costs as other borrowers, and, at the end of the day, 
would lower credit costs.
    The simplest example, a six percent real estate loan, which 
isn't out of line, and that would make sense, we could lower 
that same interest rate to 4.6. If we could save, as 
Congressman Scott alluded to earlier, a lot of dollars, it 
becomes a little bit, makes a lot of difference: 1.4 percent 
lower interest rate helps the cash flows a lot in these low 
times. And to put some numbers behind it, that is what it would 
do. It would lower borrowing costs by 21 percent on ag real 
estate.
    Mr. Marshall. Got it. Okay. Let's go on to Mr. Knisely 
next. Are there things that Congress can do to reduce the 
burdens of customers, and encourage more access to credit? What 
are things Congress can do to reduce the burdens, and encourage 
more access to credit?
    Mr. Knisely. There are plenty of providers out there for 
credit, so I don't really see that as a hurdle. I think what 
Congress can do to eliminate trade barriers, and really help 
with the income levels, and the profitability of farm 
operations is probably the most important thing that Congress 
can stay focused on. The banks and Farm Credit all deal with 
regulations, and things that get a bit cumbersome at times; 
but, for the most part there is adequate providers of credit. 
Just making sure that we are doing all that we can do to help 
producers, and that Congress can do all that it can to reduce 
barriers to trade and other things, and open markets for our 
customers, that is the most help you can provide.
    Mr. Marshall. Okay. Well, thanks. When we talk about the 
challenges of rural America--and Mr. Handke, I am coming to you 
next--when we talk about the struggles, the challenges of rural 
America, very much they seem to be the same challenges of the 
agriculture economy. As agriculture goes, so goes those rural 
communities. You find me a hospital that is struggling in a 
rural community, and I will show you an economy that is 
struggling as well. And Shan started kind of going in that 
direction about the community challenges there a little bit.
    When I sit down with small producers, and big producers, 
for that matter, they describe to me these are the challenges 
they have. First, just the price of wheat, or whatever the 
commodity is. Second, the cost of health care is a huge cost, 
especially to a small mom and pop operation. Next, agriculture 
talks about the lack of people for the jobs that we do have, 
and then input costs is the next thing. What really matters is 
giving farmers certainty, and giving them a strong economy. 
Talk about your bank, and your role in that community, and just 
expand--am I missing something, or--what would you add to my 
list that farmers are telling me?
    Mr. Handke. That is a great question, because my home is in 
northeast Kansas, but part of our bank is also located in Miami 
County, which is south of Johnson County, and what you see in 
that--it all comes back to jobs. Jobs, jobs, jobs.
    Mr. Marshall. It is the economy.
    Mr. Handke. In Miami--we have five locations in Miami 
County, urban, jobs, vibrant economy. In my community--I spent 
my lifetime in these rural counties, and we haven't been able 
to produce jobs, and so what happens is you see an erosion of 
your population. And as the jobs leave, the housing stock goes 
down. As the housing stock goes, then it eventually becomes 
difficult to sustain your hospital. And, unfortunately, I spent 
12 years on our local hospital board, and we just lost that 
hospital.
    Mr. Marshall. That is right.
    Mr. Handke. Now, there was fraud involved with that. It is 
a difficult situation, but that was a major employer in our 
small town. It gets back to developing rural America, and if I 
can stress anything, I would love to have your vote for the 
ECORA Act, because that helps--Farm Credit has done a good job 
in Kansas in rebating back money to their operators. Frontier 
Farm Credit is the largest ag lender in Kansas. They have a $2 
billion portfolio. This year they expect to send $16 million 
back to their farm customers.
    Banks on the other hand, in Kansas--we have twice the loan 
portfolio in Kansas, 260 banks, but we have about a $4 billion 
portfolio in Kansas. If we just had the same benefit, that $15 
million that Farm Credit sent in, we could send another $30 
million back to farm rural communities. I think it would be a 
good thing. Maybe that is what stimulates that. Maybe that is 
what helps bring jobs back. I would highly encourage the ECORA 
Act.
    Mr. Marshall. Thank you. I am over my time, and I yield 
back, Mr. Chairman. Thank you so much.
    The Chairman. All right. Thank you. I now would like to 
recognize our distinguished colleague from Virginia, Ms. 
Spanberger, for 5 minutes.
    Ms. Spanberger. Thank you very much, Mr. Chairman. Thank 
you for being with us today. In my home state of Virginia, 26 
percent of producers are new and beginning farmers. And we know 
it is difficult to start a farm, and to start farming, 
especially if you do not come from a farming family, and even 
more so when the farm economy is where it is today. Given this 
context, the 2018 Farm Bill made some changes to improve access 
to credit for new farmers, and one of those changes was 
creating flexibility so that military experience, and other 
relevant experience, could fulfill a portion of, or all of the 
3 year experience requirement for loan applicants. Mr. Hanes, 
has that change resulted in an increase in the number of loans 
to new and beginning farmers, from your experience, and how 
about the other changes in title V of the 2018 Farm Bill? Have 
they affected the new and beginning farmers, as you have seen 
it?
    Mr. Hanes. I will say the 2018 Farm Bill is still kind of--
we are opening it, and we are trying to figure out what all is 
in it, and how to best utilize that. The hemp provisions were 
probably the first one that everybody's excited about, but we 
are still unraveling some of those. Those are some great 
additions to the farm bill, and we encourage anything with FSA. 
What I would say with FSA is they need to update some 
technology, and they really need additional staffing. We can 
overwhelm them already with the applications we have now, and 
they do a good job, and they work hard. It is not a derision to 
FSA at all, it is just they need more support there.
    We were submitting, with the new farm bill, with the 175, 
and from 300 to 600 on the direct, we were submitting 
applications before they had the software. I mean, the farm 
bill is approved, and it was going, but their software wasn't 
updated to accept them. And so we were sending applications 
that they said, we cannot process, don't send these to us. And 
so--not a slam to farm--to FSA at all. It comes down to, I 
think they need more support, and they need probably some help 
from Congress with some money to update their system so that we 
can implement some of those provisions.
    Ms. Spanberger. Thank you very much, Mr. Hanes, for your 
answer, and also for teeing up my next question.
    Mr. Handke. Could I respond to that?
    Ms. Spanberger. Yes, sir.
    Mr. Handke. I actually have a good report from USDA on it. 
I was surprised by this report, and actually, it is good news, 
because there is great utilization of the USDA loan guarantee 
programs and direct lending. And so this report is for Fiscal 
Year 2019, Beginning Farmers and the USDA Obligations Report. 
USDA has obligated $5.7 billion, and of that, across the 
states, $3 billion went to those beginning farmers, and the 
USDA applicants: 53 percent of the funding went to the exact 
applicants.
    But the interesting--and what Shan's saying, it also is 
interesting--if you go--the budget for 2017, we didn't use all 
the money in 2018. In 2019 we used less money than 2018. There 
is a lot of funding appropriation that is not being utilized, 
and maybe that is because of staffing reductions in our county 
offices. But it looks like the funding's there, looks like the 
programs are being administered well. We just need to get more 
of those loans through.
    Ms. Spanberger. Thank you very much. Thank you for adding 
to that. And, Mr. Hanes, you did tee up my next question well, 
which is focused on industrial hemp, and the emerging market of 
industrial hemp does provide new opportunities. In 2019 farmers 
in Virginia planted 2,200 acres of hemp, and we saw increasing 
interest in both growing and processing this crop. And, 
simultaneously, the Commonwealth, and many other states, are 
working to implement the provisions of the 2018 Farm Bill.
    Mr. Knisely, do you believe that your institutions have 
received clear guidance from USDA and the Farm Credit 
Administration on lending to hemp producers, processors, or 
other businesses in the industrial hemp supply chain, and what 
guidance could be made to help ensure that that is more useful 
and clearer for you all?
    Mr. Knisely. I think the rules are still being written, and 
there does need to be a little more clarity with that whole 
area. Each state has a little different approach. Some states 
have had pilot programs out there in the past. We have had some 
producers that are involved with this early program, but it is 
far from being kind of certain as to all of the specifics of 
the program and kind of that whole implementation piece.
    Ms. Spanberger. Yes.
    Mr. Knisely. I don't know that anybody is holding up our 
ability to lend money as a System to the industry; but, 
everybody is really going to be really cautious about going in 
and financing those operations until we have a little more 
clarity from the USDA.
    Ms. Spanberger. Wonderful. Thank you very much. Yes, Mr. 
Hanes?
    Mr. Hanes. We actually had three producers try to grow some 
hemp this year, and it kind of gets back to Congressman Scott's 
comments earlier. There was no crop insurance available for 
that. They were doing that out of pocket. And when you are 
looking at the seed costs can be upwards to $2,000 per acre, 
you are not going to plant a whole lot of that on your own. And 
so crop insurance--I know they are working on it, but we are 
just not there yet, and where we farm, you are going to do 
wholesale, you are going to do 160 acres at a time, you are 
going to have to have crop insurance on that, so we need to get 
those rules out.
    Ms. Spanberger. Thank you very much.
    Mr. Knisely. Congresswoman, if I could add, the reason 
there is so much interest in it is farmers are very innovative, 
and they are just looking for new avenues to generate revenue, 
particularly in this farm economy. Anything we can do to open 
up new markets, whether it is hemp or anything else, I think 
that is a very important step forward for agriculture. And, 
anytime you offer those types of opportunities, you are going 
to see interest in rural America to address that, and try and 
leverage that in their operations.
    Ms. Spanberger. Thank you very much to the witnesses for a 
good conversation about new industries and new farmers. I yield 
back, and thank you for letting me go over, Mr. Chairman.
    The Chairman. No problem, and I will thank you. And now we 
will call on Mr. Johnson from South Dakota, for 5 minutes.
    Mr. Johnson. Thank you, Mr. Chairman. Mr. Hanes, in your 
testimony you noted the importance of us helping producers 
become better business managers, and, of course, you mentioned 
that can come through lenders, and ag groups, and extension 
offices, of course. You particularly called out the importance 
of hedging as a good business approach, good business strategy, 
so I want to think about a little bit, and I will ask about 
both farmers and ranchers, because the answers may be 
different.
    Talk to me about how, with your farmers, row crop guys, and 
others, what are the trends? What is the evolution of these 
hedging practices, from a risk management and a buying down 
volatility perspective? Where is the next frontier, if you 
will?
    Mr. Hanes. Something the--actually, my mentor, I guess, he 
pushed marketing 20 years ago, and so our bank in particular, 
if you were our customer, you came--we still do the face to 
face renewal. You come, sit down, we do your cash flow 
together. But when that borrower leaves our office, they know 
their break-even per bushel, per pound, and when they leave, 
they know exactly--I have to sell this calf for 68, or 88, or 
whatever, I have to get $3.48 for this bushel of wheat.
    Mr. Johnson. And they have a plan about how to kind of move 
different product through different price points?
    Mr. Hanes. And so then--like, for cattle, for example, in 
South Dakota--so when they go to the auction, they are looking 
to buy stocker cattle, or fat cattle, whatever, they can have 
two or three break-evens there in front of them. If I buy a 
six-weight, I can pay up to this. If I buy a four-weight, I can 
pay up to this, but part of that break-even, we factor in a 
hedge, a put against it. And so we are not--we are setting a 
floor. We are not limiting the top side. Part of the break-even 
is the hedging portion, and we are pretty proud of the way we 
do that for our--we give that information, at least, for our 
borrowers.
    Mr. Johnson. I get the sense that the level of 
sophistication is higher on the farming side than it is on the 
ranch side. I think there is some data to suggest that. What 
has your experience been?
    Mr. Hanes. There may be. I would say they are catching up.
    Mr. Johnson. Yes.
    Mr. Hanes. We have moved into a time where everything costs 
more, and the margins are smaller, and so everybody is having 
to get more efficient, more knowledgeable. After 25 years, what 
I have been able to see, and probably all panelists, going from 
one generation to the next, that first generation may not have 
to market, and they may do it however they want, and they may 
hold the grain for 5 years, but as you move to newer 
generations, they are--they want to learn, they want to 
understand, but they also have higher debt levels, so they 
don't have the room, they can't make the mistakes. As I see 
this transition, generational transition, it is fascinating to 
watch these younger guys coming in, because they want to 
understand it. They don't want to take the risk because they 
have enough debt level out there already.
    Mr. Johnson. I have introduced the Livestock Risk 
Management Education Act, and there are others, including Ms. 
Spanberger, who are showing some interest, and wanting to show 
some leadership. As we try to build the right bill, and create 
the right mechanism, are there things we should keep in mind 
with regard to building a higher level of success within the 
livestock arena for hedging?
    Mr. Hanes. It is just going to come to education.
    Mr. Johnson. Yes.
    Mr. Hanes. Where the education part has to get, and I don't 
know how to do this from your side, is we need to get it down 
to the farm level. And we can come with programs, but getting 
it all the way down to the guys. Whether it is extension, 
whether it is land-grant universities, whether it comes through 
the financial side, somehow to push that all the way through. 
FSA would be a great avenue to do that as well, but get that 
education down to the producer. We hold farmer meetings, and 
that is what we talk about. We will bring in a speaker, and let 
them explain that to them. I think that would be a great 
avenue.
    Mr. Johnson. Mr. Handke, Mr. Knisely, are there other 
things that either of you would want to mention with regard to 
hedging?
    Mr. Handke. Well, you have three approaches. You develop 
the program, or the legislation, you have the education, but 
then you have to have the utilization. So getting the 
utilization of the farm customer, I mean, that is the last step 
of it, utilization.
    Mr. Johnson. Yes.
    Mr. Knisely. It has been hit on, but really helping 
producers understand what their break-even costs are, and 
really positioning that operation so they know when good 
marketing opportunities are available out there. And, in 
regards to livestock in particular, if you look at the value 
that Federal crop insurance has provided for rural crop 
operations and small grain operations, if you were able to 
target a program for livestock similar to that to provide that 
kind of revenue coverage, which has been worked on, I think 
that would pay big dividends long-term as well. It really 
allows people to market, not knowing what their production's 
going to be.
    Mr. Johnson. Yes, well said. Thank you, Mr. Chairman. I 
yield back.
    The Chairman. Ok. Thank you, Mr. Johnson. Next the chair 
will recognize Mr. Baird of Indiana, for 5 minutes.
    Mr. Baird. Thank you, Mr. Chairman, and I appreciate all of 
you being here, giving us your expert testimony. In Indiana one 
of the things that we have seen is that the land values have 
declined, say, about 10\1/2\ percent, ten percent. They seem to 
be holding steady right now, but at some point the demand on 
the net investor side is probably going to be able to make up 
for the lack--or not going to let us make up for the lack of 
interest and ability of farmers to purchase that land, which is 
an extremely important part of the process for them. What are 
you able to do to mitigate the effects of potential decreases 
in land prices, and the effect that would have on the credit 
for the farmers?
    Because I remember very well the 1980s, and going through 
that, and I can tell you that you cannot pay 20 percent 
interest on operating loans and come out ahead. I think that we 
have, from that experience in the 1980s, and I hope that is 
transferring over to our younger generation, we have interest 
in keeping our debt to asset ratio less than, say, .36, or less 
than 36 percent. And, to my knowledge, that has been true. 
Anyway, I am asking how the impact of the land values, and our 
debt load on these young farmers, because they are more likely 
to be highly leveraged, and they are going to have to take over 
the industry for the future.
    Mr. Hanes. All of us on this panel know Dr. Coll, right? I 
heard him speak just the other day, and he compared land values 
to Swiss cheese, meaning some of the land values is the same 
number as it was before, and you have cheese, and then all of a 
sudden you have a hole where it is declined substantially. And, 
there is some truth to that. Farmers are now making not only a 
quantity decision, there is a piece of ground for sale, and I 
want to buy it, but they are making a quality decision, and 
they are looking--what is the irrigation, what is the water in 
that, what is the quality of the dirt? And so farmers are now 
being very selective, and they are paying the same price for 
good ground, but ground that shouldn't have been broke out, or 
isn't as good of ground, or isn't as good of water, those 
prices have dropped.
    What you will hear is you will hear stories of the same 
land price, and considerably lower land prices, and it probably 
would wind up being a quality of land decision, which is the 
reason we really appreciate your interest and your support of 
ECORA, because that is exactly what ECORA would do. It would 
allow us to lower interest rates on farm real estate in times 
when we need it. And I just can't stress that enough of what it 
would allow us to be able to do for our produces.
    Mr. Handke. I think, also, a lot more fixed rate lending 
now. I mean, Farmer Mac allows us to lock those rates in. But 
that is a good axiom. That is an axiom in our area, is nothing 
goes up faster than poor ground, and nothing falls faster than 
the poorest ground. We are probably at that cycle, where you 
are starting to see those--some of those poor farms plummet. 
Luckily, in northeast Kansas, our farm real estate values have 
maintained, and that is the one key that is different than the 
1980s. We couldn't refinance and sell. But as long as real 
estate's staying strong, it gives us a source of collateral to 
restructure.
    Mr. Knisely. Congressman, the most important thing we can 
do to support real estate values is to be prudent in our 
lending practices, and not let real estate values get out of 
hand, and the financial institutions across the country have 
done that. We all look at long-term averages of commodity 
prices, and we lend into the cash flow of those farms. We don't 
lend on collateral value. I think prudent lending's probably 
the most important first step.
    And in regards to young and beginning producers, really, 
being able to leverage the FSA programs, the guarantees, and 
the Young Farmer Direct Loans are really a big deal. And I know 
even within some of the state programs that we deal with, with 
the Bank of North Dakota, and the Rural Finance Authority, the 
RFA, in Minnesota to do partial financing, we are able to get 
buy-down on interest rates for some of those young producers as 
well, and so we are able to get young operators on those farms, 
and make better use of that, from a generational transfer 
perspective.
    Mr. Hanes. And I would like to give a little shout-out to 
Farmer Mac, because that is another tool we can use on farm 
real estate that allows us to push some of that interest rate 
risk off of the bank's balance sheet, and allows us to offer 
terms that we couldn't offer on our own. And so Farmer Mac is 
another tool that you guys have put in place for lenders, but 
really for ag producers, and so I would like to say thank you 
to you guys, and thank you to them.
    Mr. Baird. Thank you very much, and I see I am out of time, 
so I yield back.
    The Chairman. Thank you very much, and thank you for your 
line of questioning on the beginning farmers. We have so many 
issues, so many critical issues facing our farmers and our 
agriculture industry. But we are going to have a little second 
round here in case anybody wants to come back. But we would 
like to hear from Ms. Axne. She just got in, and she is one of 
our outstanding Representatives. She stands up and loves 
farmers. Mrs. Axne from Iowa.
    Mrs. Axne. Thank you, Mr. Chairman and Ranking Member, and 
thank you to the great witnesses for being here today, really 
appreciate it. It is important that we are holding this second 
Subcommittee hearing to review credit conditions for our 
farmers, so I am glad to be here so you can share your 
expertise. My job here is to listen directly to you all, 
because we have a lot, as the Chairman just explained, 
happening to our farmers, so I will cut right to it.
    As many of us are sharing today, I share the concerns of my 
constituents who are worried about the state of the farm 
economy. I mentioned during our last hearing with FCA Chairman 
Smith, that my home State of Iowa has the highest level of farm 
debt in the country, and nearly $19 billion, and that a recent 
study classified 44 percent of Iowa farmers as financially 
vulnerable, so that is very deeply concerning to me and our 
state. As you all represent the majority of ag lending, can you 
quickly describe the tools you have to help identify distressed 
borrowers, and how, if at all, you work with them to find a 
solution?
    Mr. Knisely. Well, I will start, and it has been mentioned 
earlier, Congresswoman, it is really about relationships, and 
understanding, and have a deep understanding of your customers, 
and what their financial operation is, what their goals and 
objectives are, and making sure that we are leveraging all the 
tools that we have to educate and share that information with 
our customers.
    For the most part, and I know that we have had producers 
that have struggled primarily because of yields. We have had 
pockets of the country that have had really good yields over 
the last couple of years, and we have had pockets that have not 
had such good yields, and that seems to be the determining 
factor where that stress is showing up. I have to do a shout-
out for our customers in the Northern Plains. We had a really 
rough spring trying to get crops in, way too much moisture, a 
very poor growing season this summer, and a harvest that won't 
end. We can't seem to even get the corn out of the fields. We 
left over 100,000 acres of sugar beets and potatoes in the 
ground this fall up in the Red River Valley, which are not 
harvestable at this stage.
    When you add those kinds of factors in, even with crop 
insurance as a safety net, you are still not getting the level 
of profitability that you need to maintain that working capital 
for your customers. We look at working capital quite heavily. 
We have been promoting working capital with our customers and 
clients for an awfully long time. Even when it doesn't appear 
that they need working capital, making sure that they are 
building working capital, and maintaining that cash position, 
so when they run into a difficult time, they have that safety 
net there, is really important.
    And, again, just making sure that we are lending money to 
operations based on the long-term averages of commodity prices 
and those types of things, not overreacting to price swings in 
the market, and possibly over-lending. Everyone at this table 
is very cognizant of making sure that we are not--sometimes 
saying no to customers is the most important thing you can do 
for them to try and keep those debt levels in check.
    Mrs. Axne. Okay. I wanted to ask a couple more questions, 
so thank you for that answer. I got relationships, working 
capital, not overreacting, and certainly not over-lending, so 
thank you. Were there any other additional pieces to that?
    Mr. Hanes. Well, when you were saying that, I was reminded 
of the wise word from my wife, communication. Get in to talk to 
your banker, talk to your customer, it is that relationship, 
but it is that early signs of this isn't going the right 
direction. And so I won't take up your time, but, early 
communication, and constant communication between the borrower 
and the lender is the way we get through these situations.
    Mrs. Axne. Okay.
    Mr. Handke. We have a little different approach. In my 
testimony I talked about the ICBA Ag Committee that I chair, 
and one of those great leaders on that is Larry Whitham, and he 
says hello, so he represents you well on that committee.
    Mrs. Axne. He is great.
    Mr. Handke. But one of the things is we came through this 
golden age from about 2006, and our farm customers, all of 
them, booked a lot of capital. And so all of our farmers are 
well capitalized. Tight cash flow, well capitalized, lots of 
equity. But in order to have the time to use those tools, we 
have to make sure that our regulators don't expect us to solve 
a farm problem in 18 months. And for the banking--we are on an 
18-month cycle. Yes, we have those relationships identified, 
and we are working with them, but we have to make sure that we 
keep our regulators realizing that this may take a 3 year 
process, it may take a 5. Farmers will get their way out of it. 
It may take a while for the markets to rebound, but agriculture 
is not solved in one operating cycle. We have the tools, we 
have the equity, just need time to work with and through it.
    Mrs. Axne. Very good. Last question, when FCA Chairman 
Smith was here before, he noted a rise in farmers going outside 
of traditional banks. I call them payday lenders. Have any of 
you also seen a rise in this, and do you share those same 
concerns?
    Mr. Hanes. Yes, we do. We have seen that rise, and it is 
concerning not because of the competition. What is concerning 
is a lot of times those are kind of point-of-purchase. Might be 
a tractor, might be some specific piece of equipment, piece of 
their operation. Well, as we do our renewal, we look at the 
entire operation. We look at capital/debt repayment ratios, and 
a lot of information that payday lender, I love the way you 
said that, is looking at one thing, and they are saying, here's 
the piece of equipment, or here's the whatever I am selling. 
And so they are looking at their item, and not the 
relationship, and not the entire operation.
    And so the stress and the concern to me, as a lender, isn't 
the competition. It is how that one extra, the straw that broke 
the camel's back. Then they come in to us, and they can't 
figure out why they didn't break-even. And so that is the 
struggle that I have with that.
    Mr. Knisely. Congresswoman, we have not seen as much of 
that in the Northern Plains, so I am not familiar with that. 
Again, in working with customers, having a good relationship 
with them, understanding that whole business operation is kind 
of critically important, and we just--we haven't seen an 
abundance of that up in the Northern Plains.
    Mrs. Axne. I am glad you are not----
    Mr. Handke. I would agree with Shan, is that it is not the 
subprime lender, it is John Deere Credit pushing out equipment 
that they just can't cash flow.
    Mrs. Axne. Yes.
    Mr. Handke. So that is probably more, the intermediate 
lenders, not the payday, in our market, anyway.
    Mrs. Axne. I appreciate that. It ends up impacting, though, 
the operating loan, and--that they are working with their bank 
on, okay, thank you for that. I very much appreciate it.
    The Chairman. Thank you, Mrs. Axne. Now the Ranking Member 
and I, Mrs. Axne, if you are still here, I am opening it up for 
a second round, because I want to really get to some real 
things that we can do.
    First of all, I want you to know that I have asked the 
staff on this Committee--because you have to realize that our 
Committee, this Subcommittee, is the financial arm of the 
Agriculture Committee. There are things we can do. There is 
legislation that we can do as well. I am so proud of what Farm 
Credit is doing, and they are sort of opening the door to 
something we have only been dimly aware, and that is the 
financial plight in and of itself, and challenges that are 
facing our farmers, and our rural communities. My Ranking 
Member, Austin, was just talking about this need, and we are 
going to go with that. And I want you to talk about that just a 
little more. And we can put that to Richard Neal, our Chairman 
of Ways and Means, to get that legislation moving.
    I have asked our staff to look at two very important areas 
that we are glossing over. I mean, there is something going on 
that is causing so much anguish with our farmers that I think 
is contributing massively to this mental stress and suicides 
that we can do something about. The first one is the weather 
patterns. There is something going on, where we have had back 
to back storms, fires. Half of the West Coast, fires. Lava 
spewing in Hawaii. Back to back hurricanes and floods. They 
cause massive damage. But here is the greatest damage. The 
greatest damage is that we in Washington failed immensely in 
getting the aid to them. And I am convinced that that played a 
role in the high suicide rate of our farmers.
    So one of the two things that I have asked our Subcommittee 
to do is that. We have experts. We have scientists. We have 
space programs. We have great knowledge of the universe, its 
past, its present, and yet, with the havoc that our weather 
patterns are causing our farmers, we have yet to get our 
scientists, our knowledge, into this agricultural hearing, and 
let them educate us, and the farmers, of what they know. And I 
am hopeful that our staff--we have some great scientists out 
there. You have some great people out there. It's no politics 
in this, to whether there is climate change or whether there is 
not. I know one thing, we need to know what is happening out 
there so we can help our farmers prepare for the hurricane 
before the storm is raging. And I hope we can get that hearing. 
That will help everything.
    And the second thing is, we have to do something more to 
set up what is an emergency contingency fund that is set up 
here, in the Federal Government, so that, when the storms 
happen, and then you have to say, ``Well, we will get emergency 
aid down, and you are going to put it through the CR process, 
the appropriations,'' and it takes 2 or 3 years to even get the 
help down. Now, we need to do that, gentlemen. Now, if we do 
that, then we are serious. You can't do that. You don't have--
Farm Credit, bless their heart, they don't have as much money 
as we do. It is our response.
    Now, I have watched this television program, and I ask you 
to watch it, maybe over the holidays. Our own Smithsonian 
Institution puts it together. It traces America's development, 
and it is called America in Color. It the 1920s, the 1930s, the 
1940s, the 1950s. You talk about challenges that our nation 
had, and at the center of those challenges was agriculture. 
Whether it was the dust bowls, the boll weevils, the 
Depression. We had magnificent leadership here in the Federal 
Government and Congress, in the White House, to respond. We are 
not doing that now. And so we want to really get to the bottom 
of it on that.
    And then the other fact, that I am so glad that many of you 
already mentioned, is beginning farmers. Our farmers, not only 
are they suffering, not only are they committing suicide, but 
the average age of the farmer is 60 years now. We are not 
nearly doing enough to get this new generation, younger 
generation, into agriculture, but we responded in a small way 
to show you what we did do, and bipartisan Democratic/
Republican way. We got scholarships to the 1890 land-grant 
African-American colleges and universities. That is out the 
box. I just wanted to lay that out.
    My staff is going to go to work and get these two hearings 
into here so we can--we have so much advanced knowledge out 
there, even with our space program to be able to help us, what 
is coming down the road, so we can prepare for it. I just 
wanted you to know that, and I have a couple other things, but 
I want to share my time here with Mr. Scott, who wants a second 
round as well.
    Mr. Austin Scott of Georgia. Just to reiterate one of the 
things that my friend and colleague mentioned, it took so long 
for Georgia to get disaster relief. The question is should we 
have an account sitting at USDA with rules and parameters 
around how disaster relief would be appropriated in the event 
of--in our case it was a hurricane, in the Midwest it was 
floods.
    The Chairman. Yes.
    Mr. Austin Scott of Georgia. It could be droughts, it could 
be excessive moisture. But if there was--should we establish an 
account at the USDA specifically for ag-related disasters that 
would keep what happened to us from happening in the future? 
And that is easier said than done. Anytime there is a pot of 
money sitting somewhere in Washington, D.C., someone does their 
best to dip their hands in and get it out, and oftentimes it 
doesn't go to the intended parties. But that is something that 
I think we will continue to discuss as the Agriculture 
Committee. The farmers simply can't wait a year to get the 
disaster relief. If it had not been for our Governor in the 
State of Georgia, our farmers wouldn't have been farming. We 
would've missed this crop year had they not done what they did 
through the Georgia Development Authority.
    One question I have, we have talked a lot about the 1,000 
acre limitation with Farmer Mac, and you mentioned slight 
increases in the $1.75 million authority. I know you all use 
Farmer Mac in different ways. Can you explain the relationship 
with Farmer Mac, and what suggestions, for those of you in the 
private banking--the relationship with Farmer Mac, how that 
works in allowing the lower interest rates, and the 1,000 acre 
limit, and the loan limit, the challenges with that?
    Mr. Hanes. I can, and Chairman Scott, when you were 
talking--I would like--Farmer Mac actually provides--they 
actually give us economic data. They help us with some of those 
trends, and some of that--those things that are out there, and 
so Farmer Mac provides a number of services. But, 
Representative Scott, the 1,000 acre rule, while well-intended, 
has just outlived its usefulness, and now has become almost a 
barrier.
    And so what has happened--and I have not done this. I want 
to make sure the regulators know, if they are listening, I have 
not done this, but what financial institutions had to do is 
they have ended up taking that one loan that would've violated 
the 1,000 acre rule, and the limit, then they have broken that 
loan into four or five new loans, individual loans, to stay 
under the 1,000 acre rule. And so all of a sudden then we have 
five loans on the books that we have to track, we have five 
payments. It nets the same, but it doesn't make sense.
    It is a simple fix. We looked at it, the farm bill. As a 
financial institution, we lend as a percent of capital. Farmer 
Mac has a capital. Just change it so that they can lend as a 
percentage of capital. They were even offering ten percent, 
whereas we can loan up to 15 or 25 percent of capital, 
depending on our charter. They were just asking for ten 
percent, and so that eliminates--when Farmer Mac started, the 
1,000 acre rule was there, they didn't have much capital. But 
now flash forward a number of a years, they developed a 
substantial capital amount. Just making that small change would 
get--would make a long-term--and a fix for the 1,000 acre rule, 
and would be much more beneficial to both financial 
institutions and Farmer Mac, frankly.
    Mr. Austin Scott of Georgia. Okay. Mr. Chairman, I 
appreciate the Committee being here, and the experts that have 
testified before us. I yield the remainder of my time, and I 
don't have any further questions.
    The Chairman. Mrs. Axne, would you have any closing 
questions you would like to ask?
    Mrs. Axne. Thank you. I did have one question that I wanted 
to get to as well that I am concerned about. Outside of 
bankruptcy rates, have any of you seen an increase in farmers 
having to sell off their assets to pay down their debt at this 
point?
    Mr. Hanes. We have not gotten there in our area. What we 
have seen, for the first time ever, generally there were those 
producers in the area that--didn't matter where the land was, 
they would buy it. We are, for the first time in my 25 years--
those individuals--and so you had a floor. You knew that so and 
so would always buy the land if it went cheap enough. We are 
now seeing those individuals starting to sell acres. And so, as 
the Chairman referred to, we are about to see a large number of 
acres change hands, and it is a great opportunity for the young 
beginning farmers to have a shot at ground, because we have 
some large landowners selling.
    Now, it is not forced. It is more of a retirement and 
getting their estate in order, but the next few years are going 
to be an opportunity, as we transition to the next generation 
of farmers.
    Mr. Handke. I would comment that probably the borrower 
class that we have the most difficulty with are the farmers 
that were within 10 years of a life event and still farming. 
You can imagine a 70 year old farmer that is going to continue 
to have his cows, he has high net worth, doesn't really care 
what he is, it is what I call the farm reverse mortgage. And 
those farmers are going to do that until either their health 
leaves them, or they have an estate sale.
    But unfortunately, you know what, the regulators call those 
substandard loans. If they don't cash flow over a 2 or 3 year 
period, it makes it difficult for us. Even if they have a 20 
debt to asset ratio, there will be liquidity event. What you 
are seeing is maybe some of those customers selling off some of 
their assets. But in our market, I haven't really seen the 
large--the production farms--and in our neighborhood, 
production farms are five--that 1,000 to 5,000 acres. Our 
family's always farmed about 2,000 acres. Twenty years ago that 
is a big farm, right now that is a small farm.
    Mr. Knisely. Congresswoman, I think that farmers operate, 
and ranchers operate, as businesses, and we are not seeing 
forced sales, we are seeing voluntary sales, in some cases, 
where maybe they want to restructure a balance sheet, maybe 
they want to transition something to the next generation. We 
are not seeing an abundance of that, but it is surely a tool 
that farmers will use to help better prepare their balance 
sheet, or improve working capital. Farmers today look at assets 
just like any business would, and maybe aren't as attached to 
them as previous generations were. Farmers are willing to make 
changes of their operation as they see fit to make sure that 
they have a good sustainable structure, going forward.
    Mrs. Axne. Thank you. And just closing, I would like to 
reiterate what both Mr. Scotts', our Chairman and our Ranking 
Member, said about ensuring that the USDA would be able to get 
funding out as quickly as possible after a disaster. Mine is 
the flooded district in Iowa from the Missouri River. We are 
still waiting on funding. I would say that many of the 
departments, the Federal organizations we are working with, 
USDA's doing a pretty darn good job, compared to some of the 
others at this point, but there is plenty of room for 
improvement.
    One of the things I would--I am glad we are talking about 
this, is an opportunity to try and work with them that I would 
like to see is put some standard operating procedures in place 
for a disaster. I notice that that is not across the board 
anywhere in government, no matter what disaster it is. 
Obviously different disasters will have variables, a flood is 
different than a fire, but you know what, we really kind of go 
through the same standard set of things that we need to be 
doing to get the funding out to the folks in need. I am glad 
you brought that up.
    I would like to see us continue to work on that with you 
folks to see what might be the best opportunity, but, right now 
we don't know. We have still got silt on our land, in many 
cases several feet deep. We know that the high probability of 
the majority of our farmers in that area won't be planting next 
year, but I would like to get them into the fields as quickly 
as possible if not next year, the following. And, hearing 
stories about how so many people have had to wait years to be 
able to start regrouping, and getting some market share, is 
unacceptable. Anything that we can do to move that agenda 
forward, people literally are falling by the wayside as a 
result of government practices that aren't moving in a timely 
fashion. If you do have any last minute response on that, 
that'd be great.
    Mr. Hanes. I just want to complicate an already 
complicating challenge. For the Congressman from South Dakota, 
like, the MFP is valuable and necessary, but there were no 
provisions for the livestock producers in the MFP Program. And 
so, while you think of all the potential disasters, and then 
put a fund there to keep people from getting their hand in the 
cookie jar, don't forget about the livestock people as well. 
That is a great challenge. Maybe you guys could knock that out 
by Friday, but that'd be great.
    Mr. Johnson. Which Friday?
    Mr. Knisely. Congresswoman, if I could add, speed and 
getting disaster assistance out is just critical. Farmers 
operate on a production cycle, and they don't have years, quite 
often, to put that disaster money to use, so speed in getting 
disaster money out. And I also think, if you are able to build 
in some flexibility with things, even, like, crop insurance, 
where you need to make decisions in the spring, and that 
information about prevented plant, and maybe there is a 
situation that developed that wasn't anticipated. Having the 
flexibility for USDA, and the Risk Management Agency, to make 
adjustments to things like crop insurance could help soften 
that disaster blow as well. Not only speed at getting the 
disaster money out there, but also flexibility with some of 
these other programs that could address this maybe in advance, 
and be more proactive.
    Mr. Hanes. There is one that--kind of going along with 
that, that we did look at that farm bill, and it ultimately did 
not get put in the farm bill, that might help with these 
disasters. We moved ARC and PLC from the NASS to RMA data, and 
that was helpful, but what would've even been more helpful, 
that price is still a post-harvest price, and is some 12 to 18 
months after the operating year. If we could just move that 
price to be the same as the crop insurance price, and so then 
farmers would know--prior to planting they would know their 
crop insurance price, and they would know where their ARC PLC 
price would be, and they could make more informed, educated 
planting decisions, prior to getting that money out there. And 
then even if the money, for budget purposes, couldn't come 
until later, then, as a lender, we could also put that in the 
cash flow. Here is a number, we could use that for FSA 
guaranteed loan applications, we could use that with 
regulators. And so it doesn't really change anything, as far as 
the timing, but what it does, it takes some uncertainty out of 
the--out of it for both the banks and the producers.
    Mr. Knisely. Well, and it allows producers to do a better 
job of marketing because they know that in advance. They 
aren't--it isn't retro all the time, so----
    Mrs. Axne. Good information. Thank you very much.
    The Chairman. Thank you, and I thank the entire Committee. 
And, as you can see, we are, both Democrats and Republicans, 
here are very committed to this. And I close with a reminder of 
the good word from the Lord, when he said: ``Get wisdom, get 
knowledge, but with that wisdom, with that knowledge, get 
understanding.'' We don't have understanding until we can get 
the scientists in here, we get our space people, we get people 
with knowledge about these changing weather patterns so we know 
what is happening. Something is going on, and our farmers are 
suffering. And, again, I ask my staff to put that together.
    Then, second, we need to get back together on a contingency 
fund. We have to hear from people. My idea of a contingency 
fund, having something there, because I will tell you the 
truth, as long as we try to say we are going to get emergency 
relief down to people, when the floods are flooding, the fires 
are firing, the lava is doing everything it is doing to our 
country, and it goes through the appropriations process--you 
all follow us up here, and that is not the way to do it. All I 
am saying is, if anything comes out of this meeting today, the 
two great things coming out of this hearing, what the bankers 
are doing, the independent community bankers, the American 
Bankers Association, and, of course, our great pioneers in 
moving forward with their mental program, Farm Credit. You all 
are our soldiers out there on the front lines. We sit here in 
Congress with massive resources, and we need to get the 
Franklin Delano Roosevelt instinct, and the Dwight David 
Eisenhower instinct.
    Dwight David Eisenhower said, ``Hey, we are tired of 
running on these muddy roads, let's build the interstate 
highway system.'' Look what we did. And what Franklin Delano 
Roosevelt did, responding, lifting up farmers, and prove that 
farmers were the backbone and the soul of this nation. And we 
have to stop letting them down. Thank you all very much.
    I have to read this properly. 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. This hearing of the Subcommittee on 
Commodity Exchanges, Energy, and Credit is adjourned. And thank 
you all very much.
    [Whereupon, at 4:32 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
                          Submitted Questions
Submmitted Questions by Hon. David Scott, a Representative in Congress 
        from Georgia
Response from Marcus L. Knisely, President and Chief Executive Officer, 
        AgCountry Farm Credit Services; on behalf of Farm Credit System
    Question 1. Mr. Knisely, your testimony spoke about the volume 
increase of farm credit lending to young, beginning, and small (YBS) 
farmers. Can you speak about how you all count those loans? If an 
operation has multiple loans or multiple parties to a loan, how would 
that be accounted for in these numbers?
    Answer. Thank you for the question Mr. Chairman. Lending to young, 
beginning, and small farmers is a critical part of Farm Credit's 
mission to support rural communities and agriculture. As the chart 
below demonstrates, the volume of FCS lending to young, beginning and 
small (YBS) farmers has increased consistently since 2002.
Farm Credit System's Outstanding Loan Volume to YBS Farms

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          Source: Compiled by the Farm Credit Council from FCA's Annual 
        Reports.

    Farm Credit Administration regulations specifically establish the 
rules Farm Credit institutions must follow when reporting loans to 
young, beginning, and/or small farmers. These FCA rules establish the 
definition of each category and specifically define under what 
circumstances a loan is required to be counted in a specific category 
or categories. Each year, FCA compiles data on Farm Credit YBS lending 
and reports it to Congress.
    Very importantly, the number of loans reported in each of the three 
categories (young, beginning, and small) cannot be combined. For 
example, a single loan to a 25 year old rancher in her third year of 
operation with annual sales of $100,000 would be counted as a single 
loan in each of the young, beginning, and small categories.
    In addition, if that same rancher had multiple loans with Farm 
Credit, each of those loans would be counted in each eligible category. 
However, if that rancher had partners in the operation who also 
qualified as young, beginning, or small, it would not impact the loan 
count in any of the categories. Irrespective of how many individuals 
are part of an operation, the loan only counts as a single loan.
    For 2018 reporting, FCA made technical changes regarding how 
certain multi-lender loan participations were required to be counted 
for tracking purposes. As a result, the number of loans made to young, 
beginning, or small farmers in 2018 cannot be directly compared to the 
number of loans made to young, beginning, or small farmers in prior 
years. This regulatory change in counting procedure does not impact the 
counting of the dollar volume of loans made and as a result, the dollar 
volumes continue to be comparable year-over-year.

    Question 2. What are the trends you all have seen among YBS farmers 
that have been able to access credit versus YBS farmers who have not? 
What barriers do they face and how have you all as lenders worked to 
make credit more accessible to these farmers?
    Answer. Thank you again for your interest in this issue Mr. 
Chairman. Farm Credit works hard to serve young, beginning, and small 
farmers all across the country. We are very concerned that the current 
economic environment for agriculture is making it even more difficult 
than usual for young and beginning farmers.
    The continuing low commodity price environment is impacting young, 
beginning, and small farmers. Ultimately all businesses (of all sizes 
and maturity) need profitability to survive and prosper. Beyond that, 
accumulated equity and net worth provides a cushion to sustain those 
businesses in weak economic cycles. Young and beginning farmers often 
are working with a lower equity level which limits the financial tools 
available to assist with corrective activities during sustained 
economic downturns. The result is that often times young and beginning 
farmers are more vulnerable to business failure during extended 
downturns.
    Smaller operations oftentimes have fewer options for cost-cutting 
and other managerial changes to help the bottom line. Offsetting this 
somewhat is the continuing strong non-farm economy that is providing 
opportunities for off-farm employment for many YBS farmers.
    Farm Credit's service to young, beginning, and small farmers is 
increasing. FCA's 2018 annual report reveals that overall volume of 
Farm Credit lending to YBS farmers increased from 2017 to 2018 despite 
the weakened farm economy. In addition, the number of Farm Credit loans 
made to young, beginning, or small farmers as a percentage of total 
Farm Credit loans made also increased from 2017 to 2018.
    In addition, Farm Credit institutions have a deep commitment to YBS 
farmers beyond providing loans. To make credit more accessible, we work 
with them as an advisor to help better manage their costs to achieve 
profitability. At AgCountry, we offer young and beginning farmers our 
best interest rate, regardless of their Probability of Default (PD) or 
risk rating. We also provide scholarships to young farmers and their 
spouses for farm-related education programs, marketing classes and 
conferences. We provide succession and retirement planning to help 
young farmers develop transition plans with their parents. We greatly 
reduce or waive fees for farm accounting and tax planning services. In 
addition, we host a young and beginning farmer advisory committee to 
help provide feedback to our association and identify areas to better 
meet the needs of those within this demographic.
    We engage across the spectrum with those entering agriculture, 
whether they are focused on conventional, organic, indoor, farm-to-
market operations, or other emerging business models.
Submitted Question by Hon. Collin C. Peterson, a Representative in 
        Congress from Minnesota
Response from Shan Hanes, President and Chief Executive Officer, 
        Heartland Tri-State Bank; Member, Board of Directors, American 
        Bankers Association
    Question. We've seen the lending community use either cash flow 
lending or equity-based lending over the years, what will your loan 
officers be looking at for 2020 financing?
    Answer. For the most part, banks moved away from equity-based 
lending following the challenges during the 1980's. Cashflows are 
vitally important and banks spend a considerable amount of time 
developing those projections. At our institution, we complete a monthly 
based ``Cashflow'' with input from the borrower during the renewal 
interview. This renewal includes updating the financial statement to 
determine earned net worth progress, completing a projected cashflow 
for the upcoming year, and a review of overall collateral position.
    When examiners complete their safety and soundness exam, they 
expect to see realistic and justifiable cashflows. They would be 
critical of equity-based lending during these challenging times. I 
would ask for leniency by examiners for banks who re-balance the 
balance sheet. The goal is to reduce annual debt service obligations 
and allow farmers to work through low prices as long as the collateral 
substantiates the re-structure. One example would be to allow an 
interest only payment for a year as long as the collateral position is 
not put in jeopardy without having to classify the relationship.

Shan Hanes,
President/CEO,
Heartland Tri-State Bank.
Response from Steven J. Handke, Regional President and Chief 
        Administrative Officer, First Option Bank; Chairman, 
        Agriculture-Rural America Committee, Independent Community 
        Bankers of America *
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    * There was no response from the witness by the time this hearing 
was published.
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    Question. We've seen the lending community use either cash flow 
lending or equity-based lending over the years, what will your loan 
officers be looking at for 2020 financing?
    Answer.