[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
A REVIEW OF CREDIT AVAILABILITY IN RURAL AMERICA
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
LIVESTOCK, RURAL DEVELOPMENT, AND CREDIT
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
JUNE 25, 2014
__________
Serial No. 113-15
Printed for the use of the Committee on Agriculture
agriculture.house.gov
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COMMITTEE ON AGRICULTURE
FRANK D. LUCAS, Oklahoma, Chairman
BOB GOODLATTE, Virginia, COLLIN C. PETERSON, Minnesota,
Vice Chairman Ranking Minority Member
STEVE KING, Iowa MIKE McINTYRE, North Carolina
RANDY NEUGEBAUER, Texas DAVID SCOTT, Georgia
MIKE ROGERS, Alabama JIM COSTA, California
K. MICHAEL CONAWAY, Texas TIMOTHY J. WALZ, Minnesota
GLENN THOMPSON, Pennsylvania KURT SCHRADER, Oregon
BOB GIBBS, Ohio MARCIA L. FUDGE, Ohio
AUSTIN SCOTT, Georgia JAMES P. McGOVERN, Massachusetts
SCOTT R. TIPTON, Colorado SUZAN K. DelBENE, Washington
ERIC A. ``RICK'' CRAWFORD, Arkansas GLORIA NEGRETE McLEOD, California
SCOTT DesJARLAIS, Tennessee FILEMON VELA, Texas
CHRISTOPHER P. GIBSON, New York MICHELLE LUJAN GRISHAM, New Mexico
VICKY HARTZLER, Missouri ANN M. KUSTER, New Hampshire
REID J. RIBBLE, Wisconsin RICHARD M. NOLAN, Minnesota
KRISTI L. NOEM, South Dakota PETE P. GALLEGO, Texas
DAN BENISHEK, Michigan WILLIAM L. ENYART, Illinois
JEFF DENHAM, California JUAN VARGAS, California
STEPHEN LEE FINCHER, Tennessee CHERI BUSTOS, Illinois
DOUG LaMALFA, California SEAN PATRICK MALONEY, New York
RICHARD HUDSON, North Carolina JOE COURTNEY, Connecticut
RODNEY DAVIS, Illinois JOHN GARAMENDI, California
CHRIS COLLINS, New York
TED S. YOHO, Florida
VANCE M. McALLISTER, Louisiana
______
Nicole Scott, Staff Director
Kevin J. Kramp, Chief Counsel
Tamara Hinton, Communications Director
Robert L. Larew, Minority Staff Director
______
Subcommittee on Livestock, Rural Development, and Credit
ERIC A. ``RICK'' CRAWFORD, Arkansas, Chairman
BOB GOODLATTE, Virginia JIM COSTA, California, Ranking
STEVE KING, Iowa Minority Member
RANDY NEUGEBAUER, Texas MIKE McINTYRE, North Carolina
MIKE ROGERS, Alabama DAVID SCOTT, Georgia
K. MICHAEL CONAWAY, Texas FILEMON VELA, Texas
GLENN THOMPSON, Pennsylvania MICHELLE LUJAN GRISHAM, New Mexico
SCOTT DesJARLAIS, Tennessee PETE P. GALLEGO, Texas
CHRISTOPHER P. GIBSON, New York WILLIAM L. ENYART, Illinois
REID J. RIBBLE, Wisconsin CHERI BUSTOS, Illinois
JEFF DENHAM, California KURT SCHRADER, Oregon
RICHARD HUDSON, North Carolina RICHARD M. NOLAN, Minnesota
TED S. YOHO, Florida JOE COURTNEY, Connecticut
(ii)
C O N T E N T S
----------
Page
Costa, Hon. Jim, a Representative in Congress from California,
opening statement.............................................. 3
Crawford, Hon. Eric A. ``Rick'', a Representative in Congress
from Arkansas, opening statement............................... 1
Prepared statement........................................... 2
Witnesses
Long Thompson, Ph.D., Hon. Jill, Board Chair and Chief Executive
Officer, Farm Credit Administration, McLean, VA................ 4
Prepared statement........................................... 6
Submitted material........................................... 91
Submitted questions.......................................... 105
Beyerhelm, Chris, Deputy Administrator for Farm Loan Programs,
Farm Service Agency, U.S. Department of Agriculture,
Washington, D.C................................................ 13
Prepared statement........................................... 15
Submitted question........................................... 108
Kauffman, Nathan S., Assistant Vice President, Federal Reserve
Bank of Kansas City, Omaha Branch, Omaha, NE................... 20
Prepared statement........................................... 21
Frazee, Bob, President and Chief Executive Officer, MidAtlantic
Farm Credit, ACA, Westminster, MD; on behalf of Farm Credit
System......................................................... 45
Prepared statement........................................... 47
Buzby, Timothy L., President and Chief Executive Officer, Federal
Agricultural Mortgage Corporation (Farmer Mac), Washington,
D.C............................................................ 52
Prepared statement........................................... 53
Wolfe, Leonard, President and Chief Executive Officer, United
Bank & Trust, Marysville, KS; on behalf of American Bankers
Association.................................................... 60
Prepared statement........................................... 61
Williams, Sean H., President and Chief Executive Officer, The
First National Bank of Wynne, Wynne, AR; on behalf of
Independent Community Bankers of America....................... 66
Prepared statement........................................... 68
Melone, Brett, Loan Officer, California FarmLink, Santa Cruz, CA;
on behalf of National Sustainable Agriculture Coalition........ 75
Prepared statement........................................... 77
Submitted Material
Auer, Kenneth E., President and Chief Executive Officer, The Farm
Credit Council, submitted letter............................... 95
Emerson, Jo Ann, Chief Executive Officer, National Rural Electric
Cooperative Association, submitted letter...................... 100
Petersen, Sheldon C., Chief Executive Officer, National Rural
Utilities Cooperative Finance Corporation (CFC), submitted
letter......................................................... 101
Thaler, Brad, Vice President of Legislative Affairs, National
Association of Federal Credit Unions, submitted letter......... 102
National Association of REALTORS', submitted statement 103
A REVIEW OF CREDIT AVAILABILITY IN RURAL AMERICA
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WEDNESDAY, JUNE 25, 2014
House of Representatives,
Subcommittee on Livestock, Rural Development, and Credit,
Committee on Agriculture,
Washington, D.C.
The Subcommittee met, pursuant to call, at 10:01 a.m., in
Room 1300 of the Longworth House Office Building, Hon. Eric A.
``Rick'' Crawford [Chairman of the Subcommittee] presiding.
Members present: Representatives Crawford, Goodlatte, King,
Rogers, Conaway, DesJarlais, Yoho, Costa, Scott, Vela, Lujan
Grisham, Bustos, Schrader, and Nolan.
Staff present: Caleb Crosswhite, Debbie Smith, Josh
Maxwell, Kevin Kramp, Mary Nowak, Pete Thomson, Skylar Sowder,
Anne Simmons, Lisa Shelton, Liz Friedlander, and Riley Pagett.
OPENING STATEMENT OF HON. ERIC A. ``RICK'' CRAWFORD, A
REPRESENTATIVE IN CONGRESS FROM ARKANSAS
The Chairman. This hearing of the Subcommittee on
Livestock, Rural Development, and Credit to review credit
availability in rural America, will come to order. Good morning
and thank you all for attending today's hearing to review
credit availability in rural America.
Before I go any further, I do want to take a point of
privilege, if you would allow, and that is to recognize Debbie
Smith who is clerking her last hearing in the Agriculture
Committee after 35 years of service. She began her career here
on the Hill at 19 years of age, and she served seven chairmen
during the span of eight farm bills. I probably said too much
on the math. But let me just say, she has always made the
trains run on time here in the Committee. She is a treasure
that we will certainly miss dearly, especially when it comes to
getting our way in conference in the Senate. So, Debbie, thank
you so much. And we appreciate you.
All right. I know she would want me to go on with the show.
Providing credit to America's farmers and ranchers is a
necessary and serious challenge for many lenders in the United
States. The Farm Credit System, commercial banks and USDA's
Farm Service Agency have continued to do an outstanding job
working to meet the credit needs of rural America. I believe it
is important to hold hearings like the one we are holding today
to make sure the credit needs of producers are being met and
will continue to be met in the future.
As we know, the ag economy is highly cyclical. History
teaches us that interest rates will eventually go up, and
record high prices will eventually come down. In fact, after a
recent period of historic highs, crop prices have declined due
to record plantings and strong production, and farmland values
are slightly decreasing. While livestock producers are
rebounding on the balance sheet with lower feed costs, our
western producers are still struggling with consecutive years
of drought.
Thankfully, due to recent years of high farm incomes and
responsible underwriting, the state of our ag lending
institutions and the farm economy remain strong. Even though
the current ag economy and higher farm prices have resulted in
overall good credit conditions, we must be cautious moving
forward. While farmers should see a small drop in production
costs, USDA is forecasting a 27 percent decline in farm income
from last year. In order to sustain an abundant supply of food
and fiber well into the future, we must ensure that responsible
farm and ag credit policies are in place now.
The Agricultural Act of 2014 was instrumental in doing just
that. The bill included several provisions to provide
opportunities for young and beginning farmers, including making
permanent a microloan program to meet their needs for smaller
projects and creating a cooperative lending pilot program.
Additionally, the elimination of term limits on guaranteed
operating loans will give borrowers and lenders the certainty
they need to work together to graduate participants to
commercial credit.
Today, I am pleased to welcome a distinguished group of
witnesses and I look forward to learning more from them about
their perspectives of current credit conditions and their
forecast for the future economy of rural America.
[The prepared statement of Mr. Crawford follows:]
Prepared Statement of Hon. Eric A. ``Rick'' Crawford, a Representative
in Congress from Arkansas
Good morning. Thank you all for attending today's hearing to review
credit availability in rural America.
Providing credit to America's farmers and ranchers is a necessary
and serious challenge for many lenders in the United States. The Farm
Credit System, commercial banks, and USDA's Farm Service Agency have
continued to do an outstanding job working to meet the credit needs of
rural America.
I believe it is important to hold hearings like the one today to
make sure the credit needs of producers are being met and will continue
to be met in the future. As we know, the agricultural economy is highly
cyclical. History teaches us that interest rates will eventually go up
and record high-prices will eventually come down.
In fact, after a recent period of historic highs, crop prices have
declined due to record plantings and strong production, and farmland
values are slightly decreasing. While livestock producers are
rebounding on the balance sheet with lower feed costs, our western
producers are struggling with consecutive years of drought. Thankfully,
due to recent years of high farm incomes and responsible underwriting,
the state of our agricultural lending institutions and the farm economy
remains strong.
Even though the current agricultural economy and higher farm prices
have resulted in overall good credit conditions, we must be cautious
moving forward. While farmers should see a small drop in production
costs, USDA is forecasting a 27% decline in farm income from last year.
In order to sustain an abundant supply of food and fiber well into
the future, we must ensure that responsible farm and agricultural
credit policies are in place now. The Agriculture Act of 2014 was
instrumental in doing just that. The bill included several provisions
to provide opportunities for young and beginning farmers, including
making permanent a microloan program to meet their needs for smaller
projects and creating a cooperative lending pilot program.
Additionally, the elimination of term limits on guaranteed operating
loans will give borrowers and lenders the certainty they need to work
together to graduate participants to commercial credit.
Today I am pleased to welcome a distinguished group of witnesses
and I look forward to learning more from them about their perspectives
of current credit conditions and their forecast for the future economy
of rural America.
The Chairman. I would like to recognize our distinguished
Ranking Member, my friend from California, Mr. Costa.
OPENING STATEMENT OF HON. JIM COSTA, A REPRESENTATIVE IN
CONGRESS FROM CALIFORNIA
Mr. Costa. Thank you very much, Chairman Crawford, ladies
and gentlemen, and our good witnesses on the two panels that we
will be hearing from shortly. We appreciate you being here and
having the opportunity to hear from the witnesses on what we
can do to ensure that farmers, ranchers and dairy producers
across this great nation of ours have the necessary financial
resources to continue to produce what I believe--what this
entire Subcommittee believes--is the most nutritious, the
finest food products grown anywhere in the world at cost levels
to American consumers that cannot be matched anywhere in the
world. And, certainly, it is the agricultural producers of this
nation that make it happen every day.
But we are here because the certainty provided by
availability of credit for our producers is a critical link for
their continued prosperity and of our ability to make this
happen. Despite the strength of the farm economy, we all know
that there is significant volatility that occurs on a cyclical
nature throughout every region of America. America's farmers,
ranchers and dairy producers face so many different variables
as they grow the food that we put on our dinner table each day
that sadly, in my view, it is too often taken for granted by
the consumers who get that wonderful food at their table. They
don't understand, in many instances, the hard work and the
risk-taking that is involved. Every day these variables take
different shapes and forms. We are all aware of the natural
disasters like droughts and floods. And despite those
challenges, our producers are resilient. But they also deal
with other levels of volatility in the marketplace. And,
obviously, we are proud of their efforts to preserve and
sustain themselves through these difficult challenges.
In my home State of California, as across much of the
western United States, farmers, ranchers and dairy producers,
as the Chairman noted a moment ago, are dealing with a
devastating drought after 3 consecutive below average rainfall
years. And couple that with water systems that today cannot
meet the demands we face. In California, for example, we are
looking at a 6 million acres of very highly productive
agricultural land in which possibly over 600,000 acres of that
6 million acres could become fallow this year. What are the
totals of those impacts and costs?
Therefore, we have to ensure that credit is available to
our producers, both large and small and in between. And to
ensure that credit is available, we must have the mechanisms in
place, the tools, to provide producers that financial
assistance. For example, the dairy producers in California and
across the country saw a sharp decline in prices back in 2009
and 2010 when we were looking at $9 per hundredweight in milk
prices. We had significant bankruptcies as a result of that.
Farm Credit's loan portfolio was impacted as were other private
institutions that were financing dairies.
But with the passage of the new farm bill, and bipartisan
credit is due to this Subcommittee and to the full Committee
with both Chairman Lucas and Ranking Member Peterson, we were
able to produce a 2014 Farm Bill that I think reflects a lot of
the current needs that American agriculture is facing. Dairy
producers, as an example, and lenders alike, will have
confidence to apply for and provide loans respectively because
of the new dairy title and the safety net that exists with the
insurance program.
There were also other reforms that were made in the
Agricultural Act of 2014 that we believe collectively bolster
rural America. The microloans that were mentioned, the efforts
to provide assistance to young farmers, the EQIP Program and
Market Access Program, as examples, we take for granted. But
American agricultural exports are at an all-time high, proving
that not only can we produce the food on the American
consumer's dinner table better than anywhere, but we can
compete in foreign markets if we have a level playing field.
So, Mr. Chairman, I look forward to hearing what our
witnesses have to say about their confidence in our agriculture
economy and the attempt to ensure that we have a stable source
of lending activity that is available for agriculture in every
region of America, as we implement the reforms in the 2014 Farm
Bill.
So thank you, and I yield back the balance of my time.
The Chairman. I thank the Ranking Member and would request
that any Members that want to submit an opening statement would
do so in writing for the record, so witnesses may begin their
testimony and ensure that there is ample time for questions.
I would like to welcome our first panel of witnesses. Our
first three witnesses, the Honorable Jill Long Thompson, Board
Chair and CEO, Farm Credit Administration; Mr. Chris Beyerhelm,
Deputy Administrator for Farm Loan Programs, Farm Service
Agency, USDA; and Mr. Nathan S. Kauffman, Assistant Vice
President, Federal Reserve Bank of Kansas City, Omaha Branch,
Omaha, Nebraska. We appreciate the witnesses being here today.
We will recognize each of you in turn for 5 minutes. I
would direct your attention to the timer and the box that you
see in front of you. If the light is green, it means you are
good to go. If it turns yellow, it is just like when you are in
your car, you might want to step on the gas because it is
fixing to turn red. So we appreciate that.
And with that, I would like to introduce our first witness,
the Honorable Jill Long Thompson. You are recognized for 5
minutes.
STATEMENT OF HON. JILL LONG THOMPSON, Ph.D., BOARD CHAIR AND
CHIEF EXECUTIVE OFFICER, FARM CREDIT
ADMINISTRATION, McLEAN, VA
Dr. Long Thompson. Thank you, Mr. Chairman, Members of the
Subcommittee. I am Jill Long Thompson, Board Chair----
The Chairman. Can you turn on the microphone. Thank you,
ma'am.
Dr. Long Thompson. Thank you. That is better. Mr. Chairman
and Members of the Subcommittee, I am Jill Long Thompson, Board
Chair and Chief Executive Officer of the Farm Credit
Administration. On behalf of my colleagues on the FCA Board,
Kenneth Spearman and Leland Strom, and the dedicated women and
men at FCA, I am pleased to participate in this hearing today.
As required by the Farm Credit Act of 1971, as amended, FCA
serves as the independent arm's-length agency responsible for
examining and regulating the banks, associations and related
entities of the Farm Credit System. We take our
responsibilities very seriously, and we strive to interpret the
Farm Credit Act faithfully.
Congress established the Farm Credit System in 1916 to
provide American agriculture with a dependable source of
credit. The System consists of a nationwide network of
cooperatively organized banks and associations that are owned
and controlled by their borrowers. It serves all 50 states and
the Commonwealth of Puerto Rico. At year-end 2012, the System
held more than 46 percent of the nation's farm real estate
debt. And I am pleased to report that the System's overall
condition and performance remains sound, and it continues to
fulfill its Congressionally mandated mission.
The System's net income was $4.64 billion in 2013, up 12.7
percent from 2012. Since 2010 when the financial crisis and
recession were in full swing, credit quality has continued to
improve. As of December 31, 2013, non-performing loans amounted
to $2 billion, or 1.01 percent of gross loans, down from $2.6
billion or 1.36 percent at year-end 2012.
Because the System raises the money it lends to borrowers
by selling securities in the debt markets, having reliable
access to debt capital is critical for the System. And I am
happy to report that it continues to experience reliable
access. And investor demand for all System debt security
products is strong.
In addition to monitoring the Farm Credit System, my agency
closely monitors the farm economy for emerging risks that would
affect farmers and their lenders. Currently, U.S. agriculture,
as a whole, remains strong. In the Farm Credit Act, Congress
requires System institutions to provide programs specifically
to serve young, beginning and small, or as we call them YBS
farmers and ranchers. In our examinations of System
institutions, we review their YBS programs to ensure that they
are meeting the needs of these borrowers. And we also require
annual reports from institutions on their YBS lending
activities.
In the wake of the global financial crisis, we have
undertaken two major rulemaking actions to strengthen the
safety and soundness of System institutions. Last June, we
issued a revised liquidity regulation requiring each bank to
maintain higher quality liquidity, as well as a supplemental
liquidity buffer. The rule helps ensure that System banks keep
liquidity to continue operating if their access to the capital
markets is temporarily interrupted.
In addition, the FCA staff worked throughout 2013 and into
2014 on extensive revisions to the agency's capital
regulations. The proposed rule, which the Board adopted last
month, would modernize our capital requirements while ensuring
that System institutions continue to hold regulatory capital to
fulfill their mission.
Another part of our mission is to regulate and oversee the
Federal Agricultural Mortgage Corporation, or as it is known
Farmer Mac. Congress established Farmer Mac in 1988 to provide
a secondary market for agricultural mortgage and rural home
loans to improve the availability of cost effective, long-term
credit and liquidity to America's farmers, ranchers and rural
communities. Farmer Mac is in good financial condition and
continues to grow its operations and risk bearing capacity to
advance its statutory mission.
In the past couple of years, as our nation has considered
the ways corporate misconduct may have contributed to the
recent financial crisis, my agency has increased its emphasis
on ethics and standards of conduct, both among our own
employees and in the institutions we regulate. American
agriculture is critical to meeting the food demands of this
nation and the world, and the Farm Credit System is a critical
source of financing for America's farmers and ranchers. As the
regulator of the System, FCA is committed to helping maintain
the source for generations to come.
And, Mr. Chairman, this concludes my statement. But, of
course, I will be happy to answer any questions you may have.
[The prepared statement of Dr. Long Thompson follows:]
Prepared Statement of Hon. Jill Long Thompson, Ph.D., Board Chair and
Chief Executive Officer, Farm Credit Administration, McLean, VA
Introduction
Chairman Crawford, Ranking Member Costa, Members of the
Subcommittee, I am Jill Long Thompson, Board Chair and Chief Executive
Officer of the Farm Credit Administration (FCA or Agency). On behalf of
my colleagues on the FCA Board, Kenneth A. Spearman of Florida, Leland
A. Strom of Illinois, and all the dedicated men and women of the
Agency, I am pleased to participate in this hearing today.
FCA is an independent agency responsible for examining and
regulating the banks, associations, and related entities in the Farm
Credit System (FCS or System), including the Federal Agricultural
Mortgage Corporation (Farmer Mac). The banks and associations of the
FCS form a nationwide network of borrower-owned financial institutions
that provide credit to farmers, ranchers, residents of rural
communities, agricultural and rural utility cooperatives, and other
eligible borrowers.
FCA Mission
As directed by Congress, FCA's mission is to ensure a safe, sound,
and dependable source of credit and related services for agriculture
and rural America. We accomplish this mission in two important ways.
First, we protect the safety and soundness of the FCS by examining
and supervising all FCS institutions, including Farmer Mac, and we
ensure that they comply with applicable laws and regulations. Our
examinations and oversight strategies focus on an institution's
financial condition and any material existing or potential risk, as
well as on the ability of its board and management to direct its
operations. We also evaluate each institution's compliance with laws
and regulations to ensure that it serves all eligible borrowers,
including young, beginning, and small farmers and ranchers. If a System
institution violates a law or regulation or operates in an unsafe or
unsound manner, we use our supervisory and enforcement authorities to
take appropriate corrective action.
Second, we develop policies and regulations that govern how System
institutions conduct their business and interact with customers. Our
policies and regulations protect System safety and soundness; implement
the Farm Credit Act; provide minimum requirements for lending, related
services, investments, capital, and mission; and ensure adequate
financial disclosure and governance. We approve the corporate charter
changes of System institutions, System debt issuance, and other
financial and operational matters.
Through the oversight and leadership of the House and Senate
Agriculture Committees, many important reforms were made to the Farm
Credit Administration and the FCS as a result of the agricultural
credit crisis of the 1980s. This included restructuring FCA as an
independent arm's-length regulator with formal enforcement powers,
providing borrower rights to System borrowers with distressed loans,
and establishing the Farm Credit Insurance Fund (Insurance Fund) to
protect System investors.
Since then, the Farm Credit System has restored its financial
health and the public trust. Using our authority as an arm's-length
regulator, we have contributed to the System's success by ensuring that
System institutions adhered to safety and soundness standards. The
Insurance Fund also helped by restoring investor confidence.
Both the System and FCA learned much during the crisis of the
1980s, and those lessons helped build a much stronger Farm Credit
System, as well as a stronger regulator. We will continue to focus on
ensuring that the System remains safe and sound by promulgating
regulations, providing appropriate guidance, and maintaining strong and
proactive examination and supervisory programs. With the dynamics and
risks in the agricultural and financial sectors today, we recognize
that FCS institutions must have the appropriate culture, governance,
policies, procedures, and management controls to effectively identify
and manage risks. Today the System is a dependable provider of credit
to agriculture and rural America as intended by Congress.
Farm Credit System Mission
The FCS is a government-sponsored enterprise (GSE) created by
Congress in 1916 to provide American agriculture with a dependable
source of credit. The System's banks and associations form a nationwide
network of cooperatively organized banks and associations that are
owned and controlled by their borrowers, serving all 50 states and the
Commonwealth of Puerto Rico.
The System provides credit and other services to agricultural
producers and farmer-owned agricultural and aquatic cooperatives. It
also makes loans for agricultural processing and marketing activities,
rural housing, farm-related businesses, rural utilities, and foreign
and domestic companies involved in international agricultural trade. In
addition, the System provides funding and discounting services to
certain ``other financing institutions'' and forms partnerships with
commercial banks to provide credit to agriculture and rural America
through participations and syndications.
As required by law, System borrowers own stock or participation
certificates in System institutions. The FCS had nearly 1.1 million
loans and approximately 500,000 stockholders in 2013. Approximately 85
percent of the stockholders were farmers or cooperatives with voting
stock. The remaining 15 percent were nonvoting stockholders, including
rural homeowners and other financing institutions that borrow from the
System. The U.S. Department of Agriculture's latest data show that the
System's market share of farm debt was 41 percent, which slightly
exceeds the 40 percent share held by commercial banks.
One of FCA's oversight roles is to ensure that the System, with its
mission devoted to agriculture and rural America, maintains its
presence in the agricultural marketplace to provide competitive and
dependable credit for all eligible and creditworthy farmers, ranchers,
and agricultural cooperatives. In fact, the System has maintained its
mission service during the difficult markets of the past 6 years to
help producers and rural America. When commodity prices soared in early
2008, System institutions stepped forward to meet the critical
financing needs of the grain elevator industry. They met increased
demands for financing machinery and higher input costs for producers.
The FCS also helped Midwest borrowers affected by floods and worked
with livestock producers, especially dairy and hog producers, as they
made difficult decisions during stressful market conditions. Overall
the System continued to have access to funds and was able to increase
its lending to agriculture and rural America during a financial crisis
and severe recession.
Condition of the FCS
The FCS remains fundamentally safe and sound and is well positioned
to withstand the challenges facing agriculture. Although the near-term
outlook for agriculture is generally favorable, uncertainty surrounding
both the general and farm economies will present continuing challenges
for the System.
The U.S. Department of Agriculture is projecting that net cash
income will drop sharply in 2014. Crop prices declined significantly in
2013 in response to strong global crop production. Near-record U.S.
corn and soybean plantings and a return to normal yields in 2014 could
lead to further declines in grain and oilseed prices.
As a consequence of lower prices, margins for crop producers will
be sharply lower, but the dairy and livestock sectors should see a
significant improvement in profitability. Lower grain prices are also
having a cooling effect on the farmland market, especially in the
Midwest. Severe drought conditions in the West, especially in
California, may also negatively affect System borrowers. While the
current credit stress level in the System's loan portfolio is well
within its risk-bearing capacity, the above-mentioned factors may
adversely affect asset quality in 2014.
The System continues to grow at a moderate pace. As of March 31,
2014, gross loans totaled $204.6 billion, up $12.8 billion or 6.7
percent from March 31, 2013. Real estate mortgage lending was up $5.5
billion or 6.2 percent as demand for cropland continued in 2013,
especially in the Midwest. Overall, real estate mortgage loans
represent 46.1 percent of the System's loan portfolio. Agribusiness and
production lending increased by $3.3 billion from the year before, and
intermediate-term lending increased by $2.4 billion.
The System also continues to enhance its capital base. As of March
31, 2014, System capital equaled $43.7 billion, up from $39.6 billion
the year before. The System's total capital-to-assets ratio was 16.6
percent as compared with 16.0 percent a year earlier. Moreover, more
than 81 percent of total capital is in the form of earned surplus.
The increase in total capital is due in large part to the System's
strong earnings performance. For the first quarter of 2014, the System
reported net income of $1.1 billion. For the 2013 calendar year, the
System reported net income of $4.6 billion. With the decline of 18
basis points in the interest rate on earning assets, net interest
margin declined in the first quarter to 2.63 percent compared with 2.83
percent the year before. Higher average earning asset balances, up
$15.1 billion year over year, helped offset the decline in net interest
margin. While the System has been able to take advantage of the low
interest rate environment, its ability to continue to lower its cost of
debt relative to asset pricing is limited. Some compression of net
interest spread is expected as interest rates change and assets prepay
or reprice.
Credit quality in the System's loan portfolio continues to be
strong. As of March 31, 2014, non-performing loans totaled $2.1
billion, or 1.01 percent of gross loans, as compared with $2.7 billion,
or 1.41 percent, for the same quarter a year ago. In comparison to
total capital, non-performing loans represented 4.7 percent at quarter-
end. High feed costs, which challenged livestock, poultry, and dairy
producers through much of 2013, have moderated as a result of the
substantial drop in crop prices. Combined with strong product pricing,
profit margins for these sectors are substantially higher. Other
sectors such as the forestry and nursery industries have also seen a
drop in nonaccrual rates as the U.S. housing market continues to
strengthen.
The System continues to have reliable access to the debt capital
markets. Investor demand for all System debt products has been
positive, allowing the System to continue to issue debt on a wide
maturity spectrum at very competitive rates. Even as the Federal
Reserve started to slowly taper its quantitative easing policy at the
end of 2013, risk spreads and pricing on System debt securities
remained favorable relative to corresponding U.S. Treasuries. Further
strengthening the System's financial condition is the Insurance Fund,
which holds more than $3.6 billion. Administered by the Farm Credit
System Insurance Corporation, this fund protects investors in System-
wide consolidated debt obligations.
System banks also maintain liquidity reserves to ensure they can
withstand market disruptions. As of March 31, 2014, the System's
liquidity position equaled 183 days, significantly above the 90 day
regulatory minimum.
A Changing Risk Profile in Agriculture
The high grain prices of the past few years led to strong earnings
for grain and soybean farmers. High grain prices had the inverse effect
on the earnings of livestock and dairy producers, constricting their
profit margins by driving up their feed costs.
The tables have now turned, however. The large U.S. corn and
soybean crops in 2013 and the potentially large crops in 2014 have
caused prices for these crops to decline considerably. As a result, the
profit margins for livestock and dairy producers have expanded as the
profit margins of grain and soybean farmers have constricted. Crop
insurance played an important role in supporting grain and soybean
farmers' income in 2013, but the level of support it will provide in
the future is unclear.
The reduced profit margins in the crop sector are not expected to
lead to significant credit problems in the near future because many
grain farmers have experienced several years of good earnings and
should have the resources necessary to get them through some lean
times. Nevertheless, grain farmers who rent most of the land they farm
may face greater financial stress than those who have no land rental
costs.
Farmland values in the Midwest rose rapidly during the past several
years because of high grain prices and historically low interest rates.
Most observers agreed that these elevated farmland values were not
sustainable because grain prices and interest rates would likely revert
to more sustainable levels, leading to an adjustment in farmland
prices. Surveys conducted by several Federal Reserve Banks and Iowa
State University indicate that farmland values are adjusting.
Fortunately, farm real estate mortgage underwriting has been
conservative among Farm Credit System institutions as well as
commercial banks, according to colleagues from other financial
regulators with whom we discuss common issues regularly. Consequently,
we believe that most FCS institutions will not face significant losses
because of adjustments in farmland prices.
FCA staff monitors developments in the farmland market closely, and
our examiners have implemented a program for examining the collateral
risk management at each Farm Credit institution. In addition, we
monitor System real estate mortgage loan-to-value ratios on a quarterly
basis. The FCA Board receives semiannual staff reports on the farmland
market and loan-to-value ratios at Farm Credit institutions.
Examination Programs for FCS Banks and Associations
FCA is responsible for regulating and supervising the banks,
associations, and related entities that compose the Farm Credit System.
Our examination and oversight programs provide strategic, proactive
risk supervision of the System. In conducting our institution-specific,
risk-based oversight and examination activities, we assign highest
priority to institutions that present the greatest risk.
We also perform nationally focused examinations that target
specific issues and operational areas to monitor the condition and
operations of the System as a whole. We actively monitor risks that may
affect groups of System institutions or the entire System, including
risks from the agricultural, financial, and economic environment.
Through our oversight, we require System institutions to have the
programs, policies, procedures, and controls to effectively identify
and manage risks. Our oversight program also requires compliance with
laws and regulations. When institutions are either unable or unwilling
to address unsafe and unsound practices or to comply with laws and
regulations, we take appropriate supervisory or enforcement action. We
use a comprehensive regulatory and supervisory framework to ensure the
System's safety and soundness. FCS institutions, on their own and in
response to our efforts, continue to improve their risk management
systems.
FCA uses the Financial Institution Rating System (FIRS) to assess
the safety and soundness threats to each System institution. Similar to
the systems used by other Federal financial regulators, the FIRS is a
CAMELS-based system, with component ratings for capital, assets,
management, earnings, liquidity, and sensitivity, all factoring into an
overall composite rating. System institutions are assigned component
and composite ratings based on FCA's evaluation of quantitative and
qualitative factors. FIRS ratings range from 1 for a sound institution
to 5 for an institution that is likely to fail.
Although the System's financial condition remains sound, a small
number of individual institutions display some weaknesses. These
weaknesses stem from several factors that have adversely affected some
System borrowers:
The slow pace of economic recovery
Volatile commodity prices
Drought in the western United States
Damaging diseases in the citrus and pork sectors
As the System's regulator, we have increased supervisory oversight
and dedicated additional resources to institutions experiencing stress.
As of December 31, 2013, eight System institutions had a composite FIRS
rating of 3. While these institutions represent about two percent of
System assets and do not meaningfully affect the System's consolidated
performance, they require significantly more resources to oversee.
The chart below includes the System banks and their affiliated
associations. The figures in the bars reflect the number of
institutions by FIRS rating.
Farm Credit System FIRS Composite Ratings
Source: FCA's FIRS Ratings Database.
Regulatory Activities
Congress has given the FCA Board statutory authority to establish
policy, prescribe regulations, and issue other guidance to ensure that
System institutions comply with the law and operate in a safe and sound
manner. We are committed to developing balanced, flexible, and legally
sound regulations.
Over the past couple of years, we have revised our regulations to
accomplish the following objectives:
To require each System institution's business plan to
include strategies and actions to serve all creditworthy and
eligible persons in the institution's territory. In addition,
the regulation encourages institutions to serve nontraditional
customers, such as women and minorities, who often operate
within local food systems by producing organic or specialty
crops on small farms. The regulation also seeks to achieve
diversity and inclusion in the workforce of System
institutions.
To enhance System disclosures of senior officer compensation
and supplemental benefit programs.
To ensure that System institutions maintain effective
policies to measure and manage exposure to single
counterparties, industries, and market segments, and to large
complex loans.
To ensure that System funding and liquidity requirements are
appropriate and to ensure that the discounts applied to
investments reflect their marketability.
To allow System institutions to purchase eligible
agricultural loans from the Federal Deposit Insurance
Corporation.
To ensure that prudent practices are in place for the safe
and sound management of System investment portfolios.
To remove all requirements related to nonbinding, advisory
votes at System institutions on senior officer compensation.
To establish a regulatory framework for the reporting of
System accounts and exposures to FCA. The revisions reaffirm
our authority to collect data on System institution accounts
and exposures, including data on shared assets.
To establish standards for Farmer Mac's capital planning
process. The revised process emphasizes the quality and level
of capital and annual stress testing.
To increase the level and quality of assets held in Farmer
Mac's liquidity reserve.
Currently, we are working on regulatory projects to accomplish
these additional objectives:
To enhance our risk-based capital adequacy framework to more
closely align it with that of other Federal banking agencies
and the Basel Accord. We published a notice of proposed
rulemaking to solicit comments on amending our regulations to
replace the current core and total surplus capital standards
with a ``Tier 1/Tier 2'' capital framework.
To implement the requirements of the Dodd-Frank Wall Street
Reform and Consumer Protection Act by imposing margin
requirements on noncleared derivatives transactions and
removing references to credit ratings.
To clarify and strengthen the standards-of-conduct
requirements for System directors, employees, and agents.
To seek public input on FCA regulations that may duplicate
other requirements, are not effective in achieving the stated
objectives, are not based on law, or impose burdens that are
greater than the benefits received.
To clarify and enhance stockholder voting procedures.
To revise regulatory requirements for mergers or
consolidations of banks or associations.
To strengthen the safety and soundness of the investment
activities of System banks by more accurately reflecting the
risk in particular investments, and to comply with a provision
of the Dodd-Frank Act by replacing credit rating requirements
with other standards of creditworthiness.
To ensure appropriate and effective risk governance and
board oversight at Farmer Mac, and to clarify standards-of-
conduct and conflict-of-interest requirements.
To remove reliance on credit ratings from investment
eligibility regulations pertaining to Farmer Mac and to
maintain the quality and availability of Farmer Mac's liquid
investments.
Corporate Activities
The number of FCS institutions has declined over the years as a
result of bank and association mergers. Generally, System institution
mergers result in larger, more cost-efficient and better-capitalized
institutions with broad, diversified asset bases, both by geography and
commodity.
However, these mergers also increase the complexity of the
continuing institutions. The increased complexity places greater
demands on both FCA staff resources, as well as the level of expertise
required of staff, particularly in areas of regulation, policy,
examination, and legal interpretation. As of January 1, 2014, the
System consisted of the following:
Seventy-eight direct-lender associations
Three Farm Credit Banks and one Agricultural Credit Bank
Five service corporations that provide support, technology,
leasing, human capital, and other services
A funding entity that markets the securities--chiefly bonds
and discount notes--that the banks sell in the capital markets
to raise loan funds
A GSE with the mission of providing a secondary market for
agricultural real estate and rural housing mortgage loans
Federal Agricultural Mortgage Corporation
Congress established Farmer Mac in 1988 to provide a secondary
market for agricultural mortgage and rural home loans to improve the
availability of cost-effective long-term credit and liquidity to
America's farmers, ranchers, and rural communities. Farmer Mac creates
and guarantees securities and other secondary market products that are
backed by mortgages on farms and rural homes, including certain USDA
guaranteed loans. Loan originators that participate in Farmer Mac's
secondary market programs include community banks, Farm Credit System
institutions, mortgage companies, commercial banks, insurance companies
and credit unions. The 2008 Farm Bill expanded Farmer Mac's program
authorities by allowing it to purchase and guarantee securities backed
by eligible rural utility loans made by cooperative lenders.
Through a separate office required by statute (the Office of
Secondary Market Oversight), FCA examines, regulates, and oversees
Farmer Mac's operations and its safety and soundness. As the secondary
market GSE devoted to agriculture and rural America, Farmer Mac has the
statutory authority to, in extraordinary circumstances, issue
obligations to the U.S. Treasury Department, not to exceed $1.5
billion, to fulfill the guarantee obligations of its guaranteed
securities. The Insurance Fund does not back Farmer Mac's securities,
and the System is not liable for any Farmer Mac obligations.
After sustaining losses on liquidity investments during the 2008
financial crisis, Farmer Mac continues to replenish capital and
strengthen its operations and risk-bearing capacity to advance its
statutory mission. Over the past several quarters, Farmer Mac's capital
position has steadily improved, with healthy core earnings growth and
recent issuances of high-quality preferred stock. As of March 31, 2014,
Farmer Mac's core capital totaled $664.0 million, which exceeded its
statutory requirement of $462.5 million. As a result, capital surplus
grew to $261.0 million, up from $155.6 million as of March 31, 2013.
New business volume growth is steady. The total portfolio of loans,
guarantees, and commitments grew by five percent from March 31, 2013,
to $14.1 billion on March 31, 2014. Farmer Mac recently reported that
small farm loans contributed 44 percent of the volume related to its
new Farm & Ranch program. Despite the decreasing number of small farms,
Farmer Mac has seen an overall increase in the dollar volume and number
of small farm loans in its programs.
Credit quality indicators reflect the strength in the agricultural
and rural utility sectors and Farmer Mac's commitment to strong
underwriting standards. As of March 31, 2014, Farmer Mac's 90 day
delinquencies were $29.4 million, or 0.56 percent of Farm & Ranch
volume, compared with $39.7 million, or 0.83 percent, as of March 31,
2013. Real estate owned as of March 31, 2014, was $2.5 million, down
from $4.4 million a year earlier. Farmer Mac reported no delinquencies
in its pools of rural utility cooperative loans. On March 31, 2014,
Farmer Mac's allowance for losses totaled $14.0 million, compared with
$14.3 million on March 31, 2013.
Farmer Mac continues to enjoy reliable access to the debt capital
markets to support its mission of providing financing and liquidity to
agriculture and rural markets. To improve its financial flexibility in
the event of a financial or market disruption, Farmer Mac has taken
significant measures to increase the quality and liquidity of its $2.5
billion investment portfolio.
Serving Young, Beginning, and Small Farmers and Ranchers
System institutions are required to develop programs and make
special efforts to serve young, beginning, and small (YBS) farmers and
ranchers. In 2013, the System continued to show gains in loan dollars
outstanding and loan numbers outstanding to YBS producers. In addition,
from 2012 to 2013, the number of new loans made to young farmers went
up by 2.3 percent, and the number of new loans made to beginning
farmers went up by 5.0 percent.
Despite these gains, YBS results as a percentage of the System's
total farm loans have either declined or remained flat over the past
few years. These results likely reflect the shrinking pool of YBS
farmers in the United States. Because of the high costs of starting a
farm, fewer people are entering agriculture. Over the years, farms have
gotten bigger, and the average age of farmers has gone up.
FCA issued a bookletter in August 2007 to encourage institutions to
seek ways to better serve YBS borrowers. The bookletter provides
institutions with more flexibility to lend to YBS borrowers and
encourages them to use credit enhancements to allow more YBS borrowers
to qualify for credit. Credit enhancements for YBS borrowers may
include:
lower rates or fees for YBS borrowers,
differential underwriting standards, and
USDA loan guarantees.
In response to this guidance, more institutions are committing
capital to assist in their YBS lending, and more are using advisory
committees to update YBS policies and procedures. Many institutions
have stepped up their YBS outreach efforts and their coordination with
outside parties or organizations to serve YBS producers.
In addition to providing credit to YBS borrowers, FCS institutions
may offer other financial services to YBS borrowers, and many
institutions provide special training and educational programs for
them.
Our efforts to encourage System institutions to emphasize diversity
and inclusion and to serve producers of local and regional foods also
benefit YBS producers. In 2012, to ensure the System fulfills its
Congressional mission to serve all eligible, creditworthy borrowers, we
issued a regulation requiring institutions to develop human capital and
marketing plans that promote diversity and inclusion. Because many
small and beginning farmers belong to underrepresented groups, this
regulation helps strengthen service to YBS borrowers. Likewise, a
bookletter we issued in 2012 to provide guidance regarding service to
local and regional foods producers also benefits YBS borrowers because
many of these producers would be classified as young, beginning, or
small.
Working with Financially Stressed Borrowers
Risk is an inherent part of agriculture, and the causes of risk are
many:
Adverse weather
Changes in government programs
International trade issues
Fluctuations in commodity prices
Crop and livestock diseases
These risks can sometimes make it difficult for borrowers to repay
loans. The Farm Credit Act provides System borrowers certain rights
when they apply for loans and when they have trouble repaying loans.
For example, the act requires FCS institutions to notify borrowers of
the right to seek restructuring of loans before the institutions begin
foreclosure. It also provides borrowers an opportunity to seek review
of certain credit and restructuring decisions. When a System
institution acquires agricultural property through liquidation, the
Farm Credit Act also provides borrowers the opportunity to buy or lease
back their former properties.
FCA enforces the borrower rights provisions of the Farm Credit Act
and examines institutions to make sure that they are complying with
these provisions. We also receive and review complaints from borrowers
who believe their rights have been denied. Through these efforts, we
ensure compliance with the law and help FCS institutions continue to
provide sound and constructive credit and related services to eligible
farmers and ranchers.
Conclusion
We at FCA remain vigilant in our efforts to ensure that the Farm
Credit System and Farmer Mac remain financially sound and focused on
serving agriculture and rural America. While we are proud of our record
and accomplishments, we remain committed to excellence, effectiveness,
and cost efficiency, and we will remain focused on our mission of
ensuring a safe, sound, and dependable source of credit for agriculture
and rural America. This concludes my statement. On behalf of my
colleagues on the FCA Board and at the agency, I thank you for the
opportunity to share this information.
The Chairman. Thank you. I appreciate that. And we will
move on to our next witness, Mr. Chris Beyerhelm, Deputy
Administrator for Farm Loan Programs, FSA.
STATEMENT OF CHRIS BEYERHELM, DEPUTY
ADMINISTRATOR FOR FARM LOAN PROGRAMS, FARM
SERVICE AGENCY, U.S. DEPARTMENT OF AGRICULTURE, WASHINGTON,
D.C.
Mr. Beyerhelm. Mr. Chairman, Members of the Subcommittee,
thank you for this opportunity to appear before you to provide
an update on credit conditions in rural America and a status
update on how FSA loan programs are working with our commercial
lending partners to provide credit to our farmers and ranchers.
The farm economy has been strong in recent years with high
farm income and farmland values at or near record levels.
However, these highs are not expected to continue, and not all
agriculture sectors have benefited from these conditions. An
increase in feedgrain production is expected to drive farm
income down, and a slowdown in real estate values has already
been observed. Our livestock producers and dairy operations are
still recovering from extended periods of high feed costs and
drought. And input costs for all are expected to remain at near
or record high levels of recent years.
Finally, considering all of these events, combined with
interest rates creeping up, lenders and their regulators are
closely scrutinizing agriculture credit standards, making some
producers unable to get credit. For those family farmers who
could not qualify for commercial credit due to lender
standards, but otherwise creditworthy, they can turn to the FSA
administered guaranteed loan programs. These loan programs are
discretionary and are funded through annual appropriations.
Federal budget resources have been increasingly leveraged over
the last 4 years through loan programs. For example, in 2010,
$148 million of budget authority was needed to provide $5
billion of lending authority. While in 2014, a significantly
reduced budget authority of $98 million provided for $5.5
billion of lending authority. This is an excellent example of
how government programs that are prudently managed the taxpayer
with a greater return.
Since early 2009, FSA has experienced record demand levels
of loan requests. In each of the last 4 years, FSA has had a
significant backlog of approved, but unfunded, loans. To manage
this increase, the President's 2015 budget has requested
lending authority to go to $6.4 billion. And should these funds
be provided, FSA expects for the first time in many, many years
to be able to meet all of the demand in our loan programs. This
will allow our customers to be better prepared and execute
their business plans, and meet on an even playing field for
land and preseason discounts.
As of May 2014, the FSA portfolio was $20 billion, 71,000
direct customers, 34,000 guaranteed customers. Performance of
the portfolio has been stellar, with loss rates for the direct
and guaranteed programs at 1.6 and .3 percent respectively.
Delinquencies for direct and guaranteed are 5.4 percent and 1
percent respectively.
The portfolio continues to be fluid with customers moving
in and out of the portfolio as it was designed. In fact, of all
of the customers in our portfolio in the year 2000, for the
operating program, only 14 percent of those remained in 2013.
These statistics indicate the program is providing new and
beginning farmers an opportunity. But once their financial
condition improves, they are able to seek and obtain commercial
credit.
The FSA continues to put an emphasis on beginning farmers.
The continued increase in average age of farmers and rural
population decline says that there is a pressing need that we
get new farmers into the industry. We try to take existing loan
programs and tweak and revise those to provide benefits to
beginning farmers. Most notably, the microloan program you have
mentioned earlier has been a tremendous asset to beginning
farmers. Since its inception in January of 2013, over 7,200 of
these loans have been made. And I am pleased to tell you that
over 70 percent of those have been to beginning farmers.
Congress also recognized the importance of beginning
farmers in the last farm bill. And soon after enactment, FSA
implemented all of the discretionary--or the non-discretionary
provisions of the farm bill. And many of those had immediate
impact on beginning farmers, though many of the farm bill
provisions will be implemented in October of 2014, with the
rest in early 2015.
In conclusion, Mr. Chairman, FSA, working together with our
commercial lending partners, is delivering a successful lending
program with high levels of participation and fiscal
responsibility. Our boots on the ground delivery system puts us
in a unique position to deliver a quality loan product to the
next generations of America's farmers and ranchers. However, we
continue to face challenges: government resources are
declining, and agriculture is changing.
We look forward to working with this Committee and others
to continue to refine and adjust our programs and processes to
maximize the opportunities for our small, beginning and
socially disadvantaged farmers, and find the appropriate level
of resources in order for us to meet this--or accomplish this
mission.
Thank you for allowing me to share the FSA farm loan
perspectives as you seek to address this important issue. I
look forward to any questions now or in the future. Thank you.
[The prepared statement of Mr. Beyerhelm follows:]
Prepared Statement of Chris Beyerhelm, Deputy Administrator for Farm
Loan Programs, Farm Service Agency, U.S. Department of Agriculture,
Washington, D.C.
Mr. Chairman, and Members of the Subcommittee, thank you for the
opportunity to appear before you to provide an update on the credit
conditions rural America now faces, and the current status and
operations of the farm loan programs at the Farm Service Agency (FSA).
Credit Conditions
The farm economy has been strong the last couple of years with net
farm income at an all-time high in 2013, and farmland values currently
at, or near, record levels. However, record farm income is not
sustainable. A bumper feed grain crop is being forecast for 2014 that
could lead to a 27 percent decline in farm income from last year, but
farm income is still forecast to be the seventh highest to date. A
slowdown in farmland value growth already has been observed.
Furthermore, the high commodity prices in prior years did not benefit
all producers equally as higher feed costs squeezed livestock and dairy
producer margins leaving them with weak balance sheets in need of
rebuilding. Compared to 2012, gross crop receipts are forecast to
decrease by more than 15.2 percent in 2014, with a $20.2 billion
decline in corn receipts and a $6.2 billion decline in soybean receipts
expected.
On a historical basis, production expenses are anticipated to fall
from 2013 levels, but will remain near their all-time highs, having
grown to a forecasted $348.2 billion for 2014, which is a 21.1 percent
increase over 2010. Therefore, large amounts of capital will continue
to be required to finance agricultural production, increasing the
demand for operating credit, financial leverage, and liquidity.
Finally with interest rates bottoming out and farmland values high,
credit standards established by lenders and their regulators have been
high since 2010 and will likely continue to be high for some time.
Recent Federal Reserve Surveys indicate commercial lenders in most
regions are maintaining stringent credit standards. This continued high
level of loan scrutiny by lenders means some farmers still cannot
qualify for commercial credit.
FSA Farm Loan Programs. Family farmers who do not qualify for
commercial credit due to lender standards, but are otherwise
creditworthy, can turn to the farm loan programs administered by FSA.
The Agency assists farmers through direct and guaranteed farm loans.
Direct loans are made and serviced by FSA; agency employees provide
supervision and technical assistance to direct loan borrowers. Direct
loans are not intended to be a permanent source of credit, and
borrowers agree to obtain commercial credit and refinance their FSA
debts when they are able to do so. In fact, of those borrowers having
outstanding operating loans in 2000, only 14 percent remain in the FSA
portfolio in 2014.
Guaranteed loans are made, funded and serviced by a commercial
lender. FSA typically guarantees up to 90 percent of the loan principal
and interest. FSA employees must evaluate and make a credit decision on
all guaranteed loans. Guaranteed lenders must retain at least the non-
guaranteed portion of the loan in their portfolio and are accountable
for loan servicing under the FSA guarantee.
Funding. FSA farm loan programs are discretionary programs funded
through annual appropriations. In accordance with the Federal Credit
Reform Act of 1990 (as amended), appropriations for FSA farm loans are
based on the projected total cost of loans when they are made. Federal
budget resources are able to be significantly leveraged through the
loan programs. In Fiscal Year (FY) 2014, $97.7 million in
appropriations supported $5.53 billion in direct and guaranteed FSA
loans which, when provided to American farmers and ranchers, resulted
in a significant investment in the rural parts of our country. Prudent
management and program administration, as evidenced by low levels of
delinquencies and losses, has allowed FSA to increase leverage of
limited budgetary resources over the past several years. For example,
in FY 2010, $148.5 million in budget authority was required to support
a total program level of $5.08 billion, while in FY 2014, a slightly
larger program level requires 34 percent less budget authority.
Loan Demand. Activity in FSA's farm loan programs indicates that a
significant number of farmers and ranchers continue to be unable to
obtain commercial credit under current conditions. Farm loan program
demand is usually a reflection of financial conditions in the farm
economy: when the overall farm economy is strong, farm loan activity
declines; during times of financial stress in the farm economy, demand
for FSA loans rises. This makes sense, given that a basic requirement
to qualify for the loan programs is to be unable to meet the criteria
for commercial credit.
In early FY 2009, loan demand surged to levels that had not been
seen since the early 1980s. Demand for farm loan program assistance in
FY 2009, and in 2013, reached its highest levels since FY 1985. Demand
has continued at, and in some programs increased above, those near-
record FY 2009 levels. In each of the last 4 years FSA has closed out
the fiscal year with a significant backlog in approved, but unfunded
loans. Application activity in FY 2014 reflects demand levels similar
to the higher levels of the previous 5 years. To manage the increased
demand, the President's budget request for FY 2015 recommended that
loan levels to be increased to $6.4 billion. If these funds are
provided, FSA expects, for the first time in many years, to have
sufficient funds to meet the demand. This will allow our customers to
better prepare and execute their business plans, and compete on an even
playing field for land and pre-season discounts on inputs.
Over the past 2 years, an unusually high number of direct operating
loan applications have been received from new customers. Normally,
about 20 percent of direct operating loan applications in any given
year are from farmers who do not have FSA loans. In FY 2013, 37 percent
of the direct operating loans made were to customers who did not have
existing FSA operating loans.
Performance and Portfolio Conditions
Farm loan programs continue to emphasize the importance of
processing applications in a timely manner. Between FY 2008 and FY
2013, the length of time to process direct loans has averaged 28 days.
During this period, FY 2010 (the largest loan volume year since the
mid-1980s) had the highest average, at just less than 31 days, while
the lowest of 25 days was achieved in FY 2013. Similarly, loan
processing timeliness in the guaranteed loan program has remained very
strong with an average of 9 days over the past 6 years. These results
for both the direct and guaranteed programs represent historic lows.
This strong performance is continuing in FY 2014. As of May 31, 2014,
the average processing time for the direct loan program was 24 days,
and 9 days for guaranteed loans. These long-term results are remarkable
given that loan demand has surged and staffing levels have declined.
The fact that there has not been a noticeable deterioration in
application processing time is a testament to the dedication of FSA
field staff, implementation of efficiency measures in loan processing,
and the effectiveness of the Information Technology (IT) solutions farm
loan programs has deployed.
As of May 31, 2014, the FSA direct loan portfolio consisted of $8.2
billion owed by 70,445 borrowers, while the guaranteed portfolio
consisted of $11.5 billion owed by 33,847 borrowers. The quality of our
portfolio has continued to improve, with foreclosure and loss rates
falling while borrower graduation to commercial loans has increased.
Loss Rates. In FY 2013, losses in the direct loan program were just
1.6 percent (see Chart 1). Losses for FY 20l3 in the guaranteed loan
program were 0.3 percent, (see Chart 1).
Delinquency Rates. As with losses, the direct loan delinquency
rates have been at historic lows for the past 2 decades at 5.4 percent
for FY 2013 (see Chart 2). This is the result of steady and dramatic
decreases, from a 23.8 percent delinquency rate in FY 1995. The
decrease was facilitated by expanded authority, since 1996, to offset
delinquent borrowers' loan obligations with their Federal payments,
salaries and income tax refunds. In the guaranteed program, the FY 2013
delinquency rate was 1.07 percent; the lowest on record (see Chart 2).
Graduation rates: FSA does not provide permanent financing; direct
loan borrowers are required to move to commercial credit or graduate
when they are able to do so. Statistics indicate that the vast majority
of borrowers leave the FSA portfolio in a relatively short (given a
potential 40+ year farming career) period of time. Eighty six percent
of the operating loan borrowers in the FSA portfolio in 2000 no longer
owed an operating loan by 2013. In the farm ownership program, over 70
percent of the borrowers in the FSA portfolio in 2000 had left by 2013.
These statistics indicate the program is providing new and beginning
farmers an opportunity to obtain credit, but after establishing
themselves financially, are able to seek and obtain commercial credit.
Equitable Treatment and Participation
I, along with all members of the FSA management team, remain fully
committed to providing equal access and opportunity to all those FSA
serves. In FY 2013, while FSA received more than 50,000 loan
applications, more than 2,700 loan servicing requests, and tens of
thousands of applications for various farm commodity, income support,
and disaster assistance programs, the Assistant Secretary for Civil
Rights received only 19 civil rights complaints related to FSA
programs. While this is the lowest number of FSA civil rights
complaints received since records have been kept, it is our goal to
further reduce this number.
I will closely monitor the operations of farm loan programs to
assure that our producers, program applicants, and employees receive
fair and equitable treatment. I want to update you on a few key
activities dealing with these important issues.
Program participation. An examination of the composition of FSA's
loan portfolio indicates that FSA finances socially disadvantaged
farmers at a much higher rate than that groups' proportion of the farm
population. FSA has significantly increased the amount of loan funds
provided to socially disadvantaged applicants. Between 2008 and 2013,
the FSA direct loan caseload for socially disadvantaged borrowers
increased from 14,068 to 15,514.
New and Beginning Farmers. The continuing increase in the average
age of farmers and decline in rural population both point to a pressing
need for more beginning farmers. As a result, assisting and fostering
beginning farmers and ranchers remain a primary concern and focus for
FSA farm loan programs. While the general strength of the agriculture
economy is certainly a positive factor for rural America, the resulting
increases in land values and other capital costs have made it ever more
difficult for beginning farmers to get started and become established.
More than ever, beginning farmers need a hand up to start their journey
toward success.
FSA is committed to effective use of farm loan programs and
authorities to assist beginning farmers. Beyond implementation of the
2014 Farm Bill provisions benefitting beginning farmers, FSA has
implemented or modified programs under existing authorities to better
fit the needs of beginning farmers. Most notably, the microloan
program, a subset of the direct operating loan program, has been
tremendously successful in assisting beginning farmers. This program,
launched in January 2013, reduces paperwork by half and is designed to
fit the business plans of non-commodity operations such as local food,
community-supported agriculture, urban agriculture and niche market
farm businesses which are attracting many beginning farmers. So far
this year, 72 percent of the microloans made have gone to beginning
farmers. Although the program is still new, performance, so far, is
very good, with over 7,200 loans made.
In addition to the microloan program, FSA implemented a
``streamlined loan'' application process for repeat operating loan
customers with good repayment history on FSA loans. This allows FSA to
provide more timely service to many beginning farmer borrowers and
frees staff time so they may spend more time with those borrowers who
need additional help or technical assistance.
2014 Farm Bill Implementation. Congress also recognized the
criticality of the situation for beginning farmers and re-affirmed the
focus on them for FSA programs in the 2014 Farm Bill. FSA continues to
strive to reach more beginning farmers and ranchers and has increased
the amount of loan funds provided to beginning farmers and ranchers.
The FSA direct loan caseload for beginning farmers increased from
18,785 in 2008 to 31,659 borrowers in 2013.
FSA was able to implement several nondiscretionary provisions of
the farm bill shortly after enactment, including provisions to increase
the guarantee percentage on guaranteed conservation loans, reduce the
interest rate on joint financing loans, increase the loan limit on down
payment loans, eliminate guaranteed loan term limits, change the land
ownership limitation for beginning farmer applicants, eliminate the
restriction on youth loans to rural areas, and reduce credit
limitations for delinquent and defaulted youth loan borrowers. Several
of these had an immediate impact on beginning farmers. In particular,
the change in interest rates on joint financing farm ownership loans
benefitted hundreds of applicants with applications pending, but not
yet funded, at the time of implementation.
Several additional farm bill provisions will be implemented through
an interim rule scheduled for publication in October 2014, including
changes to eligibility rules for entities, experience requirements for
direct ownership loans, and increasing the microloan limit to $50,000.
These provisions will add flexibility or enhance programs for beginning
farmers as well. The Agency plans to publish a request for suggestions
for pilot projects authorized in Section. 5302, and hopes to receive
suggestions for projects that demonstrate new approaches to assist
beginning farmers and others through farm loan programs. In addition,
we are prepared to implement the Individual Development Accounts
authorized by the farm bill if funding is provided.
IT Modernization. Farm loan programs has also implemented modern,
web-based systems to manage the loan application, approval and funding
process. This system provides real-time management data on application
activity and allows the Agency to better cope with funding problems and
act quickly when necessary. For example, when the Agency received
supplemental funding in the American Revitalization and Recovery Act,
over 2,000 farmers were waiting for desperately needed direct operating
loans to pay 2009 planting and other farming expenses. When funds were
made available to FSA, the Agency was able to process obligations
overnight, and funds began flowing into farmers' bank accounts only 3
days later. I am proud to say that FSA was one of the first agencies in
the government to get recovery dollars flowing to those who urgently
needed it. The modern, web-based IT systems in place for farm loan
programs, such as the Direct Loan System and the Program Funds Control
System, were, and are, a key factor in our ability to provide such
timely service.
The continued efforts to move all automated systems to the Web will
allow for the elimination of duplicate data collection and for farm
loan services to be delivered even more efficiently. This will further
our mission to conduct USDA business from any location where there is
broadband or WiFi Internet access and allow us to conduct business with
producers at locations and times convenient to them. Additionally, loan
information is stored on a centralized server allowing employees to
quickly access portfolio information and provide real time management
reports.
Conclusion
Through modernization efforts, maintaining focus on program
objectives, and the hard work and dedication of FSA employees, FSA farm
loan program staff has made great strides in improving program
performance. Loan failures and losses have declined which is a strong
indication that the program mission of helping farmers become
successful is being accomplished. At the same time, increased
assistance to small, beginning, and socially disadvantaged farmers,
reflects remarkable success as well.
However, we continue to face challenges. Government resources are
increasingly limited and the agriculture production landscape is
changing. It will require every bit of innovation, management
expertise, and determination that we can muster to maintain the
efficiency and efficacy of farm loan programs over the next several
years.
We are experiencing a unique set of conditions in the credit and
banking sectors, and to a large extent, in agriculture. These changes
pose significant barriers and challenges to the groups that FSA farm
loan programs are intended to assist. These issues create major
challenges for the agency as well, since the success of the program
depends on those whom the programs are intended to serve. To keep pace
with these changes, we look forward to working with you to continue
efforts to modernize our delivery systems, and to refine and adjust
program requirements and operations to maximize the opportunities for
our nation's small, beginning, and socially disadvantaged farmers and
ranchers and to seek a level of resources appropriate for this
important mission.
Because of our rural delivery system and experienced loan officers,
FSA's farm loan programs staff is well positioned to continue providing
high quality delivery of existing programs and new initiatives to
assist small, beginning, and socially disadvantaged family farmers.
Thank you for allowing me to share our Department of Agriculture
perspective as you seek to address this important issue. I am available
to answer your questions now or at any time in the future.
Charts
Chart 1
Farm Loan Programs Loss Rates
10 Year Trend
Chart 2
Farm Loan Programs Dollar Delinquency Rates
10 Year Trend
The Chairman. Thank you, sir. Now, I am pleased to
recognize the Vice President, Federal Reserve Bank of Kansas
City, Mr. Nathan Kauffman. You are recognized for 5 minutes.
STATEMENT OF NATHAN S. KAUFFMAN, ASSISTANT VICE PRESIDENT,
FEDERAL RESERVE BANK OF KANSAS CITY, OMAHA BRANCH, OMAHA, NE
Mr. Kauffman. Thank you, Mr. Chairman, and Members of the
Subcommittee. Thanks for the opportunity to speak to you this
morning. My name is Nathan Kauffman, and I am Assistant Vice
President and Economist at the Federal Reserve Bank of Kansas
City, our regional reserve bank that has long devoted
significant attention to U.S. agriculture. In my role, I lead
several efforts to track the agricultural and rural economy,
including a regional agricultural credit survey and the Federal
Reserve System's Agricultural Finance Databook, which is a
national survey of agricultural lending activity at commercial
banks.
I am pleased to share with you this morning information on
the current state of agricultural credit markets. Before I
begin, let me emphasize that my statement represents my view
only, and is not necessarily that of the Federal Reserve System
or any of its representatives.
The U.S. agricultural economy has been very strong since
2009. According to the USDA, average farm income from 2010
through 2013 annually was about 46 percent higher than the
average of the previous 10 years. Crop prices surged and
cropland values increased dramatically during that time. In key
crop producing states, cropland values rose by more than 20
percent annually for several consecutive years, which
strengthened overall farm sector balance sheets. The crop
sector was a primary driver of these near record farm incomes,
while the livestock sector experienced multiple years of poor
profits or losses due to elevated feed costs.
Several key measures of agriculture credit conditions
monitored by the Kansas City Fed also improved from 2009 to
2013. According to Federal Reserve surveys of agricultural
banks, repayment rates for agricultural production loans in the
Kansas City, Chicago and Minneapolis districts all improved
considerably alongside rising farm income. Profitability and
agricultural banks also strengthened significantly.
During this time, however, bankers commented that
agricultural loan demand had fallen despite declining interest
rates, as farmers used more cash to pay for farm related
expenses. Although the overall financial position of the farm
sector had improved, some agricultural producers were more at
risk for financial stress than others. Our banker contacts
consistently voiced concerns about the viability of some
livestock operations facing steep losses, as well as young and
beginning farmers with significantly less equity in their
operations.
Since last fall's crop harvest, sharp changes in
agriculture commodity prices have led to corresponding changes
in the outlook for the farm sector and agricultural finance.
Current corn prices are about 40 percent less than last year.
Conversely, average fed cattle prices are approximately 25
percent higher than a year ago. And overall livestock prices
and lower feed costs have contributed to a rebound in livestock
sector profitability.
Lower crop prices and persistently high input costs have
reduced profit margins for U.S. crop producers and have
affected recent trends in agricultural lending. Toward the end
of 2013, declining profit margins reduced farm cash flow. As a
result, demand for some agricultural loans began to rise, and
lending activity jumped considerably in the first quarter of
2014. The Federal Reserve's Agricultural Finance Databook,
included with my written testimony, shows that the volume of
new short-term farm loan originations increased by 28 percent
from the previous year in the first quarter. Total farm debt at
commercial banks increased by 9.1 percent from the year
earlier. And non-real estate farm debt rose by 9.9 percent,
which was the biggest year over year increase since 2001.
Delinquency rates on agricultural loans, however, have remained
historically low. And bankers have continued to report that
ample funds are available for agricultural borrowers, amid a
relatively competitive environment for high quality
agricultural loans.
Looking ahead, the level of working capital and overall
liquidity in the farm sector will be crucial components of the
financial health and credit conditions surrounding U.S. farm
operations. If profit margins remain under pressure in the crop
sector, and debt continues to rise, the ability of crop
producers to withstand an increase in financial stress may be a
concern, even as the outlook for the livestock sector has
improved. Farmers with lower levels of equity, including young
and beginning farmers, may be most vulnerable to financial
stress, particularly if cropland values fall and farm income
declines from its historically high levels.
Despite these concerns, commercial banks have continued to
recognize the long-term potential for U.S. agriculture and have
financed the sector accordingly, albeit more cautiously in some
areas.
Thank you, Mr. Chairman, for inviting me today. This
concludes my remarks. I would be happy to answer any questions
there may be.
[The prepared statement of Mr. Kauffman follows:]
Prepared Statement of Nathan S. Kauffman, Assistant Vice President,
Federal Reserve Bank of Kansas City, Omaha Branch, Omaha, NE
Thank you Mr. Chairman and Members, of the Subcommittee. My name is
Nathan Kauffman, and I am Assistant Vice President and Economist at the
Federal Reserve Bank of Kansas City, a regional Reserve Bank that has
long devoted significant attention to U.S. agriculture. In my role, I
lead several efforts to track the agricultural and rural economy,
including a regional agricultural credit survey and the Federal Reserve
System's Agricultural Finance Databook, a national survey of
agricultural lending activity at commercial banks. I am pleased to
share with you the following information on the current state of
agricultural credit markets. Before I begin, let me emphasize that my
statement represents my view only and is not necessarily that of the
Federal Reserve System or any of its representatives.
Agricultural Finance and Credit Conditions: 2010 to 2013
The U.S. agricultural economy has been very strong since 2009.
According to the U.S. Department of Agriculture (USDA), average real
net farm income from 2010 through 2013, annually, was about 46 percent
higher than the average of the previous 10 years. Crop prices surged
and cropland values increased dramatically during that time, rising by
more than 20 percent annually in key crop-producing states for several
consecutive years, which strengthened overall farm sector balance
sheets. The crop sector was a primary driver of these near-record farm
incomes, while the livestock sector experienced multiple years of poor
profits or losses due to elevated feed costs.
Several key measures of agricultural credit conditions monitored by
the Kansas City Fed also evolved positively from 2009 to 2013.
According to Federal Reserve surveys of agricultural banks, repayment
rates for agricultural production loans in the Kansas City, Chicago and
Minneapolis districts all improved considerably alongside rising farm
income, and profitability at agricultural banks strengthened
significantly. During this time, however, bankers commented that
agricultural loan demand had fallen, despite declining interest rates,
as farmers used more cash to pay for farm-related expenses.
Although the overall financial position of the farm sector had
improved, some agricultural producers were more at risk for financial
stress than others. Our banker contacts consistently voiced concerns
about the viability of some livestock operations facing steep losses,
as well as young and beginning farmers with significantly less equity
in their operations.
Current Agricultural Finance and Credit Conditions
Since last fall's crop harvest, sharp changes in agricultural
commodity prices have led to corresponding changes in the outlook for
the farm sector and agricultural finance. Current corn prices are about
40 percent less than last year. Conversely, average fed cattle prices
are approximately 25 percent higher than a year ago and, overall,
higher livestock prices and lower feed costs have contributed to a
rebound in livestock sector profitability.
Lower crop prices and persistently high input costs have reduced
profit margins for U.S. crop producers and have affected recent trends
in agricultural lending. Toward the end of 2013, declining profit
margins reduced farm cash flow, and as a result, demand for operating
and other agricultural loans began to rise and lending activity jumped
considerably in the first quarter of 2014. The Federal Reserve's
Agricultural Finance Databook, included with my written testimony,
shows that the volume of new, short-term farm loan originations
increased by 28 percent from the previous year in the first quarter.
Total farm debt at commercial banks increased by 9.1 percent from a
year earlier, and non-real estate farm debt rose by 9.9 percent, the
biggest year-over-year increase since 2001. Delinquency rates on
agricultural loans, however, have remained historically low and bankers
have continued to report that ample funds are available for
agricultural borrowers amid a relatively competitive environment for
high-quality agricultural loans.
Looking ahead, the level of working capital and liquidity in the
farm sector will be crucial components of the financial health and
credit conditions surrounding U.S. farm operations. If profit margins
remain under pressure in the crop sector and debt continues to rise,
the ability of crop producers to withstand an increase in financial
stress may be a concern, even as the outlook for the livestock sector
has improved. Farmers with lower levels of equity, including young and
beginning farmers, may be most vulnerable to financial stress,
particularly if cropland values fall and farm income declines from its
historically high levels, as projected by USDA and Federal Reserve
surveys. Despite these concerns, commercial banks have continued to
recognize the long-term potential for U.S. agriculture and have
financed the sector accordingly, albeit more cautiously in some areas.
This concludes my formal remarks and I would be happy to answer any
questions you may have. Thank you.
Attachment
Agricultural Finance Databook
Operating Loans Drive Recent Increases in Farm Lending
By Nathan Kauffman and Maria Akers
April 2014
Farm loan volumes at commercial banks rose dramatically in the
first quarter of 2014, driven by increased demand for short-term
production loans. According to a national survey of commercial banks
from the first full week of February, agricultural producers borrowed
larger amounts compared with last year to cover current operating
expenses. Lower crop prices reduced cash flow for farmers selling the
remainder of last year's crop and overall crop input costs remained
high despite a moderate decline in fertilizer prices. Feeder livestock
loan volumes also rose as low inventories pushed feeder cattle and hog
prices higher. In contrast, farm capital spending slowed further,
lessening the need for intermediate-term farm machinery and equipment
financing.
Small and midsize banks added loans faster than their larger
competitors under differing terms. Non-real estate farm loan volumes
increased nearly 30 percent from last year at small and midsize banks
compared with a 20 percent rise at large banks. Commercial banks
competed for larger average loan amounts by extending loan maturities
and lowering interest rates. The majority of loans at large banks
featured a floating interest rate, while customers of small and midsize
banks locked in more fixed-rate loans compared with last year.
Loan quality at agricultural banks improved during 2013 and
contributed to solid profits. Following steady improvement the past 3
years, the return on assets at agricultural banks in the fourth quarter
held at a high level and annual net income distributions strengthened.
Despite a drop in crop prices at harvest, producers still paid down
debt, reducing delinquency rates and net charge-offs for both farm real
estate and non-real estate loans.
After several years of exceptionally strong price appreciation,
farmland values rose at a much slower pace in the fourth quarter. With
lower crop prices expected to persist in 2014, most bankers expected
farmland values would stabilize while some expected modest declines.
Section A
First Quarter National Farm Loan Data
Farm borrowing ramped up in the first quarter as farmers prepared
for spring planting. Operating loan volumes reached a record high,
exceeding year-ago levels by 28 percent (Chart 1). Crop prices at the
beginning of 2014 had fallen 40 percent from the previous year,
lowering cash receipts for producers still marketing fall crops. In
addition, while prices fell for some crop inputs, such as fertilizer,
others, such as seed and fuel, were expected to hold at high levels
(Chart 2). Reduced cash flow coupled with elevated crop production
costs contributed to the upswing in operating loan volumes. The volume
of feeder livestock loans also rose as low cow inventories kept feeder
cattle prices elevated and hog prices jumped as an ongoing swine virus
continued to limit hog supplies.
Larger operating loans contributed to loan portfolio growth,
particularly at small and midsize banks. In the first quarter, non-real
estate lending at small and midsize banks rose 28 percent, exceeding
the 20 percent rise at large banks (Chart 3). In a competitive lending
environment, average effective interest rates continued to edge down
and average loan maturities lengthened regardless of bank size.
However, at large banks twice as many loans were made with floating
interest rates compared with small and midsize banks where fixed-
interest rate loans were more prevalent.
Despite an overall increase in loan volumes, the volume of farm
machinery and equipment loans fell by almost a third compared with the
previous year, marking the fifth straight quarter of decline. Capital
spending may have declined because operators recently upgraded
equipment in high income years when tax depreciation rules were more
favorable. Additionally, the prospect of lower farm income in 2014 may
have shifted financing from intermediate-term equipment loans to short-
term operating needs.
Chart 1: Non-Real Estate Farm Loan Volumes by Purpose
Source: Agricultural Finance Databook, Table A.3.
Chart 2: Principal Crop Input Costs
Source: USDA Economic Research Service, Farm Income and
Wealth Statistics.
Note: Data for 2013 and 2014 are forecasts.
Chart 3: Non-Real Estate Loan Volumes by Bank Size (First Quarter)
Source: Agricultural Finance Databook, Table A.3.
Section B
Fourth Quarter Call Report Data
Commercial bank call report data showed that agricultural loan
volumes in the fourth quarter exceeded year-ago levels. Total farm debt
outstanding as of December 31, 2013, rose seven percent year-over-year,
outpacing the five percent gain at the end of 2012 (Chart 4). The
volume of loans secured by farmland rose 7.3 percent, followed closely
by a 6.6 percent increase in production loans. A drop in crop prices at
harvest tightened margins and may have contributed to the rise in
production loan volumes at year-end.
Commercial banks reported improved loan performance in the fourth
quarter. Delinquency rates on farm real estate loans continued to trend
down at both large and small banks. In addition, delinquency rates on
non-real estate farm loans dipped below two percent at the 100 largest
commercial banks for the first time since 2008 (Chart 5). Furthermore,
the percentage of farm loans 30 to 90 days past due was smaller than
last year, suggesting delinquency rates could fall further. The volume
of loans charged off against reserves at agricultural banks fell by
almost half compared with the fourth quarter of 2012.
Profitability at agricultural banks remained strong at the close of
the year. The return on assets at agricultural banks stabilized at the
10 year average and exceeded returns at other small banks by more than
\1/3\ (Chart 6). Net income distributions as a share of average equity
improved and there were no agricultural bank failures in 2013. With
more lending activity, average capital ratios dipped slightly at both
agricultural and other small banks in the fourth quarter and average
loan-to-deposit ratios were higher than a year ago.
Chart 4: Farm Debt Outstanding at Commercial Banks
Percent Change From Previous Year
Source: Agricultural Finance Databook, Table B.1.
Chart 5: Delinquency Rates on Non-Real Estate Farm Loans
Percent of Outstanding Loans, Seasonally Adjusted
Source: Federal Reserve Board of Governors.
Chart 6: Rate of Return on Assets (Fourth Quarter)
Source: Agricultural Finance Databook, Table B.7.
Section C
Fourth Quarter Regional Agricultural Data
Demand for farm operating loans rose sharply in many major grain
producing areas in the fourth quarter while farm capital spending
waned. The steep drop in crop prices at harvest lowered earlier
expectations for 2013 farm income, particularly in the Kansas City
Federal Reserve District where drought affected crop yields. Low crop
prices also prompted some producers to store grain inventories rather
than sell in case prices rebounded later. Reduced cash flow increased
demand for operating loans, particularly across the Corn Belt and
northern Plains in the Chicago, Kansas City and Minneapolis Districts.
Crop receipts were also down in the Dallas District, but bankers
indicated strong cattle prices and revenue from oil and gas leases
supported overall farm income levels. Conversely, bankers in the St.
Louis District reported farm income strengthened compared with the
previous year and loan demand weakened. In a reversal of recent trends
in which farm capital spending spiked at year-end, contacts in the
Chicago, Kansas City, Minneapolis and St. Louis Districts noted a drop
in capital investment in the fourth quarter of 2013.
Farm income levels influenced farm credit conditions in the fourth
quarter. Loan repayment rates in the Chicago, Kansas City and
Minneapolis Districts eased from strong positions earlier in the year.
Bankers in these Districts also reported a modest rise in the number of
loan renewals and extensions in the fourth quarter and slightly tighter
collateral requirements. However, the Dallas and St. Louis Districts
reported stronger loan repayment rates and fewer loan renewals and
extensions. Despite minor deterioration in credit conditions in some
areas, interest rates on farm operating loans were steady to lower in
all Districts except Kansas City where they edged higher. Interest
rates on farm real estate loans fell further in the Dallas,
Minneapolis, Richmond and St. Louis Districts, held steady in the
Kansas City District and rose slightly in the Chicago District.
Agricultural bankers indicated farmland value gains slowed
dramatically in the fourth quarter despite less farmland for sale
compared with last year. In particular, bankers in Corn Belt states
reported year-over-year increases in nonirrigated cropland values
moderated from previous highs (Map). There was even a slight pullback
in cropland values in parts of Minnesota and Iowa. Energy activity
continued to support farmland value gains in the Dakotas, but a
majority of bankers felt that lower farm income expectations for 2014
would limit further farmland value gains in major crop producing areas.
Map: Value of Non-Irrigated Cropland (Fourth Quarter, 2013)
Percent Change From Previous Year
* Mountain states include: Wyoming, Colorado, and northern
New Mexico, which are grouped because of limited survey
responses from each state.
Sources: Federal Reserve District Agricultural Credit Surveys
(Chicago, Minneapolis, Kansas City, and Dallas).
Addendum
Agricultural Finance Databook
Previous Charts Updated Through First Quarter 2014
Section B
Chart 4: Farm Debt Outstanding at Commercial Banks
Percent Change From Previous Year
Source: Agricultural Finance Databook, Table B.1.
Chart 5: Delinquency Rates on Non-Real Estate Farm Loans
Percent of Outstanding Loans, Seasonally Adjusted
Source: Federal Reserve Board of Governors.
Chart 6: Rate of Return on Assets (First Quarter)
Source: Agricultural Finance Databook, Table B.7.
Map: Value of Non-Irrigated Cropland (First Quarter, 2014)
Percent Change From Previous Year
* Mountain states include: Wyoming, Colorado, and northern
New Mexico, which are grouped because of limited survey
responses from each state.
Sources: Federal Reserve District Agricultural Credit Surveys
(Chicago, Minneapolis, Kansas City, and Dallas).
The Chairman. Thank you. And I want to thank all the
panelists for being so accurate on your time. It was wonderful.
It doesn't happen all the time. Again, I thank you. And I thank
the witnesses.
The chair would remind the Members that they will be
recognized for questioning in order of seniority for Members
who were present at the start of the hearing. After that,
Members will be recognized in order of their arrival. I
appreciate your understanding.
I will recognize myself to begin the questioning. I
recognize myself for 5 minutes. I want to start with Dr. Long
Thompson.
You testified that non-performing loans totaled $2.1
billion, which is a decrease of nearly $600 million. Is the
non-performing loan portfolio--is that a geographic
prerogative? Is it dominated by any certain sector of the ag
industry, or is there a region in the country that may
contribute more so than others?
Dr. Long Thompson. Well, certainly, among those
institutions that we regulate, if they happen to be located in
a part of the country where there has been stress, you might
see some additional--a higher level of non-performing loans.
But we haven't detected a specific pattern geographically. I
would, however, be very happy to provide you--we have very good
data. We do analyses of the overall farm economy, as well as of
the health of the System regularly. And we have some very good
data that I would be happy to share with you and your staff.
[The information referred to is located on p. 91.]
Dr. Long Thompson. The non-performing loans tend to occur
in those areas of agriculture that are under stress. And if
there happens to be a small association that has a high
percentage of loans in that area, you might find that within
one association or another association. But, generally
speaking, across the board, the System is safe and sound.
The Chairman. Okay. Excellent. You also mentioned the Farm
Credit Insurance Fund. Do any other GSAs have any similar type
of insurance fund or reserves that you are aware of?
Dr. Long Thompson. Well, someone else could probably better
answer that question. I think you know very well the history of
the Farm Credit System Insurance Corporation, which was
established in the late 1980s after the crisis in the farm
economy. And that fund, of course, exists to insure the banks
should there be a situation where they were not able to repay
their loans. So I can't really speak to other agencies and what
they do. Of course, the FDIC has an insurance fund that is not
unlike what the Farm Credit System insurance fund is.
The Chairman. Okay. I want to move on to something that
will more than likely come up in the next panel. I think you
are obviously someone who should be given an opportunity to
comment on it. And it relates to CoBank's role in two
transactions. One was the finance package with Verizon, the
other being a financing package with Frontier Communications. I
would like to get your perspective on that. First, does CoBank
have the authority to participate in those transactions? And,
second, did FCA have any role in approving those transactions?
Dr. Long Thompson. The answer to your first question is
yes, they did have the authority. As you know, Congress gave
the entities that we regulate the authority to engage in
similar-entity participation lending to be used as a risk
mitigation tool. And we reviewed those transactions in complete
detail and found that they met any reasonable reading of the
statutory authority provided.
Now, in the interest of full disclosure, I have to tell you
that I was on the ag committee and the subcommittee that had
jurisdiction over credit issues at the time that the language
was adopted. And I recall supporting it. However, I also have
to say that it is not a model of drafting clarity. And I am not
sure anywhere else in Federal statute you would even find the
terms functional similarity. Even so, there are statutory
limits. And those statutory limits include, for example, a
single credit held by a System institution may not exceed ten
percent of total capital; a single System institution, and all
System institutions combined, must hold less than 50 percent of
the credit; a System institution may not exceed 15 percent of
its total assets in similar-entity participations. And at the
present time, System-wide, somewhere around five percent of the
System's total assets are held in some form of similar-entity
participation. But we do examine--we do ensure that they are in
compliance. And they are.
The Chairman. Thank you. I yield the balance of my time. I
now recognize the Ranking Member for 5 minutes.
Mr. Costa. Thank you very much, Mr. Chairman.
Mr. Beyerhelm, you mentioned increased demand for loans
with FSA. And, as you know, we are the authorizers. But did the
appropriators provide sufficient funding to meet what you
believe is going to be the demand in Fiscal Year 2015?
Mr. Beyerhelm. From what I understand, from the--at least
the preliminary numbers--both Chambers have authorized the
President's request for the $6.4 billion. So in addition to
that, previous appropriation bills have had language that
provided for programs that are zero subsidy to get an
additional 25 percent. Both of our guaranteed farm ownership
and our direct farm ownership, for the first time ever, are
going to be zero subsidy programs. So the answer to your
question is yes, $6.4 billion, plus the 25 percent bump in both
of those programs, will actually exceed $7 billion. And we
expect that to be sufficient.
Mr. Costa. And, historically, in terms of the level of
lending activity that is taking place, would you say that the
trends--that the appropriations reflect the demand out there?
Mr. Beyerhelm. Absolutely. As I mentioned in the previous 4
years, the programs have been oversubscribed. So we have always
had periods----
Mr. Costa. One could argue that maybe we should provide
additional support for that effort then?
Mr. Beyerhelm. That would be up to this body to decide.
Mr. Costa. No, I understand that part. Can you update us on
where things are with the changes that were made as I stated as
a result of the 2014 Farm Bill in terms of the relending
provision of the microloan program. When that will be up and
running?
Mr. Beyerhelm. Yes----
Mr. Costa. Obviously, for young farmers and ranchers, that
is a potential source of financing.
Mr. Beyerhelm. Yes. Thank you for that question. We are in
the process of drafting proposed regulations on how to
implement that among the other discretionary provisions of the
farm bill. That is one of the things we expect to have some
clarity on by October of this year.
Mr. Costa. So before the end of this year?
Mr. Beyerhelm. Yes.
Mr. Costa. That is important. When would the ability for
application take place? Let us figure there are folks that are
looking to maybe lease land or maybe purchase a farming entity,
and they are looking at next year and are making decisions in
the Fall. So in the timelines for the applications for those
who would be interested, would it be in a timely enough fashion
so that they could possibly be able to participate in 2015 with
the advantage of that microloan?
Mr. Beyerhelm. We would hope so. Once the regulations have
been drafted, we are going to have to work with----
Mr. Costa. Yes, but there is a comment period, isn't there?
Mr. Beyerhelm. That is correct.
Mr. Costa. I am trying to figure the timeline.
Mr. Beyerhelm. Yes, it will be close, to answer your
question. We are going to make every effort, with any changes,
to make them available to the 2015 lending season. But it will
be close.
Mr. Costa. Well, it is important, because if you get a loan
in the middle of the year, you are past planting season, you
are past a lot of decisions, depending upon the nature of the
agricultural enterprise, obviously.
Mr. Beyerhelm. I think the good part about it is, is that
our program is still going to be there for those that need that
credit. So if there is somebody that needs financing----
Mr. Costa. Have you done an an estimation of the potential
demand out there for the microloans?
Mr. Beyerhelm. Well, as I mentioned earlier, we have been--
we are right at the 7,200 mark right now. We did 3,500 the
first year. And we are on pace to do about 4,500 this year. We
would expect that demand to continue, especially one of the
things we are going to do is increase the loan limits from
$35,000 to $50,000--or at least propose to increase to $50,000.
Mr. Costa. All right.
Mr. Beyerhelm. So that will increase the pool.
Mr. Costa. Okay. Dr. Long Thompson, and thank you by the
way for your previous service to our country as a Member of the
House of Representatives. And it is good to see you here in
your current role. In your opening statement, you talked about
the nature of Farm Credit. But I would like you to give a
better snapshot. For example, from the time when you served in
Congress in the late 1980s, until today; you want to give a
comparative analysis in 30 seconds or less?
Dr. Long Thompson. I can do that in 30 seconds or less. The
Farm Credit System today--the institutions that we regulate--
are much more professional, much more financially sound. It is
an incredibly strong system of lending institutions. And part
of that is the result of changes that were made by Congress in
the late 1980s. But in terms of underwriting standards and
reaching out to creditworthy eligible borrowers, I think the
System has strengthened incredibly. And I am proud to be a
regulator of the System.
Mr. Costa. Thank you very much. My time has expired, Mr.
Chairman.
The Chairman. Thank you. The gentleman's time has expired.
I now recognize the gentleman from Iowa, Mr. King, for 5
minutes.
Mr. King. Thank you, Mr. Chairman. I thank all the
witnesses for your testimony. And I would turn first to Dr.
Long Thompson. And I would like to just get some definitions
down to understand the parameters that we are working with
here. And could you define a little bit more clearly the
mission statement of Farm Credit?
Dr. Long Thompson. May I ask, the mission statement of the
Farm Credit System or the mission statement of the Farm Credit
Administration?
Mr. King. I understand the mission statement of Farm Credit
Administration. But the System and the--how to identify the
borrowers.
Dr. Long Thompson. The mission of the Farm Credit System is
to provide credit to creditworthy eligible borrowers across the
country for the purpose of making credit available for
agriculture, but also for strengthening rural America.
Mr. King. And does that include a definition for small,
beginning, young farmers?
Dr. Long Thompson. Yes.
Mr. King. And so you just left that out. Does it also
include for socially disadvantaged farmers?
Dr. Long Thompson. All farmers who are creditworthy and
eligible.
Mr. King. Okay.
Dr. Long Thompson. And, in fact, since my coming to the
Board, we have adopted a policy that requires our examiners
take a look at how the System is doing in this regard, for
borrowers of all types. And they are to have a diversity and
inclusion provision, both in their marketing--in reaching out
to borrowers--but also in their human resources.
Mr. King. All creditworthy, with a diversity and inclusion.
Is this statement as written and approved by whom? Not
Congress, I take it? How is this arrived at?
Dr. Long Thompson. The statement--the diversity and
inclusion regulation--that is a regulation that we issued.
Mr. King. And who produces that document then? Who are the
people that signoff on it?
Dr. Long Thompson. It would be the Board of the Farm Credit
Administration.
Mr. King. Okay. And it is an authority that is at least
presumed granted by Congress?
Dr. Long Thompson. I missed that.
Mr. King. It is an authority that is at least presumed
granted by Congress to make that decision?
Dr. Long Thompson. Yes. Yes.
Mr. King. And you mentioned also that the share of the Farm
Credit debt was 46 percent in your testimony?
Dr. Long Thompson. Farm Credit real estate debt.
Mr. King. Yes.
Dr. Long Thompson. Overall, including production loans, it
is about 41 percent.
Mr. King. Well, what is the 46?
Dr. Long Thompson. The 46 is real estate loans.
Mr. King. Just real estate?
Dr. Long Thompson. Yes.
Mr. King. Okay. Can you tell us about the trend of Farm
Credit? The 46 percent today, what would that have been if you
would go back say 10 years? What has been the trend?
Dr. Long Thompson. I will have to ask my staff. I don't
have that trend for the last 10 years. But if you will give me
a second, I think I can give you the answer.
Mr. King. I would.
Dr. Long Thompson. Thank you. Regarding total debt, and
that would be real estate and operating loans, it is gone from
about 35 percent to 41 percent in the last 10 years.
Mr. King. Okay. And on the real estate debt, we would just
anticipate, without turning back, a similar trend. And who
holds the balance of that, if it is 46 percent in real estate?
And where is the other 54 percent?
Dr. Long Thompson. The majority of that comes from
independent banks----
Mr. King. Independent banks.
Dr. Long Thompson.--or from banks--many from independent
community banks.
Mr. King. Okay. I would like to turn to Mr. Kauffman. Thank
you very much. Mr. Kauffman, you testified that it is a
relatively competitive environment--lending environment. That
seemed like a qualifying word, and I would ask if you could
define that to me. The word relatively seemed to be a
qualifier.
Mr. Kauffman. We have heard from our bank contacts that it
is a competitive lending environment in the sense that there
are--agricultural lending activity has been strong and
repayment rates have been strong. So competitive in that sense
that they have been--we have heard from bank contacts that not
only have they been competitive perhaps with other commercial
banks, but also with Farm Credit institutions that are lending
in those areas overall.
Mr. King. What about interest rates, do you know of any
banks that are lending at a lower rate than Farm Credit?
Mr. Kauffman. I can't speak to that specifically. I would
say anecdotally, we have heard some bankers say that they may
be reluctant in some cases to reduce interest rates beyond a
certain point, taking a more cautious approach perhaps in some
areas as it relates to particularly on the farm real estate
side.
Mr. King. Sounds like a qualified answer. Do you know of
any cases, or even any anecdote about banks that are lending at
a lower rate than Farm Credit?
Mr. Kauffman. Again, I do not know of any specific cases.
Mr. King. You do not. I would turn to Dr. Long Thompson. Do
you?
Dr. Long Thompson. I can tell you that I know of instances
where that is the case. And I am wondering if you are
expressing or leading to expressing concerns about interest
rates that are charged in the System? Because they are required
to be competitive, but they are not to engage in predatory
pricing.
Mr. King. Dr. Long Thompson, I just--as our clock has run
out, I will just conclude this. I am concerned about the
competition side of this and the mission of providing credit,
although I am grateful for the service that you all provide.
Thank you very much, and I yield back.
Dr. Long Thompson. May I answer?
Mr. King. That is fine.
The Chairman. Go ahead.
Dr. Long Thompson. Thank you. Whenever there is a concern
expressed from someone across the country regarding predatory
pricing in the System, we take that very seriously. And we do
examine it, take a look at it. And if it were to occur, we
certainly would then take the appropriate corrective action to
get that corrected. But competitive is not by definition
predatory, as you very well know.
Mr. King. Agreed. Thank you.
The Chairman. The gentleman's time has expired. I recognize
the gentleman from Oregon for 5 minutes.
Mr. Schrader. Thank you, Mr. Chairman. Dr. Long Thompson,
how did Farm Credit Service, particularly Farmer Mac, fare
during the recent recession, particularly compared to other
banks and commercial institutions?
Dr. Long Thompson. The Farm Credit System did very well,
including Farmer Mac. Some of the challenges that they faced
were access to capital in the markets, liquidity, but no issues
regarding the safety and soundness of their particular
operations.
Mr. Schrader. Did you lose----
Dr. Long Thompson. They did very well----
Mr. Schrader. Did you lose any institutions under your
purview as a result of the recession?
Dr. Long Thompson. We did not lose any institutions as a
result of the recession. There had been some mergers that have
occurred since, but that was occurring beforehand.
Mr. Schrader. Right. When Dodd-Frank was written, this
group and the entire Agriculture Committee spent a lot of time
trying to differentiate between institutions of systemic risk
and to protect end-users from overregulation. Similarly, in
Dodd-Frank itself, a lot of the small independent banks were
never part of the problem, we tried to make sure they were not
burdened with burdensome regulations. And yet the Prudential
Regulators have been frankly very overzealous. And I hear
reports again and again how the small, independent folks are
seeing the same degree of regulatory overreach that was only
intended for these big systemic risk institutions. How has Farm
Credit services fared in that System? How are you keeping your
regulations under control, if I may ask?
Dr. Long Thompson. Well, as you know, for the most part,
the System was not included in Dodd-Frank reforms. And you know
that very well. It is my sense that we are not over-regulating.
But the one thing that we have to be very careful about in
overseeing the Farm Credit System is that it doesn't have the
potential for diversifying its portfolio in the same way that
banking institutions are able to do. And so we have to be very
conscious of what that means in terms of things like capital
requirements and liquidity. One of the reasons the System is
strong is that the ag economy has been quite strong overall
over the last 20 years. There have been some pockets of issues.
But we take the regulatory responsibilities very seriously,
recognizing that over-regulation can in fact impede their
ability to do their job and fulfill their mission.
Mr. Schrader. Very good. Mr. Beyerhelm, to that point, I
can confirm that the Pacific Northwest and our nursery industry
was particularly hard hit in the recession. Our seed producers
were particularly hard hit. Christmas trees producers are just
trying to get their feet underneath them. How are they fairing
in the Farm Credit System at this point in time?
Mr. Beyerhelm. I don't have specifics for that particular
enterprise, but I can surely get those for you. Certainly, they
are eligible enterprises for our loans, both our direct and
guaranteed loans.
Mr. Schrader. All right. I appreciate that. And then could
you explain a little bit about what you alluded to in your
testimony, how a farmer graduates, if you will, to commercial
lending. What do you see as your main role to encourage people
to graduate? That is the way it is supposed to work. Could you
explain that more for us?
Mr. Beyerhelm. Yes. Obviously, we don't compete with the
commercial lending industry. So most of the customers who come
to us, their balance sheets are not strong enough to go to
commercial lending. Perhaps their cash flows don't have the--a
debt repaying capacity. So what we do is try to work with them
to improve their balance sheets, their cash flows and also
their production skills. Our loan officers actually work very
closely with them, provide technical assistance. And at any
point during their tenure with us that we feel that those three
indicators have risen to the level that commercial lenders will
make them a loan, as you said, we politely ask them to go to a
commercial lender, pay us off and move on to the next customer.
Mr. Schrader. And that is to make sure that your capital
can flow onto the next young farmer or rancher coming in?
Mr. Beyerhelm. Absolutely.
Mr. Schrader. Good.
Mr. Beyerhelm. Yes. Yes.
Mr. Schrader. Okay. Mr. Kauffman, one of the problems on
the Small Business Committee, and one of the problems we have
seen there is that there is a lot of demand for small business
loans, a lot of demand for Farm Credit Service loans. In tough
economies, as people figure out they want to start a business,
start a farm, or get their dad's ranch going again, one of the
problems we have seen is that while creditworthiness of some of
the loans have actually gotten a little better, there are far
fewer loans made. The Small Business Administration is making
bigger loans to fewer people. And the real small businesses
sometimes have a tough time. They are still having a very tough
time getting the credit they need. How would you compare that
to what is going on with Farm Credit Services, the medium and
slightly larger size ranch and farm operations? What does the
portfolio look like for FSA?
Mr. Kauffman. I would say in general from the commercial
lending institutions, what we have seen has been some
producers, in terms of the scale of agriculture, capital
requirements are quite large. I think that we have seen even
the USDA Census of Agriculture has revealed there has been a
bit of a shift to large producers, but also a number of
increasing small producers. I think that there have been some
small producers that have been able to obtain the credit that
they need, albeit in some cases maybe needing to provide more
collateral if they have--if they are perceived as being a more
risky borrower.
Mr. Schrader. All right. Thank you. And I yield back, Mr.
Chairman.
The Chairman. The gentleman yields back his time. I now
recognize the gentleman from Texas, Mr. Conaway, for 5 minutes.
Mr. Conaway. Thank you, Mr. Chairman. Lady and gentlemen,
thank you for being here. Dr. Long Thompson, the FCA is
currently working on a regulatory scheme to impose margin
requirements on derivative transactions. We have just passed
the House yesterday, H.R. 4413, which amends the CEA that would
provide that initial and variation margin requirements shall
not apply to a swap in which one of the counterparties to the
swap is not a financial institution and qualifies for the end-
user clearing exemption. If enacted into law, how would that
change the FCA's efforts to impose margin requirements of end-
users?
Dr. Long Thompson. If you will give me just a minute, I
want to turn to our General Counsel.
Mr. Conaway. Sure.
Dr. Long Thompson. This is actually a very simple answer.
It is going to be consistent with the law. And we will make
sure that we are working with the other regulators. But the
stage that we are in the process, there is nothing definitive
for me to provide in terms of specifics.
Mr. Conaway. Okay. Well----
Dr. Long Thompson. But we will make sure that it is
consistent with the law.
Mr. Conaway. Okay. That is like art.
Dr. Long Thompson. I am sorry. I missed that.
Mr. Conaway. I mean, that statement is like trying to
decide what is pretty and what is not pretty. I mean, I
understand----
Dr. Long Thompson. It will be pretty. I promise you.
Mr. Conaway. Okay. Mr. Beyerhelm, you had a comment that
you provide credit to creditor--borrowers. Can you give use the
distinction between--or the difference between your words, not
qualifying for commercial credit due to lender standards but
otherwise creditworthy? What--can you help me understand that?
Mr. Beyerhelm. Well, most commercial lenders require a--
some sort of equity position, maybe let them qualify--at least
30 to 40 percent equity position and a debt service capacity of
probably 20, 25 percent in excess of what their expenses will
be. So when a customer comes in and doesn't meet those
qualifications, they can come to FSA. When I say they are
creditworthy otherwise, that means they have a good credit
history. They can show repayment, perhaps not at the 20 percent
level but something less than that. And they don't have the
required equity position to go to the commercial lender.
Mr. Conaway. Okay. All right. Also, Dr. Long Thompson, you
are redoing the capital requirements. You have regulations out
right now. Can you give me some sense of what the response has
been from the regulated industry with respect to your changes?
Dr. Long Thompson. At the stage of the process that we are
in, I don't have any summarizing data on what the responses
are, because it is still in the comment period.
Mr. Conaway. Okay. But--well, maybe some other panelists
can get--thank you very much. I appreciate you being here. And
I yield back.
Dr. Long Thompson. Thank you.
The Chairman. The gentleman yields back his time. I now
recognize the gentleman from Florida for 5 minutes, Mr. Yoho.
Mr. Yoho. Thank you, Mr. Chairman. Thank you, panelists,
for being here. Agriculture is dear to my heart, because I like
to eat, mainly. But I have been involved in it since I was
about 16 years old. The Farm Credit Service or System has done
a remarkable job. But I kind of want to expand on what Mr. King
was bringing up about mission creep, have we gone over where we
need to go with the Farm Credit System. Has it overstepped its
boundaries, knowing when it first started in some form in 1916
when we had about 32 percent of the population of America
involved in agriculture. Today, we have roughly maybe one
percent right as agriculture as our source of income, with two
percent of the Americans--America's population involved, or
living on a farm. And the role seems like, of the Farm Credit
System, has grown. I get--I don't want to say complaints. I get
inquiries about the Farm Credit System competing with the small
rural banks. And I want to build off what Mr. Schrader said, my
fellow veterinarian here in Congress, on the rules and
regulations of Dodd-Frank you brought up that you are pretty
much excluded from those. All right. And the small community
banks that they don't have a large portfolio. They are bound by
those, and they are restricted by those. And it really put them
at a disadvantage. And some of the conversations we have is
that the Farm Credit System can be more competitive because of
the operating expenses. How do you view that?
Dr. Long Thompson. I think that is a very good question.
And it has a certain complexity to it. My experience as a
regulator of the System has informed me that there really
hasn't been significant, if any, mission creep in the Farm
Credit System. But it is a balancing act, because--and it is a
balancing act not just for the System, but for the regulatory
agency as well.
Mr. Yoho. Can I interrupt you? Let me ask you----
Dr. Long Thompson. Sure.
Mr. Yoho. In your portfolio, I think you said 41 percent of
your assets are in farm--or not assets--your loans are in
agricultural land, correct?
Dr. Long Thompson. No. What I said was----
Mr. Yoho. Then 46 percent was----
Dr. Long Thompson. No. What I said was that of the farm
loans across the country, 41 percent of those are made by the
Farm Credit System.
Mr. Yoho. Okay. Go ahead then on what you were talking
about as far as your mission.
Dr. Long Thompson. And so the challenge for any regulatory
body is to find the balance. We work very hard with a very
professional staff of examiners, regulatory policy folks,
lawyers, to ensure that whatever businesses engaged in by the
System is consistent with the law. I think that the agency has
done a good job of that.
Mr. Yoho. Mr.----
Dr. Long Thompson. Yes, sir?
Mr. Yoho. Go ahead. And I was going to ask Mr. Kauffman his
opinion on that.
Dr. Long Thompson. Okay. But, in a market economy, as we
have--in a capitalist economy, there is going to be
competition. And I think that competition benefits--it
benefits----
Mr. Yoho. Well, since you brought that up. In a market
economy, in the free market, they are kind of--like a community
bank, they are kind of dependent upon themselves. Whereas in
the Farm Credit System, you have the backing of the United
States Government. It seems that is not quite as fair or as
equitable as it should be in the free market economy.
Dr. Long Thompson. Well, let me clarify. The System that we
regulate is private sector.
Mr. Yoho. Yes.
Dr. Long Thompson. And it gets its funding by selling
securities in the marketplace.
Mr. Yoho. But yet if you don't have to abide by Dodd-Frank
financial regulations, you are talking about being fair. And my
time is--we have about a minute left.
Dr. Long Thompson. But we do have a book this thick of
laws--of statutes that we have to ensure is followed by the
Farm Credit System.
Mr. Yoho. I have heard from the other banks, they have one
about this thick. Mr. Kauffman, what is your opinion on----
Dr. Long Thompson. Ours is getting thicker.
Mr. Kauffman. We do hear similar inquiries from community
bankers asking similar questions. I would corroborate what Dr.
Long Thompson had said in terms of the split between real
estate and non-real estate at community banks. You do typically
see a bit more lending activity in the non-real estate space.
And that has been a trend that we have seen here recently. But
we do hear similar inquiries from community bankers.
Mr. Costa. Would the gentleman yield?
Mr. Yoho. Yes, sir.
Mr. Costa. If I understand your questioning correctly, you
are attempting to try to get a snapshot on the balance of the
lending activity between the Farm Credit and between the
private sector institutions, correct?
Mr. Yoho. Well, what I would like to do is kind of--do we
need a Farm Credit System as big as we do now, compared to what
we did when we had 32 percent of the population involved in
farming----
Mr. Costa. Right.
Mr. Yoho. And, today, we have less than one percent
actively involved in farming.
Mr. Costa. But with FSA, especially, there is a
partnership.
Mr. Yoho. Right.
Mr. Costa. If I understand it correctly, with the community
banks that are the private sector that are banks made up of
people we know in our communities----
Mr. Yoho. Right.
Mr. Costa. You are providing in essence the secondary
mortgages or the guarantees on these loans for the community
banks, in many instances. Is that correct?
Mr. Beyerhelm. Yes, that is correct, up to--we do have a
restriction requirement that they be family size farms. So to
some extent, for the smaller operators. But for the larger
operators, there would not be a comparable--an opportunity to
participate in FSA programs.
Mr. Costa. Mr. Chairman, can I ask something on family size
farms?
The Chairman. I thank the gentleman for yielding.
Mr. Yoho. Yes, sir.
Mr. Costa. On the family size farms, what is the definition
of that? Is that just one person with a tractor, or----
Mr. Beyerhelm. I think it is what is pretty and not pretty
question. A general definition of family sized farm is that the
applicant themselves, whether it is a corporation or
individual, whatever, provide the majority of the labor
required and all of the management required to run the
operation.
Mr. Costa. Thank you.
Mr. Beyerhelm. That is the general definition.
The Chairman. The gentleman's time has expired. Just for
clarification, Dr. Long Thompson, can you leave ag space at any
point in time?
Dr. Long Thompson. I missed that question.
The Chairman. Can you leave ag space at any point in time?
That is your core mission, correct?
Dr. Long Thompson. We are the regulator. The Farm Credit
System----
The Chairman. Farm Credit System. I am----
Dr. Long Thompson. Yes. They do have, as authorized by
Congress, the ability to make rural housing loans. Beyond
that--well, and then the title III lending authority is for
rural electric co-ops, for telephone co-ops, for co-op
business, various kinds of co-op business.
The Chairman. So what we are really talking about is a--
sort of a broad definition of what constitutes agriculture
versus non-agriculture portfolio. And I don't want to encroach
on Mr. Roger's time. So I will recognize the gentleman from
Alabama for 5 minutes.
Mr. Rogers. Thank you, Mr. Chairman. That is what I was
going to ask about. And I was late. And I am sorry. And I know
that the Chairman visited this topic earlier. But one--the
primary criticisms I get about the Farm Credit System is
issuing loans in non-agriculture. And so do you know what
percentage of the loan portfolio the Farm Credit System is
issued to non-farm entities?
Dr. Long Thompson. I think it probably would be best for me
to get a detailed breakdown for you. But it is primarily
agriculture and ag related. It is agriculture--and let me also
say that, even though the System did not fall for the most part
under the jurisdiction of Dodd-Frank, there are other kinds of
rules that statute requires--for example, the territories, the
districts that are established. So there are a number of
restrictions in the Farm Credit System that simply are not
restrictions in the banking sector. And I also think that there
is a very strong case to be made for a group of farmers going
together and setting up a cooperative model of lending,
particularly when there is not always access in traditional
banking.
[The information referred to is located on p. 91.]
Mr. Rogers. Now, I represent a very rural Congressional
district. There is access to credit in our communities. I have
been a supporter of the Farm Credit System. But, it is pretty
hard for me to explain--I can't explain why you are financing a
merger deal with Verizon, or the Farm Credit System is. I
recognize that from a making money standpoint you want to do
that, but--and while it is not illegal to do it----
Dr. Long Thompson. Yes.
Mr. Rogers. Why would you do it?
Dr. Long Thompson. Well----
Mr. Rogers. When you and Mr. Kauffman talked about what you
are really there for is to take the shaky young farmer and help
to get him on stable footing so they can then go into the
commercial lending, why would Farm Credit get outside the farm
world for lending?
Dr. Long Thompson. Verizon does provide service to rural
communities. And in the title III lending authority, loans are
made for co-op-owned rural utility services that are member-
owned. And this similar-entity provision that was included in
the law back in the early 1990s was included for the purpose of
mitigating risk in a lending institution's portfolio. If you
felt that it was important to remove that particular provision,
Congress could certainly do that.
Mr. Rogers. Yes, I think that we may have to visit that,
because this really is pretty indefensible in my world. So with
that, I thank you, Mr. Chairman.
The Chairman. The gentleman yields back his time. I see no
further--we have one more Member, the gentlelady from New
Mexico is recognized for 5 minutes.
Ms. Lujan Grisham. Thank you very much, Mr. Chairman. And I
want to thank the panel for your testimony and presence here
today. Mr. Beyerhelm, I want to talk about the loan application
process and tie it to what I know many states are concerned
about and you are concerned about as well, which is the graying
or the aging of our farmers and ranchers. We have in New
Mexico, which I am sure you are aware, the highest percentage
of older farmers and ranchers who are age 65 and up, at 37
percent. That is seven points higher than the national average.
Further, we expect that \1/2\ of those 65 and older farmers to
retire over the next decade. So we are very interested in our
state at making sure that there is a sense of urgency by USDA,
a sense of urgency by everybody in the state to do what we can
to grow, if you will pardon the pun, the younger farmers and
ranchers an interest in the agricultural industry. And I know
that you have ramped up your efforts to reach out to this
demographic. But I continue to hear from young farmers and
ranchers that it is not enough, that the application process
for loans and support is arduous at best.
And I want to give you a couple of examples. And if you
could give me some specifics about what we might do to make
that simpler, more effective and to really encourage folks to
get the resources that they need and the educational support
and expertise that they need to actually enter into the
industry. So, for example, in New Mexico, even if you go
online--and I realize that you have now created an online sort
of resource directory, you have to be able to go online. But
even then, you are still going to have to make an application.
But, you can't do any of it online. You have to go in-person to
an office. In New Mexico, there are only four offices. They are
all in the southern part of the state. That means for some
people, they are going to have to make a 6, 7, 8 hour drive,
make an appointment at one of those four offices, and then, as
I understand it, even if you look at the sort of guide on the
online application, you are talking about making several trips
to that loan office over periods of several months. And what
happens is that people give up. And they don't get access to
the support, the expertise, the credit, the resources or
anything else to engage in this industry. Can you give me a
sense about what we might do in the rural states to make sure
that we are doing more than just creating an online resource
directory? And I don't want to minimize that that is a step in
the right direction. But it isn't getting to this demographic
or actually getting what they need so that they enter the
agricultural business.
Mr. Beyerhelm. Yes. Thank you so much for that. And you are
entirely correct. I think the situation is exacerbated a little
bit when you get out into the West and you have these huge
geographical regions. And then when you combine that with a
continued budget constrained environment in which we have lost
25 percent of our employees in the last 4 years and had to
restrict our footprint a little bit in rural America. So to try
to respond to your question, one of the things are we are
working very hard to create an online application to reduce
some of the repeated need that you have to go to the office. So
it is our goal and our hope that in the very near future that
somebody is going to be able to apply, going to be able to do a
lot of the pre-stuff--at some point, we have to have that face-
to-face.
Ms. Lujan Grisham. And I appreciate that. Can you give me a
sense of the timeframe? I don't mean to sound like I am pushing
back. And I know that you have talked about the streamline
process in your testimony, but that is only for repeat loan
applicants. I can do a loan, and I can get prescreened at my
bank. I could do it while I am sitting here in this Committee,
and just pull up my personal account information and send a
loan application to my bank of choice. And probably, before I
finish my remaining 46 seconds, I would get an answer about how
eligible I am and what else they need. We could be using
colleges and universities, and we could be using extension
services, and we could be using state government partners and
local government partners, so that you have a much broader
footprint in this regard. So talk to me, if you can--I know I
am over time, Mr. Chairman--about how long before you get the
entire application online, and please tell me your thinking
about broadening your partnerships to achieve the goals that we
are interested in.
Mr. Beyerhelm. Yes. As I said, I can't give you an exact
timeline on the online application. It would certainly be my
hope that sometime in the next 12 months we would have that
done. The other thing that we are doing, in the farm bill, we
were given authority to do pilot projects. And one of the
things we want to look at is exactly what you are talking about
is partnering with CDFIs, local CBOs and have those folks help
us in reaching out to individuals in remote areas, actually
underwriting loans, bringing to those to actually leverage
their expertise. So I am glad you mentioned that, because that
is one of our objectives under the pilot project authority.
Ms. Lujan Grisham. Mr. Chairman, if I might, can I make one
quick statement?
Thank you, Mr. Chairman. And I really appreciate that. And,
I am probably going to send you in this terrible circle. I am
an old bureaucrat myself. And I know that we can just go in
circles--finding the right size. So I applaud that effort. And
I know that we want to make sure that the loans that we provide
are creditworthy. But you have to also make this burden much
smaller, because you could certainly make the argument that
instead of having to figure out these partners and going out to
nonprofits and funding them and supporting them to do the loan
application, wouldn't it be much smarter and swifter to make it
less burdensome so that we don't need so much stuff, without
minimizing that you have to assess the risk? So I just want to
push that balance is great, but urgency really is important
here. And we stand ready to help you in any way that we can to
make the difference.
Mr. Beyerhelm. Yes. And thank you very much for that. And
no, certainly, we will continue to look at ways to streamline
the process. I do want to say though that because we make loans
that are very highly leveraged--I mean, we can actually--if
somebody wants to borrow $200,000 to buy a $200,000 piece of
property, we can do the whole 100 percent financing. And their
cash flow may have a three percent margin in it. So as a
consequence we do have to spend some time, for the taxpayer's
benefit, but even more importantly for the customer's benefit
that we do not provide them financing that they cannot repay
and then wreck their credit. So there is a fine line in there
somewhere. But I appreciate your comments. And we will look
into it.
The Chairman. I thank the gentlelady. The gentlelady from
New Mexico makes a good point--most of us on this Committee
serve a rural constituency. I would think that she brings a
unique perspective in that she serves a remote constituency,
and we have seen such consolidation with respect to FSA office
closures and so on. The irony in this whole thing is that rural
broadband has not kept pace. So it is that much more
challenging. And the point that she has made is very well
noted.
So with that, I will recognize the gentleman from Virginia
for 5 minutes, Mr.--no. Okay. Seeing no further requests for
time, we will dismiss this panel. Thank you all very much. We
appreciate your testimony. And we certainly appreciate you
being here. And we will prepare for the next panel.
Dr. Long Thompson. Thank you.
The Chairman. In the interest of time, as we prepare the
second panel, I would just go on ahead and take a minute to
introduce those individuals. This is a bigger panel than the
first one. We have a total of five. Mr. Bob Frazee, President
and CEO of MidAtlantic Farm Credit, Westminster, Maryland; Mr.
Timothy L. Buzby, President and CEO, Farmer Mac; Mr. Leonard
Wolfe, President and CEO, United Bank & Trust of Marysville,
Kansas, on behalf of the American Bankers Association; Mr. Sean
H. Williams, President and CEO of The First National Bank of
Wynne, Wynne, Arkansas, on behalf of the Independent Community
Bankers of America; and, finally, Mr. Brett Melone, Loan
Officer, California FarmLink, Santa Cruz, California, on behalf
of the National Sustainable Agriculture Coalition.
And it appears that we have all of our panel members
seated. I would remind our panelists, just as I did the first
panel, green is go. You are good to go. When you see yellow,
step on the gas. And red indicates your time has expired.
So with that said, we will start by introducing Mr. Bob
Frazee, President and CEO, MidAtlantic Farm Credit, ACA,
Westminster, Maryland, on behalf of the Farm Credit System. Mr.
Frazee, you are recognized for 5 minutes.
STATEMENT OF BOB FRAZEE, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, MidAtlantic FARM CREDIT, ACA, WESTMINSTER,
MD; ON BEHALF OF FARM CREDIT SYSTEM
Mr. Frazee. Thank you, Mr. Chairman, and Members of the
Subcommittee. I appreciate the opportunity to testify today on
behalf of the Farm Credit System.
At MidAtlantic Farm Credit, we are part of the nationwide
Farm Credit System that is privately owned by farmers,
ranchers, agricultural cooperatives, rural utilities and others
in rural America. MidAtlantic is owned by more than 10,000
farmers that borrow from us in Delaware, parts of Maryland,
West Virginia, Virginia and Pennsylvania. I report to an 18
member board, 16 of whom are farmers elected by the borrower-
owners of our cooperative. The Board sets the policies that
guide our institution.
Farm Credit funds its lending by marketing System-wide debt
securities to the investing public. We do not have access to
deposits guaranteed by the FDIC and backed by the U.S. Treasury
as a source of funding. The Farm Credit System remains
financially strong. Our earnings have been good. Loan volume
has continued to grow. And our capital at the end of the first
quarter this year was 16.6 percent of total assets. The
investors that buy our bonds want to see the strength so that
they will continue to make their capital available to farmers,
ranchers and rural America through us.
Being a cooperative, we share our profits directly through
patronage dividends with the farmers who borrow from us. In
2013, MidAtlantic distributed nearly $19 million, and the
System over $1 billion in earnings as patronage dividends. This
puts money back in the pockets of farmers, and that supports
rural communities.
System institutions are regulated by the Farm Credit
Administration. And I am on the receiving end of their
attention, so I will let you know that they are doing their job
thoroughly. The Farm Credit Act makes clear that our
responsibility is to meet the needs of all types of
agricultural producers that have a basis for credit. Our
customer base reflects the fact that farming has changed
dramatically since the System was established almost 100 years
ago. Our territory contains a diversity of farming operation
that is today's agriculture. We serve Maryland and Delaware
poultry producing operations that are sophisticated, complex
business, as well as startup vegetable growers in Virginia who
are producing food for farmer's markets right here in
Washington.
If agriculture is going to be able to continue to feed a
planet of nine billion people in the year 2050, it is important
that all types, all sizes of farms have access to capital and
the infrastructure to support them. We are focused on doing all
that we can to help with that. One way we are helping is
through the StartRight Program we created in 2008 to address
the challenges faced by young, beginning and small agricultural
producers. Last year, we developed a Farm Fresh Financing
Program, created to help producers involved in local foods and
sustainable agriculture.
An example of Farm Fresh Financing is the Urban Tree
Connection in Chester, Pennsylvania. They have been building
gardens in vacant city lots for over 10 years, growing fresh
produce for their neighborhoods. We help them purchase
equipment and have provided a revolving line of credit so that
they will continue to grow and serve more communities.
As of the end of May, we had over $57 million in loans in
the StartRight Program and over $83 million in Farm Fresh
Financing. Every Farm Credit Association has programs that are
specifically targeted to serve these young, beginning and small
farmers. During 2013, the System made $8.3 billion in new loans
to young farmer, and almost $11 billion to beginning farmers
and $11.4 billion to small farmers. System institutions also
deployed capital in support of rural communities, making
investments in our borrower's communities that will help to
make them places where their children and grandchildren want to
live. For example, the Farm Credit System provided $140 million
to fund a rural business investment company that will begin
operations this summer to save and create new jobs in rural
communities.
We are also very proud of a $250,000 Farm Credit grant that
has enabled the Farmer Veteran Coalition to take a labeling
program that was started in Kentucky to a national level. This
will allow consumers to choose products produced by farmers
that are veterans when they make purchases.
Now, agriculture has experienced some very good years
recently. However, some sectors have experienced stress, as we
have heard earlier today. We have seen the livestock sector
that was hit hard by high feed costs, but we have seen
improvements there recently. In the Midwest, there have been
issues around land value inflation. Our institutions took
aggressive steps to manage their lending programs to avoid
taking on increased credit risk as land values have increased.
We make our credit decisions based on repayment capacity, not
inflating collateral values.
Drought conditions are impacting many parts of the country.
In California, the third consecutive year of drought and water
restrictions pose significant risk to producers. Institutions
there tell us that borrower's liquidity will be helpful this
year. But another dry year in 2015 is likely to create
financial adversity for them. We will work with those customers
on a case by case basis to help them.
In conclusion, the Farm Credit System continues to make
credit available to all segments of agriculture. We cover the
expense of being regulated by the government. We pay insurance
premiums to protect investors. And we rely on continued access
to the debt markets and a built in oversight mechanism for our
member-owners.
Mr. Chairman, thank you again for the opportunity to
testify. And I will be pleased to respond to your questions.
[The prepared statement of Mr. Frazee follows:]
Prepared Statement of Bob Frazee, President and Chief Executive
Officer, MidAtlantic Farm Credit, ACA, Westminster, MD; on Behalf of
Farm
Credit System
Mr. Chairman, and Members of the Subcommittee, thank you for the
opportunity to testify today on behalf of the Farm Credit System. My
name is Bob Frazee and I am President and CEO of MidAtlantic Farm
Credit.
MidAtlantic is part of the nationwide Farm Credit System. My
remarks today will provide some background on the Farm Credit System,
an overview of current credit conditions, and comments on how Farm
Credit is meeting our mission, and serving the credit needs of
agriculture and rural communities.
Background on the Farm Credit System
The Farm Credit System is a federally chartered network of
borrower-owned lending institutions. Established in 1916, the Farm
Credit System is comprised of 82 privately owned institutions. This
includes four wholesale banks and 78 direct lending local associations.
Farmers, ranchers, agricultural cooperatives, rural utilities and
others in rural America cooperatively own all of these institutions.
The four wholesale banks include CoBank. In addition to lending to Farm
Credit associations, CoBank lends to agricultural, rural electric and
telephone cooperatives, as well as rural water and sewer systems,
broadband providers, agribusiness and to support exports. Farm Credit's
mission is to provide sound and dependable credit and other related
financial services to our owners and others consistent with the
eligibility criteria set out in the Farm Credit Act.
MidAtlantic is a direct lending association. We are owned by more
than 10,000 farmers that borrow from us in Delaware, and parts of
Maryland, West Virginia, Virginia and Pennsylvania. As President and
CEO, I report to an 18 member board of directors. Sixteen of these
directors are farmers elected by the borrower-owners of our
cooperative. In addition to elected borrower-owners, each System
institution is required to have at least one appointed outside director
on their board that has financial expertise. At MidAtlantic, we have
chosen to have two appointed directors. In no case are employees
allowed to serve as directors of our lending institutions.
The board of directors is responsible for setting the policies that
guide how we run our institution and serve our marketplace. They
approve the cooperative's capitalization plan consistent with Federal
regulations and ensure that management makes available loan products
and related financial services appropriate to the unique needs of
agriculture in the territory the association serves.
Each Farm Credit association obtains funds for its lending programs
through one of the four Farm Credit banks. At MidAtlantic, we get our
funding through AgFirst Farm Credit Bank, located in Columbia, South
Carolina. AgFirst is owned by MidAtlantic and 18 other associations.
The four Farm Credit System banks cooperatively own the Federal
Farm Credit Banks Funding Corporation. The Funding Corporation, as
agent for the banks, markets to the investing public the System-wide
debt securities that are used to fund the lending operations of all
Farm Credit System institutions. Unlike commercial banks, Farm Credit
institutions do not have access to secured deposits guaranteed by the
Federal Deposit Insurance Corporation and backed by the U.S. Treasury
as a source of funding.
Regulatory Oversight by the Farm Credit Administration
All Farm Credit System institutions are regulated by the Farm
Credit Administration (FCA). The FCA is an arm's-length, independent
safety and soundness regulator. The agency's three Board members are
nominated by the President and confirmed by the Senate. The FCA has the
oversight and enforcement powers that other Federal financial
regulators have in order to ensure that Farm Credit institutions
operate in a safe and sound manner. FCA examiners are required to be
engaged with every System institution at least once every eighteen
months. As one who is on the receiving end of that attention, you
should feel comfortable that they are doing their job thoroughly.
The terms of two of the three FCA board members have now expired. I
understand that this Committee is not directly involved in the
nomination and confirmation process; however, we urge the Committee to
encourage the White House to bring forward nominees to the Senate in a
timely basis.
The Farm Credit System's mission, ownership structure and
authorizing legislation are unique among financial institutions. It is
critically important that Farm Credit's safety and soundness regulator
understands our mission and what it takes to be successful in
accomplishing that mission. Sometimes they need to be reminded of that,
so we appreciate very much the language included in the farm bill
reminding the regulator that the System's unique cooperative structure
should be taken into consideration as they promulgate rules.
The System's safety and soundness also is overseen by the Farm
Credit System Insurance Corporation (FCSIC). FCSIC administers the Farm
Credit Insurance Fund. The Fund and the operations of the Insurance
Corporation are supported by premiums paid by Farm Credit institutions
every year. The Fund is there to protect investors in System debt
against loss of their principle and interest to the extent there are
funds available in the Fund. There is no direct taxpayer backstop for
the Fund. The Farm Credit Act sets the funding goal for the Fund at 2%
of the aggregate outstanding insured obligations of the System. FCSIC
also has the authority to examine System institutions and would act as
the conservator or receiver of a System institution should one fail.
Fulfilling Farm Credit's Mission of Service to U.S. Agriculture and
Rural America
All Farm Credit institutions are focused on accomplishing the
mission established for us by Congress: to serve agriculture and rural
America. Our cooperative structure and governance is designed
specifically to ensure that our lending and related financial service
activities are driven by the needs of our borrower-owners and to ensure
that there is a reliable and competitive credit source available to
agriculture that America's farmers and ranchers own and control. Our
practice is to engage our customers in a consultative lending
relationship, using our accumulated expertise and knowledge of
agriculture and finance to craft long-term relationships. Our services
are delivered in the manner that best suits our customers' needs--
whether that means talking to them and completing loan documents at a
poultry farmer's kitchen table, online while a vegetable producer is
working in the field, or in the conference room of a regional
agribusiness.
The diversity found in our customer base is indicative of the fact
that farming has changed dramatically since the Farm Credit System was
established almost 100 years ago. We are constantly evaluating our
programs to ensure that we are able to serve the full breadth of
agriculture. Much has been said and written about how agriculture needs
to be prepared to feed a planet of nine billion people by the year
2050. Very little focus has been given to the amount of capital that
will be needed to make sure our agriculture and infrastructure that
supports it will be up to the task. Many have different visions
regarding what agriculture should look like to accomplish this. Our job
is to be positioned to meet the needs of each--whether small and local,
large and national, traditional or organic. As the Farm Credit Act
makes clear, our responsibility is to meet the needs of all types of
agricultural producers that have a basis for credit.
In our territory at MidAtlantic, we see the diversity that is
today's agriculture first hand. We serve some of the premier poultry
producing operations in the nation. These are sophisticated, complex
businesses with tight margins and substantial credit needs. Our staff
understands the needs of this industry and works closely with them on a
whole host of issues. On the other end of the spectrum, we serve the
needs of the Amish farming community in Pennsylvania, financing
business improvements like solar panels that provide energy to their
farms. In between those extremes are customers and businesses with
similarly varied needs, from entrepreneurs working to develop a wine
industry in Maryland, to dairy farmers in Delaware, to fruit and
vegetable growers in Virginia producing food for local farmers' markets
right here in Washington, D.C.
Our experience with this large swath of agriculture also gives us
the knowledge, insight and expertise to develop special programs
targeted at farmers who may need special help. We created the
StartRight program in 2008, which is a suite of loan products
specifically designed to address the challenges faced by young,
beginning and small agricultural producers. Just last year, we
developed a Farm Fresh Financing program, created to help producers
committed to local foods and sustainable agriculture. As of the end of
May, we had over $57 million in loans in the StartRight program, and
over $83 million in loans in Farm Fresh Financing. I'd like to give you
two examples of the types of businesses and organizations that these
loans help:
The Urban Tree Connection in Chester, Pennsylvania has been
building gardens in vacant city lots for over 10 years, growing both
fresh produce for the neighborhoods, as well as growing a sense of
community among neighbors. Farm Credit provided funding to help them
purchase equipment. We also provided a revolving line of credit so that
they could continue to grow and serve more communities. Since its
inception, Urban Tree Farm has partnered with several additional
companies to help them meet their community goals, and Farm Credit is
currently talking to them about financing options.
Groundworks Farm in Pittsville, Maryland is another example. Owners
Margaret Evans and Kevin Brown didn't grow up on farms, but they knew
farming is what they wanted to do with their lives. Farm Credit helped
them buy a small farm on the Eastern Shore of Maryland to grow produce
and offer shares in their CSA, a Community Supported Agriculture farm.
Last year, they offered almost 150 shares in their farm to local
residents.
It should be of no surprise to the Committee that when you look
across Farm Credit's loan portfolio you will see represented in it the
broad array of operations that are U.S. agriculture. The Farm Credit
Act was designed to ensure that we can continue to meet the needs of
agriculture, cooperatives and rural infrastructure as they have
developed. Parts of the law have not been updated for over forty years,
and it can be challenging at times for us to continue to fulfill that
mission when old law has to be applied in a very changed world.
Sometimes when changes in law are made, they take time to get
implemented. Back in the 2002 Farm Bill Congress authorized the
formation of Rural Business Investment Companies (RBIC) and made clear
that Farm Credit institutions could create and invest in these entities
to further the goal of making available equity capital for rural
entrepreneurs. It took additional changes in the law and final
regulations that were not completed until 2013 for our institutions to
be able to put this authority to work for rural America. This summer a
Farm Credit System funded RBIC will begin operations thanks to a
commitment of about $140 million from Farm Credit to capitalize the new
effort. This will mean jobs saved and jobs created in rural
communities.
We also are very proud of our partnership with the Farmer Veteran
Coalition to serve veterans involved in agriculture. As the result of a
$250,000 grant from the Farm Credit System, farmers who are veterans
now have access to a national labeling program that will allow
consumers to choose products they know are produced by farmers that are
veterans when they make purchases. These funds facilitated moving this
program from one operated only in the state of Kentucky to a national
program.
Our cooperative structure ensures that our focus remains on the
success of our owners rather than on achieving quarterly returns to
impress stockholders. When our customer-owners achieve success, our
business will succeed as well. Farm Credit's lending relationship with
our member-borrowers is based on constructive credit over the long
haul--we make loans, retain loans and service loans. Farm Credit does
not enter and exit agricultural lending as farm profitability waxes and
wanes.
Distributing Profits to Farmers Through Patronage
Our commitment to our borrower-owners' business success is
demonstrated further by the fact that we share our profits directly
through patronage dividends with the farmers who borrow from us. Each
year, MidAtlantic's board of directors makes a determination based on
our profitability and financial strength as to what portion of our net
earnings will be returned to our members who borrow from us.
In 2013, MidAtlantic distributed more than $18.9 million in
earnings as patronage dividends to the member-borrowers of our
cooperative. In total, the Farm Credit System in 2013 distributed over
$1 billion in patronage. This patronage distribution puts money back in
the pockets of farmers. It is a rural stimulus that allows our
customer-owners to re-invest in their own operations and to support
rural communities through local spending.
Farm Credit's Financial Strength
The Farm Credit System remains very strong financially. The
System's combined net income was $4.64 billion for 2013, and we are
pleased to report that in the first quarter of 2014, the System's net
income was nearly $1.1 billion. Nationwide, Farm Credit ended 2013 with
a loan portfolio of about $201 billion, and we added another $3.5
billion in loans during the first quarter of this year. Our capital
position exceeds that of most every other financial institution. At the
end of the first quarter of this year, the System had just over $43
billion of capital, or 16.6 percent of total assets. This level of
capital substantially exceeds that required by our regulator. This
means that the investors that continue to make their capital available
to farmers, ranchers and rural America through us should feel secure
that they will be repaid.
Overall Farm Credit Loan Portfolio
As I noted before, at the end of the first quarter of this year we
had outstanding about $204.5 billion in loans. To give you some
perspective on the breadth of that portfolio of loans, that total was
comprised of about $93 billion in real estate mortgage loans, $42
billion in production loans, $32 billion in agribusiness loans, $15.6
billion in energy and water and sewer, $6.5 billion in rural home loans
and about $4.3 billion in communications loans. In addition we
supported exports with $4.7 billion in financing.
Consistent with our authority under the Farm Credit Act, we are
engaged in the rural community beyond agriculture. Because of the
System's capital strength, institutions are also making investments
that support the quality of life in rural communities. Institutions
have invested in bonds issued to support critical care hospitals,
nursing facilities, congregate housing for the elderly, and schools.
Because our owners understand the needs of their communities, these
investments demonstrate their commitment to making their hometowns the
places where their children and grandchildren will want to live.
A Commitment to Serving Young, Beginning and Small Farmers
Every Farm Credit association must have programs in place targeted
specifically at meeting the needs of three special categories of
borrowers: those that are young, those that are beginning in farming,
and those that are small farmers. Our regulator sets the definitions
for each of these categories. Young farmers are defined as those 35
years old or younger. Beginning farmers are those with 10 or fewer
years of farming experience. In the case of small farmers, we are
required to look specifically at the gross farm sales of the individual
producers. Small farmers are those with less than $250,000 in annual
gross farm sales.
Each institution is required to report on their lending activity to
these individual categories of producers. This data is not additive
since individuals may fall into more than one category. During 2013
Farm Credit institutions made $8.3 billion in new loans to young
farmers, almost $11 billion in new loans to beginning farmers and $11.4
billion to small farmers.
We work hard to serve the needs of young, beginning and small
farmers. Across the country we do this not only by fulfilling their
credit needs but also by supporting training and education programs,
hosting seminars on intergenerational transfer of family farms, on risk
management techniques and establishing and maintaining effective
business plans. We are engaged across the spectrum with those entering
agriculture whether they are focused on organic, sustainable, or local
food related operations, direct-to-retail, or any other emerging
business models. Our trade association, The Farm Credit Council, has
been actively engaged with the support of USDA in reviewing the
effectiveness of financial skills training for young and beginning
farmers and encouraging the development of new tools that will help
ensure those starting out in agriculture do so with the improved
business management skills that are so necessary for farm businesses to
be successful over the long term.
Current Conditions in Agriculture
Agriculture has experienced some very good years recently. As you
know, however, several sectors have seen stress. We have seen many in
what we call the green industry--sod, nursery and ornamental growers
and greenhouse--struggle alongside the struggling housing industry. The
stagnant housing sector also affected the timber industry. While the
protein sector was hit by high feed costs, we have seen improvements
recently. In the Midwest, there has been considerable attention paid to
land value inflation. Our institutions early on took aggressive steps
to manage their lending programs so as to not take on increased credit
risk exposure as land values increased similar to what some lenders did
during the housing bubble. Farm Credit System institutions approach
their markets prudently. Caps were placed on lending against land based
on realistic projections regarding commodity prices. We make credit
decisions based on the repayment capacity of the individual borrower
rather than the inflating value of the collateral. Because we hold
virtually all of our loans on our own balance sheet, we have a strong
interest in seeing that our customers are successful and prudent in
their own risk-taking, including the purchase and financing of farm
real estate.
Crop Insurance
Crop insurance remains an extremely important risk management tool
for farmers throughout the country. We appreciate very much that the
farm bill provided more crop insurance options and ensured new policies
will be made available for specialty crops. We believe that it is
important as a lender to agriculture that we know our customers have
insured their production. This protects the farmer and it protects the
lender as we provide credit to farmers to cover their operating
expenses. A strong, effective, fully funded Federal Crop Insurance
Program is vitally important to maintaining credit flows to
agriculture. We look forward to providing input as implementing
regulations are developed and proposed.
Drought Conditions
Our institutions continue to monitor drought conditions in parts of
Texas, Oklahoma, Kansas, New Mexico and particularly in California.
While there has been some improvement in certain areas of the country,
severe conditions still exist. I will address California separately but
across all Farm Credit institutions it is important to note that in
each situation we assess the circumstances of individual borrowers
adversely impacted by weather conditions and work with them
accordingly.
California is now in its third consecutive year of drought
conditions and experiencing water restrictions to most areas of the
state. This situation poses significant risk to agricultural production
across the state in 2014, with ramifications into 2015 and beyond. It
is fortunate that California farmers and agricultural cooperatives
strengthened their balance sheets coming in to the current situation
and are in a better overall financial position to withstand drought-
related business impacts.
The drought's impact differs from region to region. Farm Credit
institutions in California assess the drought's impacts by
understanding the specific and unique circumstances of each customer.
Our institutions then work collaboratively with individual borrowers
who are experiencing distress related to the drought.
Overall, high grower liquidity, coupled with relatively strong
commodity prices mean most agricultural producers should be able to
adjust their plantings and their feed rations for livestock in the near
term. It also is fortunate that the agricultural sector has become much
more sophisticated in utilizing conservation measures to more
efficiently use the water they have. However, the continuation of
drought conditions risks adverse impacts on reserve groundwater storage
and a substantial increase in groundwater overdraft. If this results,
there will be substantial long-term costs of groundwater overdraft that
are yet to be determined. Furthermore, if another critically dry year
occurs in 2015, studies suggest the impacts likely will be much more
severe, including reduction in water availability, crop acres and farm
related employment. This will require close monitoring and early
coordination among all interested parties to manage through without
significant disruption.
The Farm Credit System remains well positioned to meet borrowing
needs of agricultural producers impacted by the drought. The System's
role is to stand by its customers and it will continue to fulfill that
role in a safe and sound manner. This includes working collaboratively
with individual borrowers who are experiencing financial distress
related to the drought. Whatever the challenges presented by the
drought, access to credit will not be one of them.
Conclusion
The Farm Credit System remains financially strong, economically
vital, and focused on fulfilling its mission of service to U.S.
agriculture and rural America. We continue to make credit available to
all segments of agriculture, including commercial producers as well as
young, beginning and small farmers and ranchers. We support
agricultural cooperatives, rural infrastructure and the marketing
channels that agriculture depends on to sell their product and we serve
the needs of rural communities to the extent our authority permits. We
are proud of our commitment to rural America.
There are no Federal dollars invested in the Farm Credit System. We
pay for the expense of being regulated by the Federal Government
through assessments on all Farm Credit System institutions. We pay
insurance premiums to provide protection for those who invest in our
debt securities. To continue serving our mission, we rely on continued
access to the national debt markets and an independent, arm's-length
regulator that comprehends the unique requirements of our cooperative
structure and agriculture. In addition to being closely regulated, we
have the built-in oversight mechanism of our member-owners holding our
feet to the fire to keep service quality high while protecting their
equity in their cooperative.
Mr. Chairman, thank you again for the opportunity to testify today
on behalf of the Farm Credit System. I will be pleased to respond to
your questions.
The Chairman. Thank you, Mr. Frazee. I now recognize Mr.
Timothy L. Buzby, President and CEO of Farmer Mac. You are
recognized for 5 minutes.
STATEMENT OF TIMOTHY L. BUZBY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FEDERAL AGRICULTURAL MORTGAGE CORPORATION (FARMER
MAC), WASHINGTON, D.C.
Mr. Buzby. Chairman Crawford, and distinguished Members of
the Subcommittee, thank you for your invitation to appear today
to testify on behalf of the Federal Agricultural Mortgage
Corporation, which is commonly known as Farmer Mac. My name is
Tim Buzby, and I am the President and CEO of Farmer Mac.
Farmer Mac exists to deliver capital and liquidity to rural
America, and offers a variety of financing options tailored to
the needs of its customers, America's rural lenders. In Farmer
Mac's role as the secondary market for rural America, we work
closely with all types and sizes of rural lenders. Through
alliances and partnerships, we work with over 900 institutions,
including commercial and community banks, Farm Credit System
institutions, insurance companies and rural electric lender
cooperatives. By working with such a vast network, Farmer Mac
introduces additional competition into the marketplace to
ensure that your constituents are receiving the lowest interest
rates and most favorable terms possible for their financing
needs.
To fund the needs of our lending partners, Farmer Mac
raises money in the capital markets as investors have looked to
Farmer Mac as one vehicle to invest in rural America. Investors
are attracted to the fact that today's agricultural producers
are more efficient and productive than ever, more sophisticated
in their financing arrangements and are providing quality
commodities at competitive prices.
One indication of this interest in the investment of rural
America is regular demand for Farmer Mac's debt and equity
securities. As an example, Farmer Mac has seen great demand in
its auction of over $250 million of securities during just the
past 3 months. These securities have attracted competitive bids
from multiple financial institutions, driving down Farmer Mac's
cost of funds. Lower cost funding for Farmer Mac directly
benefits your farmers, ranchers and rural utility cooperatives
in the form of lower interest rates on products financed by
Farmer Mac.
With regard to credit, the quality of Farmer Mac's
portfolio remains a great story. We are extremely proud of our
credit profile. And it will continue to be the cornerstone of
our success in the future. Currently, our overall borrower
delinquency rate on the loans in our $14.1 billion portfolio is
only \1/5\ of 1 percent. That said, Farmer Mac understands that
agriculture is cyclical with many diverse industries that
respond in different ways to changes and economic conditions.
We take pride in the diversified nature of our loan portfolio
that ranges from almond groves in California to wheat, corn and
soybean crops in the Midwest, and from cattle ranches in the
Southwest to electric distribution cooperatives in the
Southeast and across America.
We have found over the years that this diversification
serves us well as the inevitable cycles of weather and
commodity prices impact profits in agricultural industries
across geographies.
As we look forward, although farm incomes are projected to
decrease in 2014 compared to 2013, they are still very high
from a historical perspective and will be above the 10 year
average. In Farmer Mac's experience, farmers and ranchers today
generally have stronger balance sheets than in the past, with
higher working capital and lower leverage. In the agricultural
lending space, there is great competition, particularly for the
most successful producers who have become more sophisticated in
their financing and are able to demand lower rates and more
favorable terms. Very often, these borrowers are prudently
choosing to finance farm purchases and refinancings with long-
term fixed rate mortgages to lock in low and known interest
costs.
I realize there is concern about the agriculture land value
increases experienced over the past several years. But recent
market activity suggests that land values have moderated, most
notably in those areas that experienced the greatest increases
in recent years such as the Midwest. Although lower commodity
prices and increases in interest rates could put downward
pressure on the value of farmland, Farmer Mac does not expect a
repeat of the 1980s when agricultural land values collapsed.
Fortunately, we see what others in the rural lending industry
have observed, that farmers and ranchers simply are not taking
on as much debt as they had in the past.
In summation, Farmer Mac continues to provide a stable
source of liquidity, capital and risk management tools to help
rural lenders meet the financing needs to their customers. With
a diverse array of lending products and sources of capital,
Farmer Mac is well positioned to provide rural America with the
sophisticated and low-cost products and services demanded by
today's rural borrowers.
Thank you, and I would be happy to answer any questions you
may have.
[The prepared statement of Mr. Buzby follows:]
Prepared Statement of Timothy L. Buzby, President and Chief Executive
Officer, Federal Agricultural Mortgage Corporation (Farmer Mac),
Washington, D.C.
Introduction
Chairman Crawford, Ranking Member Costa, and distinguished Members
of the Subcommittee, thank you for your invitation to appear today to
testify on behalf of the Federal Agricultural Mortgage Corporation,
which is commonly known as Farmer Mac. My name is Tim Buzby, and I am
the President and Chief Executive Officer of Farmer Mac. I appreciate
the opportunity to appear before your Subcommittee today to provide you
with some insight into what we at Farmer Mac see taking place in the
rural credit financing markets.
Farmer Mac is a stockholder-owned, federally chartered corporation
that combines private capital and public sponsorship to serve a public
purpose. The company was established under Federal legislation first
enacted in 1988 and amended most recently in 2008. Congress has charged
Farmer Mac with the mission of providing a secondary market for a
variety of loans made to borrowers in rural America, including mortgage
loans secured by agricultural real estate, rural utility loans, and
certain loans guaranteed by the U.S. Department of Agriculture (USDA).
This secondary market increases the availability of long-term credit at
stable interest rates to America's rural communities, including
farmers, ranchers, other rural residents and businesses, and rural
utility cooperatives, and provides those borrowers with the benefits of
capital markets pricing and product innovation. In Farmer Mac's role as
the secondary market for rural America, we work closely with all types
and sizes of rural lenders, including commercial and community banks,
Farm Credit System institutions, insurance companies, credit unions,
and lenders to rural electric cooperatives. We also deal directly with
other financial counterparties as we serve as a bridge between the
national capital markets and the rural credit markets by attracting new
capital for financing rural borrowers. Farmer Mac's position at the
intersection of Main Street, where the lending industry and borrower
community come together in rural America, and Wall Street allows us to
provide a unique perspective about the environment for rural credit.
Farmer Mac exists to deliver capital and liquidity to rural America
and offers a variety of effective financing options and products
tailored to the needs of its rural lender customers that increase the
ability of those lenders to offer low-cost funding to their rural
borrower customers. Although we work directly with rural lenders,
ultimately the greatest benefit we are able to provide is to your
constituents--America's farmers, ranchers, rural utility cooperatives,
and business owners in rural communities. Farmer Mac's current book of
business includes loans originated by approximately 900 different
financial institutions across the nation. By working with such a vast
network of rural lenders, we introduce more competition into the
marketplace and ensure that your rural constituents are receiving the
lowest interest rates and most favorable terms possible for their
financing needs. In fact, the interest rates available to borrowers
through the products offered by Farmer Mac are some of the most
competitive in the market today. However, whether or not a rural
borrower ultimately chooses a Farmer Mac loan product, Farmer Mac's
participation in the rural lending arena provides that borrower with
the opportunity to obtain a low interest rate on terms that work for
that individual. That is good for rural borrowers, their families,
their communities, and rural America in general. Since its creation in
1988, Farmer Mac has helped to fund loans to over 60,000 borrowers in
all 50 states, resulting in nearly $35 billion of investment in rural
America.
Current Conditions
The agricultural economy has been robust for several years, driven
by increased demand for food both in the United States and around the
world as well as efficiencies in farming production, among other
factors. This has not gone unnoticed in the capital markets, as
investors have looked to Farmer Mac as a vehicle to invest in rural
America. These investors are attracted to the fact that today's
agricultural producers are more efficient and productive than ever,
more sophisticated in their financing arrangements, and are providing
the marketplace with quality commodities at competitive prices. One
indication of this interest in investing in rural America is the
regular demand for Farmer Mac's debt and equity securities. As an
example, Farmer Mac has seen great demand in its auction of over $250
million of term debt over the past 3 months. These debt offerings have
attracted competitive bids from multiple financial institutions,
driving Farmer Mac's cost of funds down by an average of 10 basis
points per offering. Lower cost funding for Farmer Mac directly
benefits farmers, ranchers, and rural utility cooperatives in the form
of lower interest rates on products financed by Farmer Mac.
The credit quality of Farmer Mac's portfolio remains a great story.
We are extremely proud of our credit quality, and it will continue to
be the cornerstone of our success in the future. As of March 31, 2014,
Farmer Mac's overall 90 day delinquency rate on the loans in its $14.1
billion portfolio was near historical lows at only 0.21%. Through the
end of first quarter 2014, Farmer Mac has never experienced any credit
losses in its Rural Utilities, USDA Guarantees, and Institutional
Credit lines of business and has experienced cumulative losses of only
$31 million in its Farm & Ranch line of business during Farmer Mac's
entire 26 year history on $19.2 billion of cumulative originations
(0.16%). Although Farmer Mac's talented underwriting staff can take
much of the credit for the credit quality in Farmer Mac's portfolio,
growing conditions, commodity prices, and agriculture exports from
across the nation have been very good over the past 10 years and have
contributed to growth in U.S. agriculture production and, consequently,
borrower repayment capacity. Nonetheless, Farmer Mac understands that
agriculture is cyclical, with many diverse industries that respond in
different ways to changes in economic conditions. Those individual
industries often are affected differently, sometimes positively and
sometimes negatively, by prevailing domestic and global economic
factors and regional weather conditions. This results in cycles where
one or more industries may be under stress at the same time that others
are not.
Our policy at Farmer Mac is to diversify our Farm & Ranch portfolio
both geographically and by agricultural commodity. We direct our
marketing efforts toward agricultural lenders throughout the nation to
achieve commodity and geographic diversification in our exposure to
credit risk. Farmer Mac's Farm & Ranch portfolio remains diverse both
geographically and by agricultural commodity, as illustrated in the two
charts below that are current as of March 31, 2014. We take pride in
the diversified nature of our loan portfolio that ranges from almond
groves in California to wheat, corn, and soybean crops in the Midwest
and from cattle ranches in the Southwest to electrical distribution
cooperatives in the Southeast. We have found over the years that this
diversification serves us well as the inevitable cycles of weather and
commodity prices impact profits in agricultural industries or
geographies because as certain portfolio segments are stressed, others
can benefit. Farmer Mac's overall portfolio also benefits from the
diversification added by its lines of business other than Farm & Ranch,
including USDA Guarantees, Rural Utilities, and Institutional Credit.
We continue to closely monitor sector profitability, economic
conditions, and agricultural land value and geographic trends to tailor
underwriting practices to changing conditions as part of our robust
underwriting process.
March 31, 2014
Commodity Type Geography
Although farm incomes are projected to decrease in 2014 compared to
2013 primarily because of lower cash grain prices, farm incomes are
still very high from a historical perspective and above the 10 year
average. In Farmer Mac's experience, farmers and ranchers generally
have stronger balance sheets compared to several years ago, with high
working capital and low leverage. There is great competition in the
agricultural lending space, particularly for the most successful
producers who have become more sophisticated in their borrowing and
take advantage of lender competition to obtain low rates and favorable
terms. More and more, these borrowers are choosing mortgage loan
products with long-term fixed rates to lock in low and known interest
costs. Another trend that Farmer Mac has observed is that the primary
use of funds for many new loans is to refinance existing debt rather
than to purchase new real estate.
Agricultural land values have increased over the past several
years, but recent market activity suggests that land values may have
moderated, most notably in those areas that have experienced the
greatest increase, such as the Midwestern region. While the increase in
land values has varied by geographic region, it appears to have been
spurred by a combination of factors, including strong demand for
agricultural products and resulting high commodity prices, particularly
for corn, soybeans, and wheat, as well as good yields, low interest
rates, and landowners choosing to reinvest their profits in the
acquisition of more land. Lower commodity prices and increases in
interest rates could put downward pressure on the values of farmland,
although Farmer Mac does not expect a repeat of the 1980s when
agricultural land values collapsed. Some of the reasons for this belief
are that debt loads are lighter today, the interest rate environment is
much more transparent than in the 1970s and 1980s, world markets are
more transparent and interconnected today, and the current run-up in
land values is lower and more gradual than the increase in land values
in the 1970s. We see what others in the rural lending industry have
observed--that farmers and ranchers simply are not taking on as much
debt as they have in the past. The general increase in land values has
resulted in less acreage encumbered as collateral, as much of the
financing being done today is with cash or a mix of cash, free and
clear collateral, and debt. It appears that farmers and ranchers have
learned from the mistakes of the past and are not buying land at
inflated prices with debt, and lenders are also more disciplined than
in the 1980s.
Farmer Mac has been diligent in monitoring land values and has
instituted measures to ensure that its Farm & Ranch portfolio remains
sound. For example, last year we adopted stricter loan-to-value ratio
(LTV) requirements for loans located in the Corn Belt in the Midwestern
states where land prices have seen the highest escalation in recent
years. Even before this change, the LTVs of loans in Farmer Mac's Farm
& Ranch portfolio have historically been very low. The weighted average
original LTV (based on original appraised value that has not been
indexed to provide a current market value or reflect amortization of
loans) for the loans in Farmer Mac's Farm & Ranch portfolio was
approximately 48% as of March 31, 2014. The weighted average current
LTV (based on original appraised value but which reflects loan
amortization since purchase) for Farmer Mac's Farm & Ranch loans was
approximately 41% as of March 31, 2014. The average LTV of Farmer Mac's
Farm & Ranch loans decreases even more if the values in the original
appraisals are indexed to current land values.
Like others with a strong interest in agriculture, Farmer Mac
continuously monitors significant weather events throughout the country
and has been paying close attention to the current drought conditions
in the western part of the United States, including California. The
water level in many California reservoirs is only half of their average
year-to-date water storage levels, and the snowpack in the higher
elevations whose runoff would typically replenish low reservoir levels
is at a third or less than normal levels. Though many farm irrigation
districts will receive little or no water from the governing water
authorities, the impact on individual farmers will vary due to
alternative water sources the farmer may have in place. Farmer Mac has
not observed any material effect on its portfolio due to these drought
conditions as of March 31, 2014, but any continuation of extreme or
exceptional drought conditions beyond the 2014 water year could have
adverse future effects. This is particularly true in the permanent
plantings sector, where the value of the related collateral is closely
tied to the production value and capability of the permanent plantings,
and in the dairy sector, which may experience increased feed costs as
water is diverted away from hay acreage commonly relied upon by dairy
producers and toward land supporting other agricultural commodities.
In addition to Farmer Mac's secondary market activities in its Farm
& Ranch line of business that involves mortgage loans secured by first
liens on agricultural real estate, Farmer Mac has also been an active
participant in the secondary market for loans guaranteed by the USDA
under the Consolidated Farm and Rural Development Act (the CONACT)
since 1991 after Congress granted that authority to Farmer Mac. In that
time, Farmer Mac has provided lenders and their customers with
liquidity and competitive rates, including longer-term fixed rates, on
loans guaranteed by the USDA under the CONACT that are eligible for
Farmer Mac to purchase.
With regard to Farmer Mac's Rural Utilities line of business, the
demands of that industry for capital and financing have historically
tended to be linked to the state of the general economy and applicable
environmental regulations. Continued weakness in the general economy in
the United States has reduced the demand for rural electric power and,
consequently, the need for rural utilities cooperatives to expand in
recent years. This lower demand within the industry has increased
competition for Farmer Mac's customer base from other lenders. Domestic
economic indicators continue to show modest growth, and Farmer Mac and
industry sources expect that demand for rural utilities loans will
increase as the economy eventually strengthens. Farmer Mac believes
that the rural utilities industry will have significant needs for
financing over the course of the next decade, as capital will be needed
for growth and modernization, including generation and transmission
(G&T) and distribution system improvements and demand-side management.
In addition, the industry will also require capital to comply with any
future public policy initiatives such as environmental regulations and
clean energy initiatives. Farmer Mac stands ready to work with the
lenders to help meet the needs of their rural electric cooperative
borrowers. Since the inception of the Rural Utilities line of business
in 2008, Farmer Mac's secondary market activities have helped nearly
170 rural electric cooperatives throughout the United States obtain
financing to serve approximately 4.6 million customers in rural areas.
Conclusion
Farmer Mac continues to provide a stable source of liquidity,
capital, and risk management tools to help rural lenders meet the
financing needs of their customers. With a diverse array of lending
products and capital sources, Farmer Mac is well positioned to provide
rural America with the sophisticated and low cost lending products
demanded by today's rural borrowers. Last year marked Farmer Mac's 25th
anniversary of serving rural America, and we at Farmer Mac are more
energized than ever to continue to deliver the benefits envisioned by
Congress at Farmer Mac's creation--greater access to affordable credit
and a wide variety of loan products for rural communities. As I reflect
on my nearly 14 year tenure at Farmer Mac, I am proud to say that the
addition of Farmer Mac to the rural financing arena has fulfilled
Congress's vision. Farmer Mac is a valuable and much relied upon asset
for rural America, as lenders seek to offer their customers long-term
interest rates at low levels, fund larger real estate loans, and manage
borrower exposure levels. We are proud to partner with America's
agricultural bankers, Farm Credit System institutions, and rural
electric cooperatives to serve rural communities, and we remain
steadfast in our commitment to meet their needs. Farmer Mac is
committed to fulfilling its mission of delivering capital and
increasing lender competition for the benefit of rural communities
throughout the nation. Rest assured that we are prepared to build on
our recent positive results and will continue to innovate, collaborate,
and provide unparalleled service with a renewed focus on the
stewardship of our public mission as we help build a strong and vital
rural America.
Thank you for the opportunity you have generously provided Farmer
Mac to give testimony on current credit conditions in rural America. We
look forward to working with Members of Congress and our business
partners to do even more to fulfill our mission. I would be happy to
answer any questions you may have.
Background Information About Farmer Mac
Farmer Mac currently employs just over 70 people who are located
primarily at offices in Washington, D.C. and in Johnston, Iowa. Farmer
Mac accomplishes its Congressional mission of providing liquidity and
lending capacity to rural lenders by:
purchasing eligible loans directly from lenders;
providing advances against eligible loans by purchasing
obligations secured by those loans;
securitizing assets and guaranteeing the payment of
principal and interest on the resulting securities that
represent interests in, or obligations secured by, pools of
eligible loans; and
issuing long-term standby purchase commitments (``standby
commitments'') for eligible loans.
Farmer Mac's activities are intended to provide lenders with an
efficient and competitive secondary market that enhances these lenders'
ability to offer competitively-priced financing to rural borrowers.
This secondary market is designed to increase the availability of long-
term credit at stable interest rates to America's rural communities and
to provide rural borrowers with the benefits of capital markets pricing
and product innovation. Farmer Mac's activities are subject to
oversight by Congress as well as a dedicated safety and soundness
Federal regulator (the Office of Secondary Market Oversight within the
Farm Credit Administration) and the U.S. Securities and Exchange
Commission.
Farmer Mac's purchases of both eligible loans and obligations
secured by eligible loans, as well as Farmer Mac's guaranteed
securities sold to third party investors, increase lenders' liquidity
and lending capacity and provide a continuous source of funding for
lenders that extend credit to borrowers in rural America. Farmer Mac's
standby commitments for eligible loans held by lenders, as well as
Farmer Mac's guaranteed securities retained by lenders in exchange for
the related securitized loans, result in lower regulatory capital
requirements for the lenders and reduced borrower or commodity
concentration exposure for some lenders, thereby expanding their
lending capacity. By increasing the efficiency and competitiveness of
rural finance, the secondary market provided by Farmer Mac has the
potential to lower the interest rates paid on loans by rural borrowers.
Farmer Mac conducts its secondary market activities through four
lines of business--Farm & Ranch, USDA Guarantees, Rural Utilities, and
Institutional Credit. The loans eligible for the secondary market
provided by Farmer Mac include:
mortgage loans secured by first liens on agricultural real
estate, including part-time farms and rural housing
(encompassing the Farm & Ranch line of business);
agricultural and rural development loans guaranteed by the
United States Department of Agriculture (USDA) (encompassing
the USDA Guarantees line of business); and
loans made by cooperative lenders to finance electrification
and telecommunications systems in rural areas (encompassing the
Rural Utilities line of business).
Farmer Mac also purchases and guarantees general obligations of
rural lenders that are secured by pools of the types of eligible loans
described above (encompassing the Institutional Credit line of
business). As of March 31, 2014, the total outstanding amount of the
eligible loans included in all of Farmer Mac's lines of business was
$14.1 billion.
Under the Farm & Ranch line of business, Farmer Mac purchases or
commits to purchase eligible mortgage loans secured by first liens on
agricultural real estate and rural housing. Farmer Mac also guarantees
securities representing interests in pools of mortgage loans eligible
for the Farm & Ranch line of business. Loans must meet credit
underwriting, collateral valuation, documentation and other standards
specified by Farmer Mac. As of March 31, 2014, the average unpaid loan
balance for loans outstanding in the Farm & Ranch line of business was
$449,000, and the majority of loans were to small farms (less than
$350,000 in gross farm income) and family farmers (majority owned and
operated by a family). At the end of 2013, Farmer Mac had 669 approved
lenders eligible to participate in Farmer Mac's Farm & Ranch line of
business. In addition to participating directly in the Farm & Ranch
line of business, some of the approved lenders facilitate indirect
participation by other lenders by managing correspondent networks of
lenders from which the approved lenders purchase loans to sell to
Farmer Mac.
Under the USDA Guarantees line of business, Farmer Mac's wholly-
owned subsidiary purchases the portions of certain agricultural, rural
development, business and industry, and community facilities loans
guaranteed by the USDA under the Consolidated Farm and Rural
Development Act (CONACT). Any lender authorized by the USDA to obtain a
USDA guarantee on a loan under the CONACT may participate in Farmer
Mac's USDA Guarantees line of business. During 2013, 195 lenders,
consisting mostly of community and regional banks, sold USDA-guaranteed
portions of loans to Farmer Mac. As of March 31, 2014, the aggregate
outstanding principal balance of assets in the USDA Guarantees line of
business was $1.7 billion.
Farmer Mac initiated the Rural Utilities line of business after
Congress expanded Farmer Mac's authorized secondary market activities
to include rural utility loans in the Farm Bill of 2008. Farmer Mac's
authorized activities under this line of business are similar to those
conducted under the Farm & Ranch line of business--purchases of, and
guarantees of securities backed by, eligible rural utilities loans for
the financing of electrification and telecommunications systems in
rural areas. To be eligible, loans must meet Farmer Mac's credit
underwriting and other specified standards. As of March 31, 2014, the
aggregate outstanding principal balance of rural utilities loans held
by Farmer Mac was $1.0 billion.
Under the Institutional Credit line of business, Farmer Mac
purchases or guarantees general obligations of rural lenders that are
secured by pools of loans that would be eligible for purchase under one
of Farmer Mac's other lines of business. Farmer Mac refers to these
obligations as AgVantage' securities. Farmer Mac guarantees
AgVantage' securities as to the timely payment of principal
and interest and may retain AgVantage' securities in its
portfolio or sell them to third parties in the capital markets. Farmer
Mac's purchase and guarantee of AgVantage' securities
provide a continuous source of funding for lenders that extend credit
to borrowers in rural America. As of March 31, 2014, outstanding
securities held or guaranteed by Farmer Mac in its Institutional Credit
line of business totaled $6.1 billion.
After buying eligible loans, Farmer Mac can either retain them for
investment or pool the loans together, securitize them, and guarantee
the timely payment of interest and principal on the resulting
securities. Securities that Farmer Mac guarantees are sold to investors
in the capital markets, exchanged for the loans and retained by the
lender, or held by Farmer Mac.
Farmer Mac's charter establishes three capital standards for Farmer
Mac--minimum capital, critical capital, and risk-based capital. Farmer
Mac is required to comply with the higher of the minimum capital
requirement and the risk-based capital requirement. Also, in accordance
with a recently effective FCA regulation on capital planning, Farmer
Mac's board of directors has adopted a policy for maintaining a
sufficient level of Tier 1 capital and imposing restrictions on
dividends and bonus payments in the event that Farmer Mac's Tier 1
capital falls below specified thresholds. As illustrated in the chart
below that is current as of March 31, 2014, Farmer Mac has continually
improved its capital position over the past several years through a
combination of retained earnings and equity offerings. Farmer Mac also
just completed a $75 million preferred stock offering last week to
further enhance its capital position.
Key Company Metrics--Capital
Additional information about Farmer Mac is available on Farmer
Mac's website at www.farmermac.com.
The Chairman. Thank you. I appreciate that. I now recognize
the President and CEO, United Bank and Trust of Marysville,
Kansas, on behalf of the American Bankers Association, Mr.
Leonard Wolfe. You are recognized for 5 minutes.
STATEMENT OF LEONARD WOLFE, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, UNITED BANK & TRUST, MARYSVILLE, KS; ON
BEHALF OF AMERICAN BANKERS ASSOCIATION
Mr. Wolfe. Chairman Crawford, and Members of the
Subcommittee, my name is Leonard Wolfe, and I am the President
of United Bank & Trust in Marysville, Kansas. We are the
largest commercial agricultural lender in Kansas, second only
to the Farm Credit System. I am also currently serving as the
Chairman of the Kansas Bankers Association, and I serve as Vice
Chairman of the American Bankers Association Agricultural
Credit Taskforce. I appreciate the opportunity to present the
views of the ABA on credit conditions and credit availability
in rural America.
The topic of today's hearing is very timely. The
agriculture economy has been performing extremely well. Farm
and ranch incomes for the past 5 years have been some of the
best in history. With the new farm bill in place, farmers,
ranchers and their bankers have certainty from Washington about
future agricultural policy. Interest rates continue to be at or
near record lows. And the banking industry has the people,
capital and liquidity to help American farmers sustain this
excellent agricultural economy.
Banks continue to be the first place that farmers and
ranchers turn when looking for agricultural loans. In fact,
more farmers and ranchers receive credit from the banking
industry than from any other source today. In 2013, farm banks,
which the ABA defines as any bank with more than 14 percent of
their loans made to farmers or ranchers, increased agricultural
lending nine percent to meet these rising credit needs, and now
provide nearly $90 billion in total farm loans. Farm banks are
an essential resource for small farmers, holding $45 billion in
small farm loans and $12 billion in micro-small farm loans.
These farm banks are healthy, well capitalized and stand ready
to meet the credit demands of our nation's farmers, large and
small.
I would like to thank Congress and especially the
Agriculture Committees for repealing borrower term limits on
USDA Farm Service Agency guaranteed loans. Banks work closely
with the USDA 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.
We remain concerned with certain areas of the agriculture
credit market. In particular, we believe 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 $261 billion behemoth. To
put this into perspective, if the Farm Credit System were a
bank, it would be the ninth largest bank in the United States,
and larger than 99.9 percent of banks in the country.
This System operates as a government sponsored entity, and
represents a risk to taxpayers the same way that Fannie Mae and
Freddie Mac do. The Farm Credit System benefits from
significant tax breaks valued at $1.3 billion in 2013, giving
it a significant edge over private sector competitors.
Moreover, the Farm Credit System enjoys government backing
formalized by the creation of a $10 billion line of credit with
the U.S. Treasury in 2013.
The Farm Credit System has moved significantly from its
charter to serve young, beginning and small farmers, and now
primarily serves large established farms who could easily
obtain credit from the private sector. In fact, the majority of
Farm Credit System loans outstanding are in excess of $1
million. Any farmer able to take in over $1 million in debt is
not a small farmer. Moreover, small borrowers accounted for
less than 16 percent of all new Farm Credit System loans in
2013.
Our nation's farmers and ranchers are a critical resource
to our economy. Ensuring that they continue to have access to
adequate credit is essential for the wellbeing of our whole
nation. America's banks remain well equipped to serve the
borrowing needs of farmers of all sizes. An important step in
ensuring credit availability is to review entities such as the
Farm Credit System and ensure that they stick to their charter
of helping young, beginning and small farmers.
Thank you. I would be happy to answer any questions you may
have.
[The prepared statement of Mr. Wolfe follows:]
Prepared Statement of Leonard Wolfe, President and Chief Executive
Officer, United Bank & Trust, Marysville, KS; on Behalf of American
Bankers Association
Chairman Crawford, Ranking Member Costa, and Members of the
Subcommittee, my name is Leonard Wolfe, and I am the President, CEO and
Chairman of the Board of United Bank & Trust in Marysville, Kansas.
United Bank is a $570 million bank with fifteen branches serving
Marshall, Nemaha, Brown, Clay, Washington, Cloud, and Riley counties in
Kansas. We have over $176 million in agricultural real estate and
production loans in our portfolio--nearly \1/2\ of all of our loans are
to farmers and ranchers. In addition, we finance businesses that
support, in some way, the needs of farmers and ranchers in our part of
the state.
I am also the Chairman of the Kansas Bankers Association and I
serve as Vice Chairman of the American Bankers Association's
Agricultural Credit Task Force. I appreciate the opportunity to present
the views of the ABA on credit conditions and credit availability in
rural America.
The American Bankers Association is the voice of the nation's $14
trillion banking industry, which is composed of small, regional and
large banks that together employ more than two million people,
safeguard $11 trillion in deposits and extend nearly $8 trillion in
loans. ABA is uniquely qualified to comment on agricultural credit
issues as banks have provided credit to agriculture since the founding
of our country. Over 5,470 banks--nearly 81% of all banks--reported
agricultural loans on their books at year end 2013 with a total
outstanding portfolio of over $149 billion.
The topic of today's hearing is very timely. The agricultural
economy has been performing extremely well. Farm and ranch incomes for
the past 5 years have been some of the best in history. With the new
farm bill in place, farmers, ranchers, and their bankers have certainty
from Washington about future agricultural policy. Interest rates
continue to be at or near record lows, and the banking industry has the
people, capital, and liquidity to help American farmers and ranchers
sustain this excellent agricultural economy.
Banks continue to be the first place that farmers and ranchers turn
when looking for agricultural loans. In fact, more farmers and ranchers
receive credit from the banking industry than from any other source.
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, the experience, and the ability to repay.
In 2013, farm banks--banks with more than 14% of their loans made
to farmers or ranchers--increased agricultural lending 9.1 percent to
meet these rising credit needs, and now provide nearly $90 billion in
total farm loans. Farm banks are an essential resource for small
farmers, holding $45 billion in small farm loans, and $12 billion in
micro-small farm loans. These farm banks are healthy and well
capitalized and stand ready to meet the credit demands of our nation's
farmers large and small.
In addition to our commitment to farmers and ranchers, thousands of
farm dependent businesses--food processors, retailers, transportation
companies, storage facilities, manufacturers, etc.--receive financing
from the banking industry as well. Agriculture is a vital industry to
our country, and financing it is an essential business for many banks,
mine included.
Banks work closely with the USDA's Farm Service Agency to make
additional credit available by utilizing the Guaranteed Farm Loan
Programs. The repeal of borrower limits on USDA's Farm Service Agency
guaranteed loans has allowed farmers to continue to access credit from
banks like mine as they grow, ensuring credit access for farmers across
the country.
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
$261 billion behemoth offering complex financial services. To put this
in perspective, if the Farm Credit System were a bank it would be the
ninth largest in the United States, and larger than 99.9% of the banks
in the country.
This System operates as a government sponsored entity and
represents a risk to taxpayers in the same way that Fannie Mae and
Freddie Mac do. It benefits from significant tax breaks--valued at $1.3
billion in 2013--giving it a significant edge over private sector
competitors. Moreover, the Farm Credit System enjoys a government
backing, formalized by the creation of a $10 billion line of credit
with the U.S. Treasury in 2013.
The Farm Credit System has veered significantly from its charter to
serve young, beginning, and small farmers and ranchers, and now
primarily serves large established farms, who could easily obtain
credit from the private sector. In fact, the majority of Farm Credit
System loans outstanding are in excess of $1 million. Any farmer able
to take on over $1 million in debt is not a small farmer. Moreover,
small borrowers accounted for less than 16% of all new Farm Credit
System Loans in 2013.
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 wellbeing of our whole nation. America's
banks remain well equipped to serve the borrowing needs of farmers of
all sizes. An important step in ensuring credit availability is to
review entities such as the Farm Credit System and ensure that they
stick to their charter of helping young, beginning and small farmers.
In my testimony today I would like to elaborate on the following
points:
b Banks are the primary source of credit to farmers and ranchers in
the United States;
b Banks work closely with the USDA to make additional credit
available via the Guaranteed Farm Loan Program; and
b The Farm Credit System has become too large and unfocused, using
taxpayer dollars to subsidize large borrowers.
I. Banks Are the Primary Source of Credit to Farmers and Ranchers in
the United States
For my bank and for many of our 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 fourteen percent farm or ranch loans (to all
loans).
Farm Banks Exhibit Solid Farm Lending Growth
Source: Federal Deposit Insurance Corporation.
At the end of 2013, there were 2,152 banks that met this
definition. Farm lending posted solid growth during 2013. Total farm
loans at farm banks increased by 9.1 percent to $87.8 billion in 2013
up from $80.4 billion in 2012. Approximately $1 in every $3 lent by a
farm bank is an agricultural loan.
Farm production loans grew at a faster rate than farm real estate
loans. Outstanding farm production loans grew at a pace of 9.7 percent,
or $3.8 billion, to a total of $43.0 billion. Farmland loans rose by
8.6 percent, or $3.5 billion, to $44.7 billion.
Farm banks are a major source of credit to small farmers--holding
approximately $45.2 billion in small farm loans (less than $500,000)
with $11.5 billion in micro-small farm loans (less than $100,000) at
the end of 2013. The number of outstanding small farm loans at farm
banks totaled 778,545 with the vast majority--over 513,000 loans--under
$100,000.
One area of concern for farm bankers and their customers has been
the rapid appreciation in farmland values in some areas of the country.
The run up in farmland values so far has not been 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, we regularly
stress test our loan portfolios to judge repayment capacity under
different scenarios.
After several years of large increases in farmland values, the
consensus view among bankers I know is that the increase in cropland
values has slowed. USDA estimates of lower commodity prices in 2014
seem to have cooled off the demand for farm real estate somewhat. We
watch the farm real estate market very closely, as do my customers.
Eighty-two percent of farmer and rancher wealth is tied up in their
real estate.
II. Banks Work Closely With the USDA's Farm Service Agency to Make
Additional Credit Available by Utilizing the Guaranteed Farm
Loan Programs
I would like to thank Congress, especially the Agricultural
Committees, for repealing borrower term limits on USDA Farm Service
Agency guaranteed loans. Term limits restricted farmer access to
capital, and with the expansion of the farm economy over the past 10
years, there are some farmers who are not able to obtain credit from
banks like mine without a guaranty from USDA. The USDA's Farm Service
Agency guaranteed loan program has been a remarkable success. Today,
nearly $12 billion in farm and ranch loans are made by private sector
lenders 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.
This program has grown over the past 5 years, with less than $9
billion outstanding at the close of FY08 to nearly $12 billion today.
The loans made by banks like mine under this program are modest in
size. The average outstanding guaranteed real estate loan is $439,000
and the average outstanding guaranteed non real estate secured loan is
$250,000. 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 0.6% in FY10 to a low of 0.3% in FY13. 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.
III. The Farm Credit System is a Large Government Sponsored Entity That
Primarily Serves Large Borrowers at the Expense of Taxpayers
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 98
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 $261 billion in assets. If it were a bank, it would be the ninth
largest bank in the United States. It is tax-advantaged and enjoyed a
combined local, state, and Federal tax rate in 2013 of only 4.5%.
According to the Federal Farm Credit Banks Funding Corporation, the tax
advantages enjoyed by the FCS in 2013 were worth $1.348 billion or 29%
of the Farm Credit System's net income in 2013.\1\
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\1\ Federal Farm Credit Banks Funding Corporation; 2013 Annual
Information Statement of the Farm Credit System; February 28, 2014.
Page F-52.
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The Farm Credit System is a Government Sponsored Entity
In spite of their size, profitability, and tax advantages the Farm
Credit System presents the same kind of potential threat to the
American taxpayer as Fannie Mae and Freddie Mac. As a Government
Sponsored Enterprise (GSE) like Fannie Mae and Freddie Mac, the
American taxpayer is the ultimate back stop should the Farm Credit
System develop financial problems. This reality was formalized in 2013
when the Farm Credit System Insurance Corporation arranged a $10
billion line of credit ``with the Federal Financing Bank, a Federal
instrumentality subject to the supervision and direction of the U.S.
Treasury--to which the Federal Financing Bank would advance funds to
the [Farm Credit System] Insurance Corporation. Under its existing
statutory authority, the [Farm Credit System] Insurance Corporation
will use these funds to provide assistance to the System Banks in
exigent market circumstances which threaten the Banks' ability to pay
maturing debt obligations. The agreement provides for advances of up to
$10 billion and terminates on September 30, 2014, unless otherwise
extended.'' \2\
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\2\ Federal Farm Credit Banks Funding Corporation; 2013 Annual
Information Statement of the Farm Credit System; February 28, 2014,
page 23.
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We believe the farmers who own stock of the Farm Credit System--and
the American taxpayers who back it--deserve a better understanding of
what transpired between the Farm Credit System and the U.S. Treasury
last September, but very little information is available to the public.
Unlike the housing GSEs which are subject to reform efforts to lessen
the taxpayer's exposure, the Farm Credit System seems to be increasing
its dependence upon the U.S. Treasury.
FCS Loans Going to Large Borrowers
Source: FCA's Annual Report of the Farm Credit System's
Young, Beginning and Small Farmer Mission Performance.
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 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 decline--even as the assets of the System have
expanded enormously. In all categories of YBS lending, new young,
beginning, and small farm loans continues to steadily drop with small
farm loans declining the most--from a high of 30% of total new loan
volume in 2003 to just 15.4% in 2013.\3\ 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.
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\3\ ``FCA's Annual Report on the Farm Credit System's Young,
Beginning, and Small Farmer Mission Performance: 2013 Results''. Office
of Regulatory Policy, June 12, 2014 Board Meeting.
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Large Borrows Benefit Most from Farm Credit System Subsidy
A review of the 2013 Annual Information Statement from the Federal
Farm Credit Banks Funding Corporation indicates that 51.3% of all Farm
Credit System outstanding loans at the end of 2013 were in excess of $1
million. The Farm Credit System does not provide the public with
aggregated data by borrower; if they did, we would see a much higher
percentage of borrowers with debt in excess of $1 million. In addition,
the Farm Credit System does not disclose approved, but unfunded
commitments. If it did, the numbers would be even higher. In short,
well more than half of the entire Farm Credit System's portfolio at the
end of 2013 was to individuals who owed it much more than a million
dollars.
We do not believe this is the highest and best use of the Farm
Credit System's government sponsorship. Borrowers who can amass over $1
million in credit from the FCS do not need taxpayers to subsidize their
debt. Again, small farm borrowers, according to data supplied by the
Farm Credit Administration, accounted for less than 16% of all new FCS
loans in 2013.
Moreover, the Farm Credit System has wandered dangerously off
course into areas of finance that have nothing to do with agriculture,
or rural America for that matter. Two recent Farm Credit System loans
demonstrate this point:
In 2013, Denver based CoBank, the largest Farm Credit System bank,
approved a $750 million loan to Verizon. CoBank's loan was part of a
financing package that totaled over $6 billion. Financial institutions
from all over the world shared a portion of the loan. CoBank was the
only government sponsored enterprise to be a participant in the loan.
CoBank's share of the loan was the largest single piece of the credit
package. The purpose of the loan was to enable Verizon to purchase the
portion of Verizon Wireless that it did not already own. The proceeds
of the loan, which closed in 2014, went to London based Vodafone, the
corporate entity that owned the rest of Verizon Wireless. The Farm
Credit Administration, the regulator of the FCS, has publicly stated
that the loan is perfectly legal because Verizon is a ``similar-
entity'' to a rural cooperatively owned telephone company. In other
words, since Verizon provides telephone services like a rural telephone
cooperative, the loan is a legal for a Farm Credit System lender to
make.
On June 2, 2014, CoBank entered into a $350 million ``credit
agreement'' with Connecticut based Frontier Communications Corporation
to help finance a $2 billion acquisition by Frontier Communications
from AT&T. Frontier Communications is a $16 billion publicly traded
company. CoBank played a major role in this financing package in that
they are credited with being the ``administrative agent and lead
arranger'' by Frontier. While we have not seen a finding from the Farm
Credit Administration about the eligibility of Frontier Communications
to borrow from CoBank, we suspect that the regulator will again cite
the notion that $16 billion Frontier Communications Corporation is
``similar'' to a rural cooperatively owned telephone company.
What new benefit has accrued to rural America as a result? These
loans facilitated corporate deals designed to maximize shareholder
returns. In the case of the Vodafone buyout, U.S. taxpayer supported
money was transferred to European investors. As a banker, I understand
the concept of maximizing shareholder wealth, but as a taxpayer I have
a hard time understanding how the Farm Credit System can be involved in
these deals and how the regulator of the Farm Credit System seems to be
working to aid and abet their activities.
Conclusion
The banking industry is well positioned to meet the needs of U.S.
farmers and ranchers. U.S. agriculture has enjoyed one of the longest
periods of financial prosperity in history; financially, American
agriculture has never been stronger. USDA projected that at year-end
2013, farm and ranch net worth was nearly $2.7 trillion. This
unprecedented high net worth is due in part to a robust increase in
farm asset values (mainly farm real estate), but is equally due to
solid earned net worth as farmers used their excess cash profits to
retire debt and to acquire additional equipment and additional land. As
a result, farmers and ranchers today have the capacity to tap their
equity should there be a decline in farm profitability resulting in
diminished cash flows. While no farmer or rancher wants to take on
additional debt, the strength of the U.S. farm and ranch balance sheet
gives producers options to do so if the need arises.
When the agricultural economy collapsed in the middle 1980s, the
banking industry worked closely with farmers and ranchers to
restructure their businesses and to rebuild the agricultural economy.
Since that time banks have provided the majority of agricultural credit
to farmers and ranchers. While other lenders, including the Farm Credit
System, shrank their portfolios of agricultural loans or exited the
business altogether, banks expanded agricultural lending. Bankers saw
opportunity where others did not. Bankers still see great opportunities
in agriculture.
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, Mr. Wolfe. I am now pleased to
recognize one of my constituents who made the trip up from
Arkansas, the President and CEO of The First National Bank of
Wynne, Wynne, Arkansas, on behalf of the Independent Community
Bankers of America, Mr. Sean Williams. You are recognized for 5
minutes.
STATEMENT OF SEAN H. WILLIAMS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, THE FIRST NATIONAL BANK OF WYNNE, WYNNE, AR; ON BEHALF
OF INDEPENDENT
COMMUNITY BANKERS OF AMERICA
Mr. Williams. Thank you, Mr. Chairman. I appreciate the
invitation to be here today and testify. I am Sean Williams,
President and CEO of The First National Bank of Wynne, in
Wynne, Arkansas. And I am testifying today at your invitation
on behalf of the Independent Community Bankers of America.
Our bank was established in 1915, nearly 100 years ago. And
we have branches in five communities, 80 employees and
approximately $285 million in assets. Seventy percent of our
$150 million loan portfolio serves farmers. The remainder
serves businesses that farmers depend on. We are one of the
largest ag focused lenders in the State of Arkansas, and serve
row crop agriculture, primarily rice, soybeans and corn. But
cotton, wheat and milo are also grown in our area. America's
7,000 community banks, primarily in rural areas and in every--
nearly every small town in rural America do an outstanding job
of providing the credit that farmers and businesses need to be
successful in both good times and in bad. Banks under $1
billion in assets extend 50 percent of farm operating loans and
60 percent of farm real estate loans from the banking sector.
Corn and soybean prices are declining. Livestock producers
will do better, but drought is of concern. USDA projects net
cash and net farm income will be down 22 to 27 percent. We
expect about a 15 percent drop locally: 2014 expenses will be
the second highest level on record. Federal Reserve district
bank surveys project lower income, stable to lower land prices,
and higher loan demand and slower repayment rates. Rural credit
markets remain highly competitive, and banks have ample
liquidity for loan demand and want to make farm loans.
We thank you for passing the new farm bill. Crop insurance
funding is extremely important, with 290 million acres insured.
We urge Congress not to lower funding or coverage levels.
Community bankers and rural communities continue to be hampered
by the CFPB's definition of rural as it relates to home
mortgage lending. We have urged the CFPB to fix the rural
definition and to better align the QM and escrow rules to
eliminate this confusion.
ICBA's Agriculture-Rural America committee, with bankers in
every geographical region, recently completed a survey. Credit
is plentiful. Farm land prices are stable but could decline if
commodity prices remain lower. Drought and weather conditions,
problems in many states are concerning. The farm bill and crop
insurance are vital to extending credit. Reference prices are
adequate but won't always cover production costs. And more farm
bill details and decision making tools are needed.
Bankers surveyed are alarmed by the Farm Credit System
cherry picking. The FCS leverages tax and funding advantages as
a government sponsored enterprise to undercut the loan rates on
community banks biggest and financially strongest customers,
and ignores less creditworthy borrowers. The Farm Credit Act
prohibits undercutting loan rates. Bank's larger, more stable
borrowers are important to bank portfolios, allowing lending
risks to be spread over both small and large operations. Losing
the biggest and the best borrowers elevates risk in our
portfolios. This diminishes bank's ability to serve
agriculture, lessens credit expertise available to farmers,
lessens credit choices for borrowers, and lessens credit
availability in rural America.
The regulator, FCA, wants to allow FCS to broadly make non-
farm loans. The FCS--when FCS will continue--they won't
continue to make farm loans. They want to also now cherry pick
the best non-farm loans from bank portfolios, although not
authorized by law. FCA's proposed mission related investments
regulation would allow FCS lenders to seek approval for broad
non-farm lending programs labeled as investments, loan for
manufacturing, apartments, office buildings and hospitals.
The FCA's apparent lack of awareness of CoBank's $725
million Verizon loan is alarming. Verizon and Vodafone are
located in New York City and in London. This isn't a rural loan
and isn't authorized by the statute. FCA's excuse that this is
allowed under the similar-entity provision is not credible as
this provision isn't intended to allow enormous non-farm loans
for hundreds of millions of dollars in size in non-rural areas
in the world's largest cities to non-cooperatives or Fortune
500 corporations. We question the FCA obtaining a $10 billion
line of credit at a time of record profits without seeking
Congressional approval as recommended in a Brookings
Institution Report. Why did the FCA act in secret and behind
Congress' back? We strongly recommend a series of hearings
reviewing these and other questions. The FCS cherry picks the
best farm loans they now seek to aggressively win for non-farm
purposes. This diminishes the number of rural lenders in
America. The FCA actions therefore threaten the availability of
credit to rural America as this Congress created this GSE.
Again, thank you. I am happy to respond to any questions.
[The prepared statement of Mr. Williams follows:]
Prepared Statement of Sean H. Williams, President and Chief Executive
Officer, The First National Bank of Wynne, Wynne, AR; on Behalf of
Independent Community Bankers of America
Introduction
Mr. Chairman, and Members of the Subcommittee, thank you very much
for the opportunity to testify today on a topic of great interest to
everyone in rural America including particularly the community banking
industry. 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.
My name is Sean Williams. I am President and CEO of the First
National Bank of Wynne in Wynne, Arkansas. I testify today on behalf of
the Independent Community Bankers of America (ICBA). Our bank is a
forty-six year member of ICBA.\1\ Our bank is a long-time member of the
Arkansas Community Bankers Association.
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\1\ About ICBA
The Independent Community Bankers of America' (ICBA),
the nation's voice for nearly 7,000 community banks of all sizes and
charter types, is dedicated exclusively to representing the interests
of the community banking industry and its membership through effective
advocacy, best-in-class education and high-quality products and
services. ICBA members operate 24,000 locations nationwide, employ
300,000 Americans and hold $1.3 trillion in assets, $1 trillion in
deposits and $800 billion in loans to consumers, small businesses and
the agricultural community. For more information, visit www.icba.org.
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First National Bank of Wynne
Wynne is located approximately 60 miles northwest of Memphis, or
120 miles northeast of Little Rock. First National Bank of Wynne was
established in 1915, providing financial services for almost 100 years.
Our bank has branches in five communities throughout the region; nearly
80 employees; approximately $285 million in total assets and a $150
million loan portfolio. Seventy percent of our loans focus on farmers
and the remainder serves businesses that supply farmers or are depend
on their financial health for survival.
On a personal level, agriculture and the availability of credit are
very important to me. I was born and raised on a farm in a northeast
Arkansas community near McCrory. My father, grandfather and I raised
rice and soybeans. I worked on the farm while attending college and
also for several years after beginning to work in the financial
services industry. My farming background led me to pursue both a
bachelors and masters degree in agricultural business and economics
from Arkansas State University.
Focus of Our Testimony
Mr. Chairman, our testimony this morning focuses on how our bank
and community banks in general serve rural America; the key factors
that influence credit availability in rural America; the effects of
competition in influencing credit availability and the results of a
brief survey conducted with ICBA's Agriculture-Rural America committee.
However, I want to stress up-front the vast majority of bankers
believe credit availability is plentiful and competition for loans is
intense. To the benefit of farmers and ranchers, interest rates are at
or near historically low levels.
Serving Our Community; Serving Agriculture; Serving Main Street
Like most community banks, our bank's employees serve our
communities by volunteering in many civic organizations, churches, city
councils, school boards, and other activities.
First National Bank is one of the largest agricultural lenders in
the State of Arkansas. Our employees know the people who bank at First
National Bank and care about their success. We are predominately a
farming region where the economic impact of farmers and their success
is critical to the economic fortunes of our communities. Our market is
row crop agriculture where rice, soybeans and corn are produced.
Cotton, wheat and milo are other crops raised in our area. First
National Bank provides the vital credit that farmers need to be
successful.
On a broader scale, community banks play an important role in the
nation's economy. There are approximately 7,000 community banks in the
U.S. and the vast majority of these are located in communities of
50,000 or fewer residents. Thousands of community banks are in small,
rural, and remote communities across our nation.
While community banks comprise just 20 percent of the banking
industry's assets, institutions with less than $10 billion in assets
provide nearly 60 percent of the industry's small-business loans.
According to the Federal Deposit Insurance Corporation's third quarter
2013 industry data, small-business lending at banks with less than $1
billion was up 3.8 percent from the previous quarter and 3.0 percent
from the previous year.
This is important since small businesses represent an astounding 99
percent of all employer firms and employ \1/2\ of the private sector
workforce. In addition, the more than 26 million small businesses in
the U.S. have created 70 percent of the net new jobs over the past
decade. Small businesses are important in rural America since many
farmers and/or their spouses have off-farm jobs. As small businesses
ourselves, community banks specialize in small business relationship
lending. When our customers do well, community banks do well.
Community banks under $500 million in assets extend about 50
percent of all agricultural credit from the banking sector. In
addition, commercial banks under $1 billion in asset size extend
approximately 56 percent of non-real estate loans to the farm sector
and about 62 percent of all real estate credit from the banking sector.
Farm Bill and Crop Insurance
There are a number of factors that determine whether credit is
available in rural America. Congress achieved an important objective in
February when the President signed the new farm bill into law. The farm
bill includes a number of programs that provide an economic safety net
for the nation's farmers and ranchers.
These programs will provide farmers the choice of reference prices,
formerly known as target prices, or the new Agriculture Risk Coverage
(ARC) program on either a whole farm basis using individual farm data
or an individual crop basis by using county based data. Cotton
producers will have a new STAX program. The cyclical nature of
agriculture and the uncontrollable risks of severe adverse weather
combined with unknown commodity prices and costs of production expenses
require a continued safety net for farmers and ranchers.
These programs are intended to complement a strong crop insurance
program going forward and supplement crop insurance by providing
support in periods of multi-year price declines and helping producers
cover the crop insurance policy's deductible.
In 2013, over 86 percent of insurable acreage was covered by
Federal crop insurance in the U.S., over 290 million acres. Crop
insurance protected $1.6 billion of cropland in Arkansas last year.
Crop-hail insurance provided an additional $1.5 billion in liability
insurance for Arkansas crops. This is very important since nearly 90
percent of Arkansas farms are less than 500 acres in size.
Crop insurance is essential as it allows community banks security
for loan repayments if disastrous weather strikes. It is very important
that Congress not diminish the crop insurance program by adopting
amendments that restrict the ability of producers to enroll or
discourage producers from obtaining high levels of coverage.
Guaranteed Loan Programs
The farm bill also continues the important guaranteed operating
loan and guaranteed farm ownership (real estate) loan programs.
Importantly, as ICBA requested, the farm bill also wisely removes the
arbitrary 15 year term limit on guaranteed operating loans. This change
ensures thousands of family farmers can continue farming utilizing
credit extended by private sector community banks.
We are pleased the agriculture appropriations bills also contain
funding levels adequate to meet loan demand. These programs are almost
entirely self-funding.
The farm bill's farm programs, combined with guaranteed loan
programs and a strong crop insurance program are essential elements
allowing community banks to ensure adequate credit is available to our
nation's farmers and ranchers.
Farmer Mac
Another important tool for agricultural lenders is Farmer Mac, the
secondary market for agricultural real estate loans and rural
residential mortgages. Farmer Mac offers community bankers the
opportunity to provide farm customers access to longer term, fixed rate
mortgages. These loans, when sold to Farmer Mac's secondary market,
allow lenders to replenish their existing funds so they can then make
additional loans. As interest rates rise in the future, which they
inevitably will, Farmer Mac will become an even more important program
as farmers seek to lock in long term rates.
Some Concerns for Agriculture
A farm safety net is vital to agriculture and rural America due to
the uncertainty, volatility, weather and cyclical nature of
agriculture. Many farmers and ranchers and their lenders were concerned
at the start of this year about the potential for lower farm income. In
some areas, lower farm income is expected due to the severe drought
impacting many Western states. In other areas, a large corn crop is
expected to continue the downtrend in corn prices which began last
year. Soybean prices are expected to be down as well.
Net Farm Income and Net Cash Income, 2000-2014F
Note: Data for 2013 and 2014 are forecasts.
Source: USDA, Economic Research Service, Farm Income and
Wealth Statistics.
Data as of February 11, 2013.
http://www.ers.usda.gov/ersDownloadHandler.ashx?file=/media/
1013171/net-farm-income-and-net-cash-income.png
For example, USDA projects that net farm Income will decrease about
27 percent in 2014 to approximately $96 billion led by a projected $11
billion decline in corn receipts and a $6 billion decline in soybean
receipts. Net cash income, projected at $102 billion, is projected to
be down 22 percent from the $123.5 billion achieved in 2013.
Although USDA notes net farm income will still be $8 billion above
the previous 10 year average, we point out the last time we testified
before this Subcommittee in 2012, the net farm income projection was
$16 billion above the previous 10 year average.
Although production expenses will be down slightly, by about $4
billion, 2014 is expected to still mark the second highest year ever
for production expenses and farmers and ranchers have witnessed an 85
percent increase in production expenses from 2002 to 2013.
Additionally, USDA's Economic Research Service (ERS) noted recently
that high operating costs, along with a sharp drop in prices,
contributed to an 18 percent decline in net returns to corn operators
from 2012 to 2013.
Fortunately, the ag economy has experienced record price levels in
recent years allowing many farmers to pay down their debt load.
Livestock producers are also now benefitting from lower feed costs and
higher prices providing them much needed profits. The rapid rise in
farmland values has slowed or stalled meaning that land prices are
expected to be stable or slightly decline in the near future if crop
prices continue declining or remain below the cost of production.
Federal Reserve Agriculture Perspectives
The Federal Reserve districts conduct quarterly surveys of
agricultural bankers to determine their views on agricultural credit
conditions. We have summarized a few of these surveys from the first
quarter of 2014.
Little Rock Zone Ag. Bankers' Expectations Q1-14 vs. Q1-13
------------------------------------------------------------------------
Lower Higher Net
------------------------------------------------------------------------
Loan demand 20 20 0
Available funds 0 20 8200
Loan repayments 20 0 5^200
Farm income 29 14 5^140
Capital expenditure 29 29 0
------------------------------------------------------------------------
Federal Reserve Bank of St. Louis Survey of Agricultural Credit
Conditions \2\-\3\
---------------------------------------------------------------------------
\2\ Federal Reserve Bank of Saint Louis, Agricultural Finance
Monitor, First Quarter, 2014. http://research.stlouisfed.org/
publications/afm/2014/afmq1.pdf.
\3\ Burgundy Book, A Report on Economic Conditions in the Little
Rock Zone, First Quarter, 2014.
---------------------------------------------------------------------------
Producers are concerned about lower corn and soybean prices and
high input costs. Lower feed prices will help producers retain cow
herds. Quality farmland prices fell slightly in the first quarter, a
reversal of the gain reported in the fourth quarter of 2013. However,
quality farmland prices in the first quarter were 7.5 percent higher
than a year earlier. Bankers continue to expect farm income and quality
farmland values to decline over the next 3 months compared with year-
earlier levels.
Interest Rates
------------------------------------------------------------------------
2014:Q1 2013:Q4 Change
------------------------------------------------------------------------
Interest Rates (%)
--------------------------------------
Operating:
Fixed 5.28 5.39 ^0.12
Variable 4.84 5.01 ^0.17
Machinery/Intermediate term:
Fixed 5.53 5.65 ^0.12
Variable 5.02 5.21 ^0.19
Farm real estate:
Fixed 5.20 5.23 ^0.03
Variable 4.77 4.93 ^0.16
------------------------------------------------------------------------
Similarly, bankers also expect farm household expenditures and farm
equipment expenditures in the second quarter to be lower than a year
earlier. The Saint Louis Fed noted their survey included an important
conclusion: The vast majority of bankers' indicated the expectation of
lower farm income in 2014 has not changed the highly competitive
agriculture loan market.
Federal Reserve Bank of Kansas City 10th District Agricultural Credit
Conditions \4\
---------------------------------------------------------------------------
\4\ Federal Reserve Bank of Kansas City, Survey of 10th District
Agricultural Credit Conditions, First Quarter, 2014. http://
www.kc.frb.org/research/indicatorsdata/agcredit/#/articles/research/
agcredit/05-15-2014/farm-income-land-values-soften-further.cfm.
---------------------------------------------------------------------------
Crop producers faced tighter profit margins although livestock
producers experienced improved profits. Lower corn and soybean prices
and relatively high input costs limited farm income and cropland
values. Winter wheat growers were concerned poor yields would limit
profits despite a rally in wheat prices. With lower income, more crop
producers borrowed to pay for operating expenses. Bankers saw higher
levels of carry-over debt versus a year ago.
Cropland prices have generally stalled due to expectations of lower
profits. The value of nonirrigated farmland dipped 1.4 percent from the
fourth quarter of 2013 to the first quarter of 2014, and irrigated
farmland values rose just 0.5 percent. Higher incomes for livestock
producers resulted in slight increases in ranchland values.
Funds for farm loans remained sufficient to satisfy additional
borrowing and interest rates on farm loans remained steady. Most
bankers indicated collateral requirements were unchanged despite a
slight decline in loan repayment rates.
Federal Reserve Bank of Minneapolis Agricultural Conditions Survey \5\
---------------------------------------------------------------------------
\5\ Federal Reserve Bank of Minneapolis, First Quarter 2014
Agricultural Credit Conditions Survey, http://www.minneapolisfed.org/
publications_papers/pub_display.cfm?id=5318.
---------------------------------------------------------------------------
Reduced crop prices and high input costs continue to take a
financial toll on farmers and may be putting downward pressure on land
prices. The outlook for the second quarter of 2014 is downbeat, with
bankers predicting further declines in incomes, capital expenditures
and household spending. Bankers indicated crop producers face tighter
profit margins but livestock producers are more profitable with lower
grain prices.
Even with the drop in incomes, agricultural producers maintained
their rate of loan repayments, but renewals increased slightly. Loan
repayments were unchanged for 75 percent of bankers, while 13 percent
reported repayment rates decreased.
A quarter of lenders reported increased loan demand, while another
\2/3\ experienced no change. The amount of required collateral
increased slightly, with 92 percent of bankers reporting no change.
After several years of very strong growth land prices have moderated, a
trend that continued in the first quarter. Values decreased in some
cases along with cash rents. Land values fell the most in Minnesota,
where nonirrigated cropland prices dropped eight percent compared with
a year earlier.
Federal Reserve Bank of Chicago AgLetter \6\
---------------------------------------------------------------------------
\6\ The Agricultural Newsletter from the Federal Reserve Bank of
Chicago, Number 1964, May 2014 http://chicagofed.org/digital_assets/
publications/agletter/2010_2014/may_2014.pdf.
---------------------------------------------------------------------------
Increases in farmland values in some areas contrasted with
decreases in others. Demand to purchase agricultural land was weaker in
the 3 to 6 month period ending March 2014 than 1 year earlier, yet
pockets exist where farmers remained interested in buying more land.
Percent Change in Dollar Value of ``Good'' Farmland
----------------------------------------------------------------------------------------------------------------
January 1, 2014 to April 1, 2014 April 1, 2013 to April 1, 2014
----------------------------------------------------------------------------------------------------------------
Illinois ^4 0
Indiana ^4 +7
Iowa +1 ^2
Michigan ^3 ^1
Wisconsin +1 +2
Seventh District ^1 +1
----------------------------------------------------------------------------------------------------------------
Demand for non-real-estate loans was up relative to a year ago for
a second straight quarter, which hadn't occurred in 4 years. The
availability of funds to lend improved compared with a year earlier,
but repayment rates for non-real-estate farm loans were lower than a
year ago. There were higher levels of renewals and extensions of these
loans. The average loan-to-deposit ratio remained close to 67 percent
for the third quarter in a row. Interest rates moved lower during the
first quarter and a record low rate was set for feeder cattle loans.
The livestock sector returned to profitability as milk, hog and cattle
prices rose sharply (31 percent, 48 percent and 19 percent) since April
2013. Lower feed costs raised livestock profits helping support
farmland values in some areas.
Survey Results of ICBA's Agriculture-Rural America Committee
ICBA conducted a survey of its Agriculture-Rural America committee
in June to get our bankers' views on credit availability in rural
America. ICBA's Agriculture-Rural America committee consists of twenty-
five bankers from every geographical region of the U.S. representing
most agricultural commodities produced in the United States.
The survey asked bankers whether credit is plentiful, adequate or
constrained in their area. No bankers felt credit was constrained and
nearly all members stated credit was plentiful in their marketplace. We
asked banks if they would desire to make more agricultural loans if
demand existed. All bankers stated they desired to make more
agricultural loans.
Record high commodity prices over the past 4 years, combined with
good yields in many areas, has generated significant cash for
producers, allowing them to pay down term debt, pay cash for capital
purchases and has reduced the need to borrow for operating expenses.
Banks are very liquid, allowing them ample funds to make more farm and
rural loans. Regulators, of course, want to ensure that farm loans can
cash flow.
We asked bankers if they believed their customers' farm income and
farmland values would increase, decline or remain stable. Generally,
bankers stated farm income and farmland values would decline or remain
stable. Some bankers felt farm income would increase, reflecting their
customers' involvement in livestock operations.
A large majority of bankers responded crop insurance is essential,
allowing them to make loans to farmers and most bankers could not
extend loans to most customers without the assurance of repayment which
crop insurance provides. As a banker stated, ``our ability to lend
would be hurt dramatically without crop insurance.''
Regarding farm bill programs, most bankers felt the farm bill was
also indispensable to their ability to make farm loans. Regarding
program options, most bankers felt the new reference prices were
adequate but would not cover production costs. Most bankers also felt
there was not enough information for customers to choose which farm
program to sign up for. Most banks said they would work with their
customers to help them decide farm program options.
Farm Credit System Abuses
We asked bankers several questions related to activities of the
Farm Credit System (FCS). FCS is a tax advantaged, government sponsored
enterprise given tax and funding advantages by Congress in the early
years of the previous century. The expectation was that FCS would
provide farmers and ranchers access to credit at a time when such
access was much more limited than today, particularly for long-term,
fixed-rate financing. However, the banker responses discussed below are
quite troubling in terms of FCS abuses of their GSE advantages.
We asked bankers whether they had lost loans to the FCS and if so,
was this a result of the FCS undercutting banks on their loan rates or
a result of the FCS providing better service? Nearly all bankers said
they had lost loans to the FCS and this was a result of FCS
undercutting loan rates and in no case did bankers say that FCS
provided better service.
Next, we asked if banks had lost loans to FCS due to FCS
undercutting loan rates, was FCS targeting primarily the bank's
financially strongest customers or a broad mix of customers based on
financial strength. Nearly all bankers stated that FCS exclusively
targets their best customers in terms of financial strength. As one
banker stated, ``I haven't seen FCS take any customers except the best
and the biggest.''
We asked bankers whether FCS was making non-farm loans in their
marketplace. Several banks stated that FCS was indeed making non-farm
loans. An example provided were FCS lenders making rural hospitals
loans (an authority the FCS has never been granted by Congress).
The Harmful Impact of FCS Actions on Credit Availability to Rural
America
We asked bankers if FCS activities undermine community banks'
ability to make agricultural credit available in their market. Bankers
believed this is the case and noted FCS targets the best operations,
attracting these businesses through low rates which community banks are
unable to match since they lack the tax and funding advantages of a
GSE. Community banks cannot match the below market rates FCS offers to
the best customers and still remain profitable. One banker noted there
is stiff competition among all banks in his area; however, they cannot
match the low rates offered by the FCS to the best customers.
The large, more stable operations are important to community bank
portfolios as they spread lending risks over both small and large
operations. By targeting the large and financially strongest borrowers,
FCS elevates the risks in community banks' farm loan portfolios.
As one banker explained, ``Almost every community and regional bank
in our market is more than willing to make agricultural loans
(operating, equipment and real estate), yet find ourselves undercut by
FCS in all those categories.''
As another banker stated, ``Not only is there an issue with FCS
lenders cherry picking the best loans in community bank portfolios, but
also when FCS urges the newly acquired customers to move their deposit
accounts to one of the large banks, thus taking deposits out of local,
small communities and hurting the economic base of these remote, rural
communities. This hurts community banks' ability to loan funds locally
because of lower deposit balances.''
Another example of a questionable lending practice by the FCS was a
banker's comment noting they had lost a large real estate loan to the
FCS because FCS was willing to take a minimal down payment while
financing 93 percent of the real estate debt. The banker noted this is
the type of practice common in the 1980s that led to the ag credit
crisis and does not put borrowers in a healthy financial position.
Borrowers with heavy debt loads ultimately lost farms in the 1980s.
FCS almost exclusively targets top borrowers; offers these targeted
borrowers below market rates and is willing to fix those below market
rates at longer terms. By taking top borrowers from community banks,
FCS weakens the overall community bank portfolio, and leaves the less
seasoned/younger borrowers and higher leveraged borrowers with
community banks. Similarly, if community banks stretch to keep top
borrowers, community banks must accept less return and assume more
interest rate risk by fixing the rate for a longer period.
Bankers typically stated the FCS largely ignores young, beginning
and small farmers. As one banker stated, ``FCS wants us to get these
types of farmers started first and then later attempts to take them
away once they become financially stronger.''
FCS Mission Creep
We remind the Subcommittee the FCS is a GSE, granted several unique
advantages not afforded to the private sector. These advantages were
intended to allow the FCS to serve the specialized niche of
agricultural producers and their cooperatives. However, we are seeing
the FCS run amuck into non-farm related activities.
The FCS's regulator, the Farm Credit Administration (FCA), is
complicit in aiding and abetting this unauthorized behavior. The FCA
works hand-in-hand with FCS to expand the customer base of the FCS even
though Congress has said no to the FCS's non-farm legislative agenda.
Illegal Investment Schemes: Through its `Investments in Rural
America' (i.e., also termed by FCA as `mission related investments')
proposal, the FCA has sought to grant FCS powers to engage in
practically all types of non-farm lending. These activities were
initially granted as `pilot projects' enabling FCS lenders to engage in
loans to hospitals, commercial offices (doctors, lawyers),
manufacturing, apartment complexes, hotels and motels, etc. While their
initial proposal to grant national, blanket authority by regulation for
these activities was withdrawn, the FCA is now proposing allowing these
same activities if approved by FCA on a case-by-case basis. We point
out these are loans, not `investments' and they are inconsistent with
the statute's focus on agricultural based lending. FCA needs to stop
playing name games, calling loans `investments' and stick to the laws
Congress passed.
$725 Million Verizon Loan: Additionally, the FCA apparently was
unaware that CoBank, the FCS's large lender to cooperatives, had made a
$725 million loan to Verizon to buyout Vodafone's interest in a joint
venture. Verizon and Vodafone are headquartered in New York City and
London and this extremely large loan was not rural-based, nor is it an
allowable lending activity. While the FCA has excused this illegal loan
as eligible under the Farm Credit Act's `similar-entity' provision,
this provision was never intended to allow FCS lenders to make loans
that are completely different from loans that are eligible under the
statute. FCA is again abandoning their regulatory oversight
responsibilities in an effort to go to any length necessary to allow
FCS lenders to make whatever types of non-farm loans they desire.
$10 Billion Line of Credit: On September 24, 2013, the Treasury
Department, through its Federal Financing Bank, entered into a $10
billion note purchase agreement with the Farm Credit System Insurance
Corporation (FCSIC) to establish a standby line of credit to provide
FCS lenders funds at the Treasury's cost of funds. This line of credit,
which the FCA sought in secret, raises a number of serious questions.
For example, why did the FCA seek a $10 billion line of credit at a
time when FCS lenders were reporting record profits of $4.64 billion in
2013? Why did the FCA not seek Congressional approval?
When the FCS failed in the 1980s, the farmland values which the FCS
utilized as collateral had collapsed. Yet, the $10 billion line of
credit, according to FCA is ``collateralized'' meaning that the
collateral backing for this line of credit could be dramatically
reduced. If the FCS were to collapse, as it did in the 1980s, American
taxpayers would be on the hook for the bailout.
It would appear the FCA and FCS desired to lower their borrowing
costs even further by acquiring this line of credit. The FCSIC was
created to collect premiums from FCS institutions as a backstop in the
event of financial deterioration within the System. Why then did the
FCA seek and obtain a line of credit from the Treasury's FFB as
additional protection?
Further, a report \7\ to the FCSIC prepared by the Brookings
Institution on behalf of the FCSIC stated: ``FCS should be required to
approach the Congress and the Administration for legislative help
(emphasis added).'' Yet, FCA did not go to Congress but secretly went
to the Treasury to obtain the line of credit.
---------------------------------------------------------------------------
\7\ The Brookings Institution: Farm Credit System Liquidity and
Access to a Lender of Last Resort, Report for the Farm Credit System
Insurance Corporation, page 8, Kohn and McGarry; http://
www.brookings.edu//media/research/files/papers/2012/11/
06%20farm%20credit%20
system%20liquidity%20kohn/
06%20farm%20credit%20system%20liquidity%20kohn.pdf.
---------------------------------------------------------------------------
Mr. Chairman, we could raise a number of additional issues
regarding FCS abuses. We believe these types of issues and questions
warrant a series of separate hearings.
There are many concerns Congress should explore in their oversight
capacity of the FCS. Understandably, Congress has been knee-deep in
writing a farm bill in recent years. However, Congress should not lose
sight of this GSE's activities particularly when Congress is debating
what to do with the housing GSEs. Certainly this GSE needs to have
greater scrutiny.
Conclusion
Mr. Chairman, thank you for the invitation to testify. As
explained, there is a plentiful amount of credit available to farmers
and ranchers at very low interest rates. Community bankers and their
customers will continue to look forward to implementing the new farm
bill and we thank you for your hard work on the legislation. We also
thank you for ensuring a strong crop insurance program and continuing
the guaranteed loan programs with greater flexibility.
However, more attention and scrutiny needs to be paid to the FCS's
inappropriate activities and their unauthorized actions as well as to
the FCA's laissez-faire attitude towards regulating the mission of this
GSE, particularly the expansion of their scope and eligibility
parameters.
The purpose of today's hearing is to examine credit availability in
rural America. However, the actions of the FCS undermine the
availability of credit in rural America as they seek to drive out other
providers of credit by leveraging their unique GSE advantages in their
efforts to lend to the very best customers and often ignoring producers
in a weaker financial position. Is that really what the purpose of a
GSE should be?
We look forward to working with you in the future. Thank you.
The Chairman. Thank you, Mr. Williams. I now recognize Mr.
Brett Melone, Loan Officer, California FarmLink, Santa Cruz,
California, on behalf of the National Sustainable Agriculture
Coalition. Mr. Melone, you are recognized for 5 minutes.
STATEMENT OF BRETT MELONE, LOAN OFFICER, CALIFORNIA FarmLink,
SANTA CRUZ, CA; ON BEHALF OF NATIONAL
SUSTAINABLE AGRICULTURE COALITION
Mr. Melone. Thank you. Good morning, Chairman Crawford,
Members of the Committee. It is an honor and a pleasure to
address you this morning and talk about credit availability in
particular for small, beginning and socially disadvantaged
farmers.
Again, my name is Brett Melone. I am a loan officer with
California FarmLink. We are a nonprofit agricultural lender
based in Santa Cruz, California. And, again, a member of the
National Sustainable Agriculture Coalition.
FarmLink's mission is to link independent farmers in
California with the land and financing that they need to be
successful. We provide micro and small business loans, lines of
credit and technical assistance. As a statewide nonprofit,
our--the farmers that benefit from our lending are primarily
low to moderate income farmers, about \1/3\ are very low
income. We do take advantage of the Federal programs available
to us to serve this population, in particular FSA guaranteed
program, the rural micro-entrepreneur assistance program, and
recently within the last year became a certified community
development financial institution, one of the few
agriculturally focused CDFIs in the country.
The typical assistance services and financial products that
we provide have a strong focus on high risk populations.
FarmLink's development services focus on farm financing, cash
flow protections, credit counseling, financial management and
land access strategies. We see this technical assistance as
critical not only to their business' success but simply for
them to be able to access the financing that they need to grow
their businesses. Due to the cost of making these micro and
small loans, most banks and commercial lenders don't want to
make them. Building a pipeline of viable loans requires
relationships with farming communities that commercial lenders
generally lack. And, again, it takes time in the form of
technical assistance to get applicants to the point where they
can actually qualify.
As we have heard, the FSA microloan program became
permanent, and we applaud that. I think this is really going to
help increase access to capital for this farming population,
and in addition the lifting of the term limits so that beyond
the microloans they will be able to have full access to those
programs. The increased--we would like to thank the Agriculture
Appropriation Subcommittee for increasing funding for FSA
direct loans, and also ask you to think about as FSA seeks to
continue access to credit for farmers who have not historically
used FSA loans, it will be imperative to ensure FSA has the
administrative and staffing resources to serve this growing
demand.
As the first organization in the country to offer
agriculture individual development accounts and a champion of
the effort to establish a national program, we are pleased to
see the reauthorization of this program in the 2014 Farm Bill.
And we urge you to work with your colleagues on the
Appropriations Committee to fund this program for $2.5 million
in Fiscal Year 2015.
The 2014 Farm Bill authorized USDA to develop the Whole-
Farm Revenue Protection Program, and this is a welcome addition
to the risk management toolkit for sustainable and organic
producers, a segment of American agriculture that has
historically been under-served by crop insurance. It is an
important tool, crop insurance is, for lenders in mitigating
their risk. And we urge you to work with the USDA to expand the
coverage of this program nationwide, in our area in particular.
Sustainable and organic growers have been left out of this
program currently.
Section 6025 of the farm bill was revised and renewed. And
this is Strategic Economic and Community Development. And we
encourage you to work with the USDA in shaping how this program
will serve the community and regional needs of agriculture and
particularly around sustainable and organic where we are seeing
significant growth in California.
The Rural and Micro-Enterprise Assistance Program was
reauthorized in the farm bill with $15 million in mandatory
funding over the 5 year cycle. We would also like to see an
additional $3 million per year in discretionary funding for
that program to meet the demand.
The Microloan Cooperative Lending Pilot Project, which we
heard a little bit about earlier as well, we think this is
going to really help FSA reach the farmers that are difficult
to reach, serve them in a way that is going to meet their
needs. So we urge USDA to work with partners to shape that
program in providing underwriting support, guarantees and the
like.
Thank you, Chairman Crawford.
[The prepared statement of Mr. Melone follows:]
Prepared Statement of Brett Melone, Loan Officer, California FarmLink,
Santa Cruz, CA; on Behalf of National Sustainable Agriculture Coalition
Introduction
Chairman Crawford, Ranking Member Costa, and Members of the
Agriculture Subcommittee on Livestock, Rural Development and Credit,
thank you for this opportunity to provide information about credit
availability in rural America.
My name is Brett Melone. I am a loan officer with California
FarmLink. FarmLink is a nonprofit lender based in Santa Cruz,
California. FarmLink is also a member of the National Sustainable
Agriculture Coalition. My remarks reflect the credit needs of farmers
in California as well as nationally.
Both of my parents worked in agriculture when I was growing up in
South Florida. I have dedicated my professional career to supporting
the success of beginning, minority and small farmers, primarily in
California, though I have been involved in national policy efforts, and
spent a number of years living in Latin America as well. My commitment
to these farmers comes from my first-hand knowledge of their ability to
make a living in agriculture, provide jobs for others, feed the
country, and steward our natural resources. This is what I am
passionate about, and it is clear to me that a key factor in this
farmer population being able to realize these goals is their ability to
access capital.
Much has been done over the last several decades to create programs
that provide business development services and access to credit
programs for small businesses. Since the financial crisis this effort
has increased. Microloans are now part of the vernacular for anyone
that is interested in economic development. Crowd funding is also
becoming commonplace. We are even hearing more about policy efforts to
allow Direct Public Offerings, where individuals who are not certified
investors can invest their savings in ``Main Street'' or in our case,
regional farms.
Despite all of this activity and progress, there are still gaps
between what farmers with $1 million or less in revenue can access in
terms of capital. FarmLink recognized these gaps several years ago, and
is now in its fourth year of direct lending to small, sustainable
farmers. In 2011 we obtained Standard Eligible Lender status with the
Farm Service Agency, and began making Rural Microentrepreneur
Assistance Program loans. In 2013 we became a certified Community
Development Financial Institution, one of just a handful nationwide
that focus on agricultural lending.
California FarmLink is a statewide nonprofit serving Low-Income
Targeted Populations (LITP) throughout the State of California with
three regional offices in the North Coast, Central Valley and Central
Coast. FarmLink's mission is to link independent farmers and ranchers
with the land and financing they need for a sustainable future.
FarmLink provides business development services, microloans, small
business loans and small lines of credit.
FarmLink serves a target market across California of immigrant and
other under-served beginning and small farmers. Since 2011, FarmLink
has made more than 80 loans, deploying $1.5 million in capital to
farmers, with an average loan size of $25,000, and loan size range of
$5,000 to $100,000. In 2012, 63% of FarmLink's clients were at or below
80% of the Area Median Income (AMI) and approximately 24% were very
low-income, at or below 30% AMI.
There are very few sources of small agricultural loans available to
low-income and beginning farmers. The target market has a difficult
time securing land and/or financing due to: limited history as
entrepreneurs; limited traditional collateral; no or limited credit
history; small loan size required; language or cultural barriers; and
non-traditional marketing and business models.
The barriers to entry and to gaining stability for new and
beginning farmers are formidable. According to the 2012 USDA Census of
Agriculture, the average age of California's farmers has increased to
60. At the same time, beginning farmers lost ground. From 2007 to 2012,
California lost more than 6,000 beginning farmers, a 23% drop, largely
due to the economic downturn starting in 2008.
FarmLink knows from experience that the first 5 years of farming
are the most critical. Many start-up farmers have developed solid
production skills, but have not developed an ideal mix of market
options, economies of scale, or business savvy to survive. While the
number of beginning farmers declined over the last 5 years, the number
of Latino farmers, many of them immigrants, increased by 8% to almost
10,000 farmers throughout California. In fact Latinos comprise about
70% of FarmLink's borrowers and 40% of farmers who receive one-on-one
technical assistance on finances and land tenure.
Clearly, small farmers lack capital to expand. In a 2011 survey of
1,000 beginning farmers conducted by the National Young Farmers
Coalition, 78% identified lack of capital as the biggest challenge to
achieving success.\1\ As the number of small and beginning farmers
continues to grow, the financial products and technical assistance
services offered by FarmLink are essential to ensure that these growers
succeed.
---------------------------------------------------------------------------
\1\ Shute,``L.L.'' (2011) Building a Future with Farmers:
Challenges Faced by Young, American Farmers and a National Strategy to
Help Them Succeed.
---------------------------------------------------------------------------
FarmLink has made more than half of its loans in Monterey and Santa
Cruz counties where farm labor income is seasonal and closely tied to
minimum wage, creating endemic poverty in spite of chronic, seasonal
labor shortages. Unemployment in Monterey County peaked at 17.5% 2
years ago in the winter months and peaked this past winter at 15%.
Workers earning subsistence wages turn to self-employment in
agriculture as a way to increase their income. These small and
beginning farmers need access to capital and technical assistance to
start, stabilize, or expand their farming business.
FarmLink's technical assistance services and financial products
have a strong focus on higher risk populations. FarmLink development
services focus on farm financing, cash flow projections, credit
counseling, financial management and land access strategies. Our
experience shows that one-on-one technical assistance and training is
effective in helping farmers establish, operate and expand strong farm
businesses and access and manage loans.
National Credit Context
FarmLink is part of a nascent movement of CDFI's working with
farmer networks, and in particular, farmer networks that serve
beginning farmers, farmers of color, immigrant farmers, and other
farmers that have difficulty accessing credit through traditional
means.
Current research funded by the Kellogg Foundation and being
conducted by Michigan State University's Center for Regional Food
Systems has documented the fact that very few farmer networks, and in
particular farmer of color networks, are aware of the mission,
structure and function of CDFIs. At the same time, even those CDFIs
that have taken steps to increase their agricultural lending admit to
having limited knowledge of the farming sector.
This research points to the need to be intentional, at a national
level, to build the capacity of CDFI and other community lenders to
serve agriculture. Specifically, the research recommends creating an
agricultural lending caucus among CDFI's and Farmer of Color Networks
that focuses on the development of short and long term policies and
best practices, including designated funding for farmer network
projects modeled after the Healthy Food Financing Initiative.
Due to the cost of making micro and small loans, most banks and
commercial lenders don't want to make them. Building a pipeline of
viable loans requires relationships with farming communities that
commercial lenders generally lack. It takes time, in the form of
technical assistance, to get the applicants to a point where they are
ready to apply, and the underwriting requires knowledge of direct and
alternative markets, that commercial lenders typically don't have.
Important Federal Policy Changes
Policy changes within the USDA, and in large part led by this
Committee, have created opportunities for FarmLink and other community-
based lenders, to begin to address the need for capital among this
under-served farmer population.
On behalf of California FarmLink, the National Sustainable
Agriculture Coalition, and NSAC's member organizations, and the farmers
that we serve, I'd like to genuinely thank the Members of this
Committee for their commitment to improving and increasing access to
capital for beginning, small and minority farmers.
The FSA Microloan program that started out as a pilot program is
now permanent--thanks to the efforts of this Committee during debate of
the 2014 Farm Bill. Microloans made to beginning and veteran farmers
will now be exempt from the term limits that otherwise apply on all
direct operating loans. This important change will allow these farmers
to continue to take advantage of Federal credit resources as they
continue to grow their farm operations in the future.
Additionally, the Microloan Cooperative Lending Pilot Projects
provision will allow USDA to work with nonprofit community lenders to
expand access to microloans and financial training for small,
beginning, veteran and socially disadvantaged farmers.
The increased priority on lending to beginning and socially
disadvantaged farmers through FSA Direct and Guaranteed Farm Ownership
and Operating loan programs will increase access to capital for these
farmer groups. In addition, increased flexibility in determining what
types of experiences should count towards the ``farm management
experience'' requirement for direct farm ownership loans will further
expand access to these loans.
The lower interest rate for Joint Financing (or Participation)
loans that bring together farmers, USDA, and a private lender in order
to leverage scarce Federal credit appropriations with private lending
resources will harnesses the power of leveraging and will allow FSA to
serve more farmers for the same amount of Federal appropriations.
We also thank the farm bill conference committee for continuing
mandatory funding the Rural Microentrepreneur Assistance Program (RMAP)
at the 2008 Farm Bill level of $15 million over the 5 year cycle. This
program has been essential to FarmLink's ability to make loans to
beginning, immigrant and small farms in California. In addition to the
direct spending of $3 million per year, we would like to see
discretionary funding of $3.3 million in FY15, consistent with the USDA
request, and more robust discretionary funding in subsequent years. I
urge you to work with your colleagues on the Appropriations Committee
to get the $3.3 million request into the FY15 bill. Furthermore, we
believe greater flexibility is needed in how the formula for technical
assistance funds is applied, and urge you to work with USDA to achieve
a workable solution to this problem.
As the first organization in the country to offer agricultural
IDAs, and a champion of the effort to establish a national program, we
were pleased to see the reauthorization of the Beginning Farmer and
Rancher Individual Development Accounts (BFRIDA) Pilot Program,
designed to help beginning farmers and ranchers of limited means
finance their agricultural endeavors through business and financial
education and matched savings accounts. As the age of the average
American farmer continues to rise, now is the time to launch this
important new credit tool, and I urge you to work with your colleagues
on the Appropriations Committee to fund this program in FY15.
We'd also like to thank your colleagues on the Agriculture
Appropriations Subcommittee for increasing funding for FSA direct
loans. Historically low interest rates and lower default rates
certainly have helped a great deal in increasing loan volume. In
addition, agency leadership and staff are doing a great job increasing
access to credit to farmers, despite dwindling staffing resources. For
the first time in recent memory, there is no backlog in the number of
farmers who have been approved but not yet received direct loans. As
FSA seeks to continue access to credit for farmers who have not
historically used FSA loans (including a growing number of microloans
to smaller, diversified farms selling to local and regionally markets),
it will be imperative to ensure FSA has the administrative and staffing
support to service and provide technical assistance on the larger loan
portfolio each office will likely carry.
The 2014 Farm Bill authorized USDA to develop Whole Farm Revenue
Protection (WFRP). WFRP is a welcome and long-awaited addition to the
risk management toolkit for sustainable and organic diversified farming
operations, a segment of American agriculture that has historically
been under-served by traditional crop insurance. Crop insurance is an
important tool that lenders look at to evaluate a farmer's perceived
risk in their farming operation. We therefore commend USDA for
responding quickly under its new farm bill authority to develop WFRP in
time for the 2015 crop insurance year. In order to avoid suffering the
same under-utilization as AGR and AGR-Lite, and to provide an
appropriate and accessible risk management option for all producers in
all states, it is critical that USDA develop and swiftly implement a
plan to expand WFRP nationwide.
Finally, revisions to and renewal of Section 6025 of the 2014 Farm
Bill, Strategic Economic & Community Development hold promise for
supporting regionally significant economic development efforts. Local
and regional governments are taking steps to support agriculture and
rural economic development through planning efforts, and this program
will leverage those efforts in synergistic ways. We urge you to work
with local and regional partners to shape this program.
Strategic Partnership
Increasing consumer demand for local food and a growing recognition
of the role of food systems in addressing rural economic development,
public health, climate change preparedness, veteran transition to
civilian life, among many other national issues, is driving farmer
demand for micro and small loans all across the country.
FarmLink and FSA are strategic partners in facilitating access to
credit. FSA's role as the lender of last resort/first opportunity is
very complementary to FarmLink's role as an agriculturally-focused CDFI
making relatively high risk loans. While there are loans that we would
potentially both make, and thus be competing with one another, the
reality is that FSA is reaching those farmers that feel comfortable
going into the USDA Service Center, and FarmLink, as a community-based
lender, is going to where borrowers are, in the field, and providing
technical assistance to help them be loan-ready.
The power of leverage that comes with providing loan guarantees is
tremendous. The Cooperative Lending Pilot Project represents an
important opportunity to build on this leverage.
For example, the current drought in California is affecting farmers
in diverse ways, depending on where they are located, and what their
options for accessing water are in each location. California FarmLink
is working to facilitate access to credit for these farmers who have
water emergencies. Where possible, California FarmLink is making bridge
loans to finance irrigation and water efficiency projects supported by
the Environmental Quality Incentives Program cost-share. California
FarmLink expects to begin conducting water audits later this summer for
farmers, and connecting them with financing for irrigation and water
development projects based on audit findings.
California FarmLink is also developing a farm mortgage product, in
response to the growing demand and need we see from farmers in our
region. We look forward to working with FSA to create a product that
will serve the needs of our target market and ensure affordable and
stable land tenure for the next generation of California farmers.
Farmer Profiles
In addition to the loans that FarmLink has made with FSA
guarantees, which are an important part of our portfolio, have ranged
from $25,000-$100,000, and include a diversity of production systems
and business models, there are other ways that we support each other's
efforts to facilitate access to credit.
The borrower target market for FSA and California FarmLink has some
overlap, and each also has a distinct market. By way of example, this
becomes clear by considering a few examples of mutual referrals:
A well-established Community Supported Agriculture farm in
Fairfield had obtained two FSA direct operating loans and was
then referred to FarmLink in hopes of graduating to more
conventional financing. They obtained an annual operating loan
with an FSA guarantee from FarmLink for the 2013 season. For
the 2014 season the borrower was able to ``graduate'' to a loan
with Farm Credit West, benefitting from a lower interest rate
and more flexible terms.
A 12 acre direct market diversified organic fruit and
vegetable operation in Humboldt County applied for a microloan
from their local FSA office. For reasons that are not
completely clear, the applicant was denied, but was referred to
California FarmLink. FarmLink made an equipment and operating
loan totaling $21,000.
The FSA Farm Loan Officer in Modesto recently referred a
borrower to FarmLink that has reached the term limit on FSA
Direct Operating Loans, having received 7 years of Direct
Operating Loans, and then an additional 2 years on waiver.
FarmLink is likely to finance this bee operation, with the
benefit of knowing the type of credit risk they represent.
A start-up aquaponics operation in the Bay Area sought an
operating loan from FarmLink. The borrower was a returning
veteran who had completed a training program and
apprenticeship, but his experience was not sufficient to meet
FarmLink's underwriting standards. FarmLink referred the
applicant to FSA, where he was able to obtain a microloan to
launch his operation, producing specialty vegetables to
restaurants.
These are just a few examples of farmers that have benefitted from
the FSA-FarmLink relationship.
Key Policy Recommendations
As this Committee evaluates the current state of agricultural
credit across the country, we would like to recommend a few ways that
Congress and USDA could better meet the credit needs of our nation's
farmers--especially those beginning, minority and small farmers who
have struggled over the years to find adequate credit options needed to
finance their farms.
First, we would urge the leaders of this Committee to sponsor an
amendment to the Agriculture Appropriations bill to fund IDA's for the
2015 Fiscal Year. This is a program that this Committee authorized in
the new farm bill. USDA sees this program as a key tool they need to
recruit a new generation of farmers and has requested an initial $2.5
million to jumpstart the program next year. The Senate also recognized
this need and the value this program could serve, and matched the
Administration's request. I therefore strongly urge you to consider
sponsoring an amendment to the appropriations bill in order to launch
this important and long overdue credit resource for new farmers, and
follow through on the House's commitment to this program.
Second, we would also urge the leaders of this Committee to work
with stakeholders to shape Section 6025--Strategic Economic & Community
Development. This updated provision prioritizes the funding of projects
that are consistent with an adopted regional economic or community
development plan. It will be important for the success of this program
to be shaped by regional partners.
Third, we would urge the leaders of this Committee to work with
USDA to expand coverage of Whole Farm insurance nationwide as soon as
possible. The 2014 Farm Bill mandated a pilot program because organic
and diversified vegetable growers have been pretty much excluded from
Federal crop insurance. We believe the Congressional intent in the 2014
Farm Bill was to make the program available to farmers in the major
organic and specialty crop growing areas--that would without question
include Monterey and Santa Cruz counties. The pilot as currently
described by USDA, relies on the current AGR and AGR-Lite designations
for geographic coverage and crop specifics--which excludes key
agricultural regions in California and other parts of the country. The
lack of this risk management tool places these farmers and their
creditors at a distinct disadvantage, relative to farmers who can
access this program. We therefore urge you to work with USDA to
expedite the process of making this program apply nationwide as soon as
feasible.
Fourth, we urge this Committee to work with your colleagues on the
Appropriations Committee to increase discretionary spending for Rural
Microenterprise Assistance Program (RMAP). In addition to the direct
spending of $3 million per year that this Committee provided in the
farm bill, we would like to see an additional $3.3 million in
discretionary funding for FY15 as requested by USDA, in order to meet
the high demand for small business loans that exist in rural America.
This too would be a high priority amendment to the pending FY15
agriculture appropriations bill.
Fifth, we urge this Committee to work with USDA to provide greater
flexibility in the application of the formula that determines technical
assistance grant awards under Rural Microenterprise Assistance Program
(RMAP). We believe greater flexibility is needed in how the formula for
technical assistance funds is applied. RMAP partners--like FarmLink--
are at a distinct disadvantage in accessing technical assistance funds
because they emphasize annual operating loans--with the associated
faster pay down of those loans, followed by those funds being revolved
out in the form of new loans--rather than longer-term equipment and
infrastructure loans.
Finally, we urge leaders of this Committee to work with
stakeholders and USDA to shape the Microloan Cooperative Lending Pilot
Projects. The bulk of loans that FarmLink has made to date have been
microloans. We have not sought guarantees on loans less than $25,000,
due to the underwriting costs and guarantee fee. We are optimistic
about the promise of this pilot program that may open new opportunities
to make microloans while providing the much-needed technical assistance
microloan applicants typically require, along with additional risk
mitigation features. We are eager to see the new intermediary
microlending option that this Committee authorized rolled out across
the country, and would urge you to work with USDA to ensure this option
is available as soon as possible.
Conclusion
The face of agriculture in this country is undergoing dramatic
transformations. Our Federal support structure and safety net has been
adapting in response to these changes, and must continue to do so if we
aspire to be efficient with our limited natural and financial
resources, increase equity and fairness in our delivery of programs,
and embrace those who seek to produce our food, fiber and fuel, now and
in the future.
Thank you for the opportunity to provide this testimony on behalf
of beginning, small and immigrant farmers and ranchers across the
country. I look forward to answering any questions you have about their
credit needs, and California FarmLink's efforts on their behalf.
The Chairman. Thank you. I appreciate it. And once again, I
want to thank all the witnesses. I now recognize the gentleman
from Texas for 5 minutes, Mr. Conaway.
Mr. Conaway. Thank you, Mr. Chairman. And, gentlemen, thank
you for being here. Mr. Franz--Frazee, I am sorry. In your
testimony, you had a couple of comments that I found
interesting. One that you are working under a 40 year old law
and that that is causing you challenges in your operations. Can
you give us a couple of examples of where that is binding----
Mr. Conaway. Do I have a hand?
Mr. Frazee. Sure. I mentioned that we are seeing
agriculture evolve. And I also indicated that we are focusing
on trying to respond to the credit needs of an evolving
agriculture that includes more local sustainable foods, urban
oriented markets. And sometimes the authorities that we have
are a bit challenging in terms of being able to provide the
financing that is needed to support that infrastructure.
Mr. Conaway. So is this the rub that Mr. Wolfe and Mr.
Williams talked about you are trying to push out beyond the
original young farmer, beginning farmer, small farmer issue?
Mr. Frazee. I think what we are talking about aligns very
well with the young startup issue, the kind of operations we
are talking about that are locally or sustainable operations
that are going to serve the farmer's markets here in the area.
Mr. Conaway. Okay. Well, I would like to visit with you
about how the law itself is binding that up. You have also
mentioned in written testimony you have provided--the System
provided financially to $4.7 billion in exports. Can you put
some meat on the bone as to what that meant?
Mr. Frazee. Yes, that is--those are authorities that are
provided for CoBank to authorize export financing related to
farmers, cooperatives----
Mr. Conaway. Is that directly related to rural America
that----
Mr. Frazee. Pardon?
Mr. Conaway. That is where those exports are coming from,
is that rural America?
Mr. Frazee. Correct.
Mr. Conaway. Okay.
Mr. Frazee. That is correct. It is all directly related to
the ag production changes.
Mr. Conaway. All right. Mr. Wolfe, Mr. Williams, crop
insurance both--I know Mr. Williams mentioned it. Could you
talk about--is that a requirement on your loans to production
farmers? And what--I get both of you on the hook here to
comment about the importance of crop insurance and the other
risk management tools under the farm bill.
Mr. Williams. Yes. Crop insurance is extremely important to
us in our portfolio. It is not required on 100 percent of our
loans, but I would guess about 90 percent of our loans it is a
factor. And so, certainly, maybe even more than 90 percent. But
crop insurance is extremely important in allowing us to make a
decision and having a comfort level with where the income base
is going to be for that operation. The farm bill, the target
prices and--is also something that is very important. But over
the last 10 years, and certainly in the last 2 or 3, I have
seen crop insurance play a bigger role than it ever has in risk
management for farmers, and it is certainly important for
banks.
Mr. Conaway. Mr. Wolfe?
Mr. Wolfe. Yes. We require crop insurance on 100 percent of
our borrowers that we have--that we provide loans for crop
production. And I ask our lenders last year to find a borrower
at any level that didn't have crop insurance. We couldn't find
any in our banks. So it is close to 100 percent of our
borrowers, no matter whether they borrow money for crop
production, but they do participate in that program today.
Mr. Conaway. All right. The FSA is under--and RMA are both
trying to implement the changes to the farm bill. Any issues
with the pace of that implementation and changes that are
affecting your borrowers? Maybe----
Mr. Wolfe. What change are you referring to, sir?
Mr. Conaway. Say again.
Mr. Wolfe. What change----
Mr. Conaway. Well, we--based on changes to those risk
management tools, and there would be the process of
implementing those. Has it impacted this year's borrowings,
lendings in production agriculture's, or something that they
should be doing quicker than they are doing?
Mr. Wolfe. In our case, it has not. We typically do those
on interim loans. We work very closely with USDA Farm Service
Agencies in our area. And if there is the high likelihood that
that is going to happen, we go ahead and provide interim
financing for those.
Mr. Conaway. Right. So you are working--Mr. Williams,
anything going on about that that we need to know about?
Mr. Williams. It has not had an impact on us either. We
have about a $60 million operating loan portfolio, and about 20
percent of that volume is guaranteed by FSA guarantees. So we
have been able to do that. It has been very efficient and
hadn't caused any problems for us.
Mr. Conaway. Right. Mr. Melone, any issues with you?
Mr. Melone. Yes, it is virtually nonexistent for our--the
borrowers that we serve. And that is why we would like to see
it go nationwide as soon as possible.
Mr. Conaway. Mr. Frazee, quickly, you keep 100 percent of
your loans on your balance sheet. Is that a requirement or why
do you do that?
Mr. Frazee. We keep our loans on our balance sheet for a
couple of reasons. One, because we are a cooperative, and we
want our members to benefit from the ability to have their
loans on a balance sheet and receive patronage benefits. There
are times that we may sell loans into a secondary market for
risk management purposes. But substantially all, we keep on our
balance sheet.
Mr. Conaway. All right. Thank you. I yield back.
The Chairman. The gentleman yields back. I now recognize
the gentleman from Florida, Mr. Yoho, for 5 minutes--Mr. Yoho.
Mr. Yoho. Thank you, Mr. Chairman. I appreciate it. Let me
see. Let me get back to my questions here. You were talking
about--or let me ask you, is it----
Mr. Frazee. Frazee.
Mr. Yoho. Frazee. Mr. Frazee, do you guys classify under-
performing loans and Farmer Mac the same way as Dodd-Frank and
commercial loans used to do it? Like, say I borrowed $500,000
on a piece of property and was farming it, paid it off--paid on
it on a 5 year note. Say I paid 3 years on it. And I have it
paid down to $350,000. Land prices dropped, or the value of the
land is now say $250,000. Traditionally, or with the Dodd-
Frank, that was considered an under-performing loan, even
though I didn't make a--miss a payment. Do you guys, in the
Farmer Mac program, evaluate loans that way as under-
performing?
Mr. Frazee. We use a risk rating system that is consistent
with other financial institutions. It is a 14 point rating
system that looks at the probability of default. We look at our
loss given default. And, obviously, we have to comply with the
standards that--our financial statements are audited by
external auditors, Price Waterhouse Cooper. So----
Mr. Yoho. All right. Mr. Wolfe, how about you and your loan
portfolio, if you have a loan in that kind of a situation, that
illustration?
Mr. Wolfe. Well, we would recognize it as a troubled asset,
if you will, and we would reserve higher for that. But, no, we
wouldn't just, by the fact that it is under collateral, show it
as a default.
Mr. Yoho. Okay. Because in some of the banking situations,
correct me if I am wrong, I know they looked at it that way,
and they said you have to get these off the book because it is
an under-performing based on the rules of the Dodd-Frank. Now,
they may have corrected that I heard in some of the smaller
banks.
Mr. Wolfe. I think that applies to residential real estate
loans, but not necessarily to ag loans.
Mr. Yoho. Okay. Let me ask Mr. Wolfe and Mr. Williams, do
you feel you are in direct competition with Farmer Mac?
Mr. Wolfe. Well, not with Farmer Mac. No. Farmer Mac--what
we do.
Mr. Yoho. With----
Mr. Wolfe. Farm Credit----
Mr. Yoho. Farm Credit?
Mr. Wolfe. Yes. Farm Credit is our largest competitor. We
compete with local banks every day. But Farm Credit is our
largest competitor and our biggest competition.
Mr. Yoho. Have you ever lost a loan based on competitive
interest rates where they are more competitive than the
interest rates that you can charge today?
Mr. Wolfe. Yes. I did--yes, we do every day--not every day.
Mr. Yoho. What causes that? Why is there that discrepancy?
Why can you not adjust your interest rates where they can, or
they can be more competitive?
Mr. Wolfe. Well, in Kansas, we have a state income tax that
is applied to banks called a privilege tax that is 4.375
percent. We are also subject to 34 percent Federal income tax.
And so when we have to give them a 38 percent head start, it
does create some added competition for us. Yes.
Mr. Yoho. What I would like for all of you to do is give
some recommendations on how we can make this more equitable so
that there is not this competition, so that in the next farm
bill we can correct some of these inequities so that it--when
it comes out to pass, we won't have these discussions. We will
already have addressed them. Is--I would love for you guys to
enter in some recommendations so that we can address those
before they become an issue.
Mr. Melone, on the end, I have some questions for you. In
what you do, are--what is the amount of loans you give you in a
year's time?
Mr. Melone. So last year--we have been lending since 2011.
We have made about 90 loans, $1.5 million so far last year,
2013.
Mr. Yoho. Yes. And 100 percent of that money comes from the
Federal Government, right?
Mr. Melone. No. Probably about \1/3\ of it directly, and
about the same amount is FSA guaranteed. But we have investors
that are banks and foundations as well.
Mr. Yoho. Okay. What is the failure rate of that?
Mr. Melone. We have a two percent default rate.
Mr. Yoho. That is great.
Mr. Melone. So we made about $900,000 in loans last year.
We are looking to make $1.25 million this year, and doubling
the number of loans that we are making to about 50 this year.
Mr. Yoho. Okay. I don't really have any more questions,
other than my goal is to make agriculture remain a strong
sector. And my working together with the information and the
suggestions that you have, we can make better policies up here
that will affect the availability of credit for our farmers to
keep ag strong in this country so that we remain a leader in
that. And I look forward to any comments, and always feel that
you can reach out to our office. And I appreciate you being
here.
The Chairman. The gentleman yields back. The chair now
recognizes Ranking Member Costa for 5 minutes.
Mr. Costa. Thank you. Thank you, Mr. Chairman. To any of
the panel members, and maybe we will start with Mr. Melone. We
heard a lot of things that we talked about earlier that have
been positive with the farm economy. Obviously, with different
regions of the country, especially the West as we talked, this
multi-year drought has been devastating. But, we have the
opposite conditions along the Mississippi River where we have
floods that have been occurring. How do you believe that the
impacts of floods and droughts taking place concurrently will
hit the overall outlook on the farm economy at the end of this
year? Have you made some estimations?
Mr. Melone. So as you probably well know, there is a lot of
geographic variability even within California. For instance,
about how the drought is affecting different farmers, depending
on how they get their water.
Mr. Costa. Right.
Mr. Melone. We are seeing, probably, \1/4\ to \1/3\ of our
portfolio being affected in some direct way by the drought. So
we are looking at making bridge loans to farmers that are
getting funding through NRCS.
Mr. Costa. How about individual loans for well drilling?
Mr. Melone. Yes. We are actually working on a couple right
now, putting in new pumps as well, farmers that were getting
water from the Central Valley Project, for instance, that now
no longer have access to that water.
Mr. Costa. Yes. As you know, we are looking at a 6 to 10
month waiting list just to get a well driller online. The costs
for those wells are anywhere from $\1/2\ million dollars to
$1\1/2\ million and higher. So these kind of loans are
important. Let me move over to the dairy industry, which I
spoke about with the first panel and the changes in the dairy
title as a result of the 2014 Farm Bill. I noted we had some
terrible years in 2009 and 2010 when we had milk prices at $9
per hundredweight, and the input costs were far, far higher,
and we had a number of significant bankruptcies in California
to underline it. Are you, as lenders, being more selective on
how you deal with the loans to dairies? And I don't know who
would like to opine here first?
Mr. Wolfe. We do finance some dairies in northeast, north-
central Kansas and southern Nebraska. And we haven't seen any
large issues, except with the milk prices. That is something
that is very difficult to manage for our borrowers, but it is
something that they have gone out a little farther, contracted
prices. It is limited on the upside, obviously. But there are
some vehicles they can use, and we do require that if we
finance. And we have half a dozen large--relatively large
dairies that we finance out of our bank. But we do require
forward pricing.
Mr. Costa. And so notwithstanding the volatility, your
lending has remained somewhat constant?
Mr. Wolfe. Yes, it has.
Mr. Costa. On that. Have any of you looked at--in terms of
forward lending, under the new dairy title, the insurance
program and how you anticipate that might factor in on future
loans for dairies?
Mr. Frazee. We have looked at it. We think it provides some
stability to the industry in looking at the credit risk around
dairy. You know, as a cooperative and with the mission charge
that we have to be there to provide for the income and
wellbeing of farmers and to be a sustainable source of credit,
we look at that as being something that helps to provide some
stability in the industry and helps us to take a longer term
view of the risk associated with those farmers.
Mr. Wolfe. I would agree.
Mr. Costa. So you don't see any different application
between those dairies that belong to co-ops and those that have
a different process in which they sell their milk?
Mr. Wolfe. No, I don't. We finance both cooperative dairies
and privately owned dairies.
Mr. Costa. And do any of you have any reaction to the tax
treatment on bonus depreciation under Section 179 provisions?
Mr. Wolfe. Would you restate the question, please?
Mr. Costa. The tax depreciation that is allowed today----
Mr. Wolfe. Right.
Mr. Costa. Do any of you think that it provides any more
favorable conditions for lending that you are involved in?
Mr. Wolfe. Perhaps. Again, in our area specifically, Farm
Credit System owns that space through their leasing programs.
And we do a few farm building programs or farm sheds, if you
will. But, primarily, that is owned by the Farm Credit System
in our area.
Mr. Costa. All right. Well, my time has expired. Thank you
very much, Mr. Chairman.
The Chairman. The gentleman yields. I now recognize the
gentleman from Iowa, Mr. King, for 5 minutes.
Mr. King. Thank you, Mr. Chairman. And I thank the
witnesses for their testimony. I would turn first to Mr. Wolfe
and ask you, I believe you were in the gallery listening to the
previous panel's testimony. And when I asked the question if
the Farm Credit personnel could identify an independent bank
rate that was lower than their rate for credit for our farmers,
and they apparently could not do so. Were you surprised at
their response?
Mr. Wolfe. No.
Mr. King. And neither was I. But I would ask if you could
speak to that issue, because I don't think we heard from your
side of this.
Mr. Wolfe. Well, yes. I agree that it is--I mean, it is--
she got into predatory lending. I don't think that is where you
were going with that. You just wanted to know about general
pricing. Pricing is very difficult for us to match, even the
Farm Credit System in our areas, I mentioned before, in Kansas
anyway, my specific bank, it is a 38 percent head start, 34
percent Federal tax, 4.375 percent for a state income tax. That
is what makes it difficult to match fund--or match any rate
that Farm Credit has out there.
Mr. King. And would you have any comments to make on the
mission creep question that I asked of the original panel?
Mr. Wolfe. Well, obviously, it has crept. I mean, the
Verizon loan is one example of that. Frontier is another that
has just been recently done. I don't think that that can be
described by anything other than a mission creep. Their mission
has expanded. The size of the Farm Credit System has doubled in
the last 10 years. And it--they haven't done that all within
traditional agriculture, I do not believe.
Mr. King. Would it be your recommendation to this Congress
to take a look at the mission and perhaps help write a mission
statement since they write their own?
Mr. Wolfe. Absolutely.
Mr. King. I thought it might. I don't know if that was in
your original testimony. I was called away. Was it?
Mr. Wolfe. No. No, it wasn't. But, absolutely, I would
support that.
Mr. King. And, Mr. Williams, your comments on this subject
matter?
Mr. Williams. Yes, I would echo Mr. Wolfe's comments. But,
specifically, in east Arkansas, I could provide about 30
examples over the last 3 years where we have lost a borrower to
the Farm Credit System. And without exception, it is a rate
issue. So what we see is typically 150 to 200 bases points
difference in short-term rates. And then, of course, as you
stretch out our real estate lending, it even widens out from
there. So time after time after time, we see it. And it is
always based on rate.
Mr. King. Could you speak to the scope of your
competition's real estate loans, how broad that scope might be?
Mr. Williams. Yes, it is pretty well formed in our area.
But we have also seen the scope widen from the Farm Credit
System over the past couple years to things like lumber
companies and things of that nature. So it appears, from our
perspective, that there is not a lot of restriction in what
they can or can't do. And we certainly are willing to compete
and want to compete. And I have in Wynne--we have seven banks
in Wynne that we compete with every day, as well as the Farm
Credit System. So we are not afraid to compete. We just would
like to do it with a level playing field.
Mr. King. What about non-farm, say grain handling or
processing, is that also a field of competition?
Mr. Williams. Absolutely.
Mr. King. And what about residential?
Mr. Williams. Absolutely.
Mr. King. Would that be urban, small town, as well as rural
residential?
Mr. Williams. In our area, and we are pretty urban--Wynne's
a population of about 8,000 people. But Farm Credit certainly
is making housing loans in Wynne and in our entire market in
eastern Arkansas.
Mr. King. Thank you, Mr. Williams. Since I have asked you
all these questions, Misters Wolfe and Williams, I should turn
to Mr. Frazee and give him an opportunity to perhaps eliminate
the other side of this.
Mr. Frazee. I appreciate that opportunity. First, the story
I hear about competition are similar to what I hear from my
loan officers about commercial banks. We are losing deals every
day to commercial banks. It is a competitive environment. There
is a lot of liquidity in the banking system. And we have seen
pressure on our loans and our margins. So--and we think that is
a good thing for customers, because ultimately farmers are
going to benefit if they get lower rates. So we see that
competition as well from banks that are losing loans.
Mr. King. Mr. Frazee, if I would just ask this, if Farm
Credit is at 46 percent of their real estate loans, as we heard
in the previous panel, would there be a number that--if that
number increased, would there be a number that you would think
of that this Congress should be concerned about?
Mr. Frazee. I believe that the FCA panelist said that we
had 41 percent of the total agricultural debt.
Mr. King. Yes.
Mr. Frazee. That means that 59 percent, or the majority of
it, is somewhere else with other lenders. So the majority of
the agriculture of that is somewhere other than the Farm----
Mr. King. But you would agree that 100 percent is too much?
Mr. Frazee. I would agree with 100 percent is too much.
Mr. King. But we weren't going to agree on whatever that
number might be in between 41 and 100?
Mr. Frazee. I think it ought to be--whatever the number is,
it ought to be what is in the best interest of the farmers and
ranchers of this country.
Mr. King. I gave you the last word. Thank you, Mr. Frazee.
Mr. Frazee. Sure.
Mr. King. I yield back, Mr. Chairman.
The Chairman. The gentleman yields. And with that, we will
dismiss the panel with our thanks from the entire Agriculture
Committee. We appreciate you being here today.
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 questions posed by a Member.
The Subcommittee on Livestock, Rural Development and Credit
hearing is now adjourned.
[Whereupon, at 12:00 p.m., the Subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
Submitted Material by Farm Credit Administration
Insert 1
The Chairman. . . .
You testified that non-performing loans totaled $2.1 billion,
which is a decrease of nearly $600 million. Is the non-
performing loan portfolio--is that a geographic prerogative? Is
it dominated by any certain sector of the ag industry, or is
there a region in the country that may contribute more so than
others?
Dr. Long Thompson. Well, certainly, among those institutions
that we regulate, if they happen to be located in a part of the
country where there has been stress, you might see some
additional--a higher level of non-performing loans. But we
haven't detected a specific pattern geographically. I would,
however, be very happy to provide you--we have very good data.
We do analyses of the overall farm economy, as well as of the
health of the System regularly. And we have some very good data
that I would be happy to share with you and your staff.
Insert 2
Mr. Rogers. Thank you, Mr. Chairman. That is what I was going
to ask about. And I was late. And I am sorry. And I know that
the Chairman visited this topic earlier. But one--the primary
criticisms I get about the Farm Credit System is issuing loans
in non-agriculture. And so do you know what percentage of the
loan portfolio the Farm Credit System is issued to non-farm
entities?
Dr. Long Thompson. I think it probably would be best for me
to get a detailed breakdown for you. But it is primarily
agriculture and ag related. It is agriculture--and let me also
say that, even though the System did not fall for the most part
under the jurisdiction of Dodd-Frank, there are other kinds of
rules that statute requires--for example, the territories, the
districts that are established. So there are a number of
restrictions in the Farm Credit System that simply are not
restrictions in the banking sector. And I also think that there
is a very strong case to be made for a group of farmers going
together and setting up a cooperative model of lending,
particularly when there is not always access in traditional
banking.
Source: FCS Annual Information Statements.
Nonaccruals as a Percentage of Loans Outstanding
The chart shows nonaccruals as a percent of loans outstanding for
the System as a whole and six key stressed sectors for the past 3
years. The nonaccrual rate for the six combined sectors is also shown.
The combined six sectors' nonaccrual rate was 1.8 percent at
December 2013 compared to 0.9 percent for the System as a whole.
Each of the stressed sectors experienced improvement in 2013,
except poultry and eggs.
The stress experienced by these sectors was due to the high corn
and soybean prices of the past few years in the case of cattle, dairy,
poultry/eggs and biofuels; and problems in the housing industry in the
case of forestry and horticulture.
The percentage in parentheses indicates that sector's loan volume
as a percent of total FCS volume.
The six stressed sectors combined accounted for 56 percent of all
FCS nonaccruals at December 2013.
Farm Credit System Institutions Nonaccrual Ratio \1\
(as of 3/31/14)
------------------------------------------------------------------------
------------------------------------------------------------------------
AgFirst District AgriBank District
------------------------------------------------------------------------
AgFirst FCB 0.3% AgriBank FCB 0.1%
Ag Credit ACA 1.2% 1st Farm Credit 0.5%
Services, ACA
AgCarolina ACA 2.0% AgCountry ACA 0.6%
AgChoice ACA 1.7% AgHeritage ACA 0.2%
AgGeorgia ACA 4.6% AgStar ACA 2.0%
AgSouth ACA 1.3% Badgerland Financial 0.3%
ACA
ArborOne, ACA 1.2% Delta ACA 0.9%
Cape Fear ACA 1.6% Farm Credit 0.1%
Illinois, ACA
Carolina ACA 1.8% Farm Credit Mid- 1.2%
America ACA
Central Florida ACA 2.3% FCS Financial, ACA 0.5%
Central Kentucky ACA 1.0% FCS of America ACA 0.4%
Colonial ACA 1.8% GreenStone ACA 1.2%
FC of the Virginias 1.4% Mandan ACA 0.5%
ACA
First South ACA 0.3% Midsouth ACA 0.2%
Florida ACA 6.5% North Dakota ACA 0.4%
MidAtlantic ACA 1.1% Progressive FCS, ACA 0.1%
Northwest Florida 4.1% United ACA 0.4%
ACA
Puerto Rico ACA 7.9% Western Arkansas ACA 1.0%
River Valley 2.1%
AgCredit, ACA
Southwest Georgia 0.0%
ACA
------------------------------------------------------------------------
CoBank District Texas District
------------------------------------------------------------------------
CoBank ACB 0.2% FCB of Texas 0.2%
AgPreference, ACA 0.0% Ag New Mexico, FCS, 2.5%
ACA
American AgCredit, 0.9% AgTexas FCS 0.2%
ACA
Central Oklahoma ACA 0.1% Alabama ACA 0.3%
Chisholm Trail ACA 0.1% Alabama Ag Credit, 1.7%
ACA
Colusa-Glenn ACA 0.5% Capital Farm Credit, 1.2%
ACA
East Central 2.1% Central Texas ACA 0.0%
Oklahoma ACA
Enid ACA 0.7% Great Plains Ag 1.4%
Credit, ACA
Farm Credit East, 1.2% Heritage Land Bank, 1.8%
ACA ACA
Farm Credit West, 1.4% Legacy Ag Credit, 1.7%
ACA ACA
FCS Southwest ACA 1.4% Lone Star, ACA 1.0%
Fresno-Madera ACA 0.0% Louisiana Land Bank, 0.6%
ACA
Frontier ACA 0.2% Mississippi Land 0.4%
Bank, ACA
Golden State ACA 0.0% Panhandle-Plains 0.2%
FLCA
Hawaii ACA 1.8% Southern AgCredit, 1.1%
ACA
High Plains ACA 0.0% Texas FCS 0.3%
Idaho ACA 0.1%
Ness City, FLCA 0.0%
New Mexico ACA 1.9%
Northwest FCS, ACA 0.9%
Premier ACA 0.2%
Southern Colorado 1.2%
ACA
Southwest Kansas ACA 0.0%
Western AgCredit, 0.5%
ACA
Western Kansas ACA 0.0%
Western Oklahoma ACA 0.0%
Yankee ACA 0.7%
Yosemite ACA 0.8%
------------------------------------------------------------------------
\1\ Represents nonaccruals loans as a % of loans outstanding including
accrued interest.
Farm Credit Institution Territories
ACAs & FLCAs by Districts (abbreviated names)
January 1, 2014
Trends in Farm Credit System Outstanding Farm Loans
Farm Credit System Outstanding Loans, December (million $)
Source: FCS Annual Information Statements.
Percent Change from the Prior Year
----------------------------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
----------------------------------------------------------------------------------------------------------------
Real estate mortgage loans 4.8% 8.3% 7.1% 12.3% 13.3% 4.8% 3.5% 3.4% 9.4% 6.7%
Production & intermediate-term 3.4% 9.7% 20.2% 12.3% 16.1% 5.7% 2.5% 1.7% 6.3% 3.5%
loans
-------------------------------------------------------------------------------
Total FCS Farm Loans 4.4% 8.7% 11.2% 12.3% 14.2% 5.1% 3.2% 2.8% 8.4% 5.7%
----------------------------------------------------------------------------------------------------------------
Farm Credit System Loan Portfolio
(as of December 31, 2013)
------------------------------------------------------------------------
(in millions) %
------------------------------------------------------------------------
Agricultural related loans:
Real estate mortgage loans $94,194 46.8%
Production and intermediate-term 45,412 22.6%
loans
Agribusiness loans 27,242 13.5%
Agricultural export finance 4,588 2.3%
Lease receivables 2,706 1.3%
Other 746 0.4%
s/t agricultural related loans 174,888 87.0%
Non-agricultural related loans:
Rural residential real estate 6,557 3.3%
loans
Rural utility \1\ 19,615 9.8%
s/t non-agricultural related 26,172 13.0%
loans
-------------------------------------
Total loans $201,060 100.0%
------------------------------------------------------------------------
\1\ Represents energy loans, water/waste water loans, and communication
loans.
In addition to participating in loans to eligible borrowers, FCS
institutions have the authority to work with non-System lenders that
originate ``similar-entity'' loans. A similar-entity borrower is not
eligible to borrow directly from an FCS institution, but because the
borrower's operation is similar in function to that of an eligible
borrower's operation, the System can participate in the borrower's
loans (the participation interest must be less than 50 percent).
As of December 31, 2013, similar-entity lending accounts for
approximately 5% of total System loans.
Of the 13% in non-agricultural related lending, 2% are similar-
entity loans associated with rural utility lending.
More than 95% of similar-entity lending is associated with title II
and title III lending authorities.
______
Submitted Letter by Kenneth E. Auer, President and Chief Executive
Officer, The Farm Credit Council
July 14, 2014
Hon. Eric A. ``Rick'' Crawford,
Chairman,
Subcommittee on Livestock, Rural Development, and Credit,
House Committee on Agriculture,
Washington, D.C.
Dear Mr. Chairman:
We applaud you and your colleagues on the Subcommittee for holding
the recent hearing on credit availability in rural America. The Farm
Credit System appreciated very much the opportunity to present
testimony and to provide the Subcommittee our insights regarding rural
credit conditions.
Unfortunately others appearing before the Subcommittee,
specifically witnesses for the commercial banks, the American Bankers
Association (ABA) and the Independent Community Bankers of America
(ICBA), chose to provide testimony regarding the Farm Credit System
that was highly inaccurate and deceptive. This letter addresses the
most egregious inaccuracies in their testimony. We ask that it be made
a part of the hearing record to ensure that those inaccuracies are not
left unanswered on the record.
The Farm Credit System's Mission is to Be Agriculture's and Rural
America's Customer-Owned Partner
As you may recall, questions were raised during the hearing
regarding the mission of the Farm Credit System. The mission of the
Farm Credit System was established by the Congress and is found in the
Farm Credit Act of 1971, as amended. Congress stated it clearly in the
opening clause of the Act, ``. . . making credit available to farmers
and ranchers and their cooperatives, for rural residences, and to
associations and other entities upon which farming operations are
dependent, to provide for an adequate and flexible flow of money into
rural areas, and . . . to meet current and future rural needs.''
The System's mission is to serve all types of agricultural
producers who have a basis for credit, as well as others who help
ensure that agriculture and rural America are economically successful.
That includes farm-related businesses, rural homeowners, rural
infrastructure providers including electric, telecommunications, water
and waste as well as other entities. The System was not created to
serve only young, beginning or small producers, as the bankers alleged.
The Farm Credit Act specifically directs the System to serve all types
of agricultural producers. In fact, it was almost 65 years after the
System was established that language was added to the Farm Credit Act
to require System lending associations to report on programs that focus
on young, beginning and small farmers. The ABA and the ICBA continually
and deliberately misstate the mission of Farm Credit System
institutions including suggestions that Farm Credit institutions are
supposed to be the lenders of last resort.
The institutions of the Farm Credit System comprise a borrower-
owned, permanent system of credit for agriculture and rural America,
just as intended by Congress and provided for in the Farm Credit Act.
System institutions are doing what they are supposed to do when they
compete with government-backed commercial banks in the marketplace and
when they participate in loans with those same banks to support the
rural economy.
Congress established the Farm Credit System and over the years
expanded the operating authority of System institutions to compete
effectively because farmers, ranchers and rural communities depend on
timely and reliable access to capital and because it is well understood
that government-backed commercial banks will seek to maximize profits
in the face of limited competition.
Farm Credit Associations Have a Great Record of Serving Young,
Beginning and Small Farmers and Are the Only Lenders Reporting
on Actual Service
The bankers stated in their testimony that the data reported by
Farm Credit institutions show that Farm Credit institutions are not
making loans available to young, beginning and small farmers. This is
inaccurate, and we are happy to correct the record.
The truth of the matter is that 83% of the loans made by Farm
Credit institutions in 2013 were for less than $250,000. Almost 55% of
all loans made were for $50,000 or less. Over 16% of the loans made by
the System in 2013 were made to individuals 35 years old or less. This
represents a great record of service since, according to the 2012
Agricultural Census, only 6% of principle farm operators are 35 years
old or less.
The most relevant data for measuring service to these categories of
borrowers is the number of loans made and the number of loans
outstanding that support young, beginning and small farmers. The number
of loans is the relevant data set instead of the percentage of total
loan volume because the average loan size to young, beginning and small
farms is naturally going to be smaller since in most cases their
farming operations are smaller and can only support smaller amounts of
debt.
Just over 40% of the number of new loans made by Farm Credit
institutions in 2013 were made to borrowers that had less than $250,000
in gross sales from their farming operation. These are actual loans to
small farmers. At the end of 2013, more than 49% of the total number of
loans outstanding were made to individual farmers that had less than
$250,000 in sales.
Even if you look at the volume of loans outstanding, the portfolio
of the System reflects what is happening in agriculture. A study by
USDA's Economic Research Service released in April 2014 \1\ describes
the overall percentage of debt held by various sized farm businesses.
Using this analysis is somewhat complicated because USDA recently
increased the income threshold in its definition for ``small farm'' to
those with less than $350,000 of gross farm income \2\ resulting in a
larger number of farmers being included in the category. Farm Credit
institutions have maintained their definition of small farmer at
$250,000 of sales. According to the USDA study, small farmers using
their broader definition held 27% of total farm debt. As of the end of
2013, 21% percent of the Farm Credit System's total loan volume was to
farmers with $250,000 or less of gross farm sales--and this was in a
year of high commodity prices that drove up the number of farmers with
gross farm sales that exceeded $250,000.
---------------------------------------------------------------------------
\1\ Debt Use by U.S. Farm Businesses, 1992-2011; USDA/ERS Economic
Information Bulletin Number 122; Jennifer Ifft, Amirdara Novini, Kevin
Patrick. April 2014
\2\ http://www.ers.usda.gov/amber-waves/2013-may/the-revised-ers-
farm-typology-classifying-us-farms-to-reflect-
todaysagriculture.aspx#.U7rXz7cU_cs.
---------------------------------------------------------------------------
Farm Credit institutions are the only lenders that collect data on
their lending to young, beginning and small farmers. Farm Credit
institutions know how well they are serving these farmers and ranchers
and are very proud to talk about it. Commercial banks do not collect
similar data on whom they serve in agriculture. The ABA often reports
on ``small farm loans'' made by banks. In fact, what they are reporting
on is the size of loans made not whether the borrower's operation is
small or large. Small loans are often made to large farmers. The
commercial bank data provides very little information regarding their
service to small farmers. Commercial banks do not track whether those
``small farm loans'' actually are made to small farmers, large farmers,
beginning farmers, retired farmers or any other type of farmer since
they are not required to collect the same types of data required of
Farm Credit institutions. Because Farm Credit institutions collect this
data, they know the types of borrowers to whom they are lending. In
fact, and they are required to report on this annually to the Farm
Credit Administration which reports the collective data to the Congress
and posts it on their website.
Do Farm Credit institutions make and participate in large loans? Of
course they do. The reality of modern agricultural production and the
modern rural economy requires that large loans be made to finance
successful projects and businesses that create jobs and provide for the
quality of life in rural America. It takes a lot of capital for rural
infrastructure providers to deliver services in rural communities.
Agricultural cooperatives and other agribusinesses that store or add
value to the agricultural products of farms or that provide necessary
inputs to farmers have substantial capital needs.
Most commercial-sized farming operations, which produce the
majority of our food and fiber, require substantial credit. Even a
modest 15 acre pick-your-own strawberry operation requires credit that
can exceed a million dollars, between land, equipment, plant purchases
and soil requirements. According to the USDA/ERS analysis, large-scale
family farms that produced close to 40% of all agricultural production
in 2011 had average agricultural debt that exceeded $1.1 million per
family farm. Adequate supplies of competitively priced credit are the
lifeblood of the rural economy and Congress charged Farm Credit
institutions with the mission of helping to ensure that supply is
always available irrespective of market conditions.
Every Financial Institution Must Have a Liquidity Line
Liquidity is the lifeline for financial institutions. Every
commercial bank and credit union in the U.S. has access to government-
backed liquidity. This became very evident in 2008 and 2009 when
financial markets were seizing up due to the debacle that was created,
for the most part, by banks in the mortgage markets. In excess of a
trillion dollars of liquidity backed by taxpayers was pumped into the
commercial banking sector. Having a Federal liquidity line backstop is
so important that the American Bankers Association, undeniably no
friend to credit unions, submitted a comment letter to the National
Credit Union Administration in 2012 commenting on the importance of
Federal backstops for liquidity. They stated, ``ABA also believes that
access to Federal liquidity backstops is part of any sound liquidity
risk management program.'' \3\ Their ``belief'' apparently stops before
it applies to the Farm Credit System.
---------------------------------------------------------------------------
\3\ Page 3, ABA letter to Mary Rupp, Secretary of Board, National
Credit Union Administration, August 7, 2012; Maintaining Access to
Emergency Liquidity.
---------------------------------------------------------------------------
Farm Credit System institutions were the only U.S. financial
institutions without a direct Federal backstop ensuring continued
access to funding. In fact, the Farm Credit System is the only
Government Sponsored Enterprise (GSE) that does not have a direct
statutory backup line of credit with the Treasury.
When the world financial markets collapsed in 2008, the Farm Credit
System could only access short-term debt in the financial markets. The
System could not sell longer term paper. The market for that had
disappeared virtually overnight. System institutions had to change the
tenor of loans they could offer farmers and other customers, not
because of anything the Farm Credit System had done--such as being a
greater risk due to credit losses or diminished capital strength--but
because of the fallout from the bad behavior of others.
The leadership of the System realized that such a situation was at
odds with the Congressionally mandated mission to ensure credit
availability for agriculture and rural America. Discussions were held
with the Federal Reserve and the Department of Treasury. The Farm
Credit System Insurance Corporation (FCSIC) initiated an interagency
discussion with Treasury and the Federal Financing Bank (FFB) to
explore whether the FFB could provide liquidity under exigent
circumstances to support FCSIC in fulfilling its responsibility to see
that investors in System debt are repaid in a timely manner. The goal
was to provide liquidity in the event that financial markets completely
stopped working and only after the assets of the Insurance Fund and
other System liquidity had been committed.
It is important to differentiate between a liquidity line and other
types of Federal backstop. The liquidity line provided to FCSIC is
limited to providing access to capital when the funding markets are
somehow compromised. The liquidity line is not accessible for Farm
Credit if the System is experiencing financial stress that makes FCS
bonds unattractive to investors. The FCSIC/FFB agreement makes clear
that any funds provided would be temporary in nature and provided only
to ensure that the System can continue to meet its obligations until
normal financial market conditions return.
Both ABA and ICBA raised misleading questions about this
interagency agreement in their testimony. ABA went so far as to suggest
that the Farm Credit System is ``increasing its dependence upon the
U.S. Treasury'' and that taxpayers ``deserve a better understanding of
what transpired between the Farm Credit System and the U.S. Treasury
last September.'' ICBA stated that, ``the FCA and FCS desired to lower
their borrowing costs even further by acquiring this line of credit.''
Both characterized this as some sort of secret arrangement. None of
these are accurate and appear intended to mislead the Subcommittee.
The agreement between FCSIC and the FFB was the subject of
briefings with key members of the Agriculture Committees. The existence
of the liquidity agreement has been consistently disclosed to the
public by the System \4\ and FCSIC has similarly disclosed it publicly
in its annual report that is available to the public as well.\5\ Both
the ABA and ICBA are attempting to make an issue out of an action taken
by a Federal agency to address something administratively that needed
no Congressional action to resolve and something that every commercial
bank already has in place to a greater extent than the Farm Credit
System. This was not an attempt to lower the cost of funds or to become
dependent on the Treasury. This was a very responsible risk-mitigation
arrangement undertaken by two Federal agencies. ABA and ICBA have
sought to paint it as some sort of sinister plot, while failing to
inform the Subcommittee regarding the extensive Federal liquidity
backstop commercial banks have.
---------------------------------------------------------------------------
\4\ See Federal Farm Credit Banks Funding Corporation (FFCBFC)
Third Quarter 2013 Information Statement page XXX and the 2013 FFCBFC
Annual Information Statement, Page 71; both accessible through
www.farmcreditfunding.com.
\5\ See FCSIC Annual Report for 2013, page 9, available at
www.fcsic.gov.
---------------------------------------------------------------------------
Commercial Banks Are Subsidized and Backed by Taxpayers--Farm Credit
Brings the Benefit of Its GSE Status to Agriculture and Rural
America, While Not Operating at Taxpayer Expense
Both ABA and ICBA frequently make the assertions that the
institutions of the Farm Credit System operate at ``taxpayer expense''
and that because the System has access to government sponsored
enterprise (GSE) funding, that System institutions harm community banks
by providing competitive rates for agriculture. The Farm Credit System
does not operate at taxpayer expense. System institutions are privately
owned by the farmers, ranchers, agricultural cooperatives and others in
rural America that borrow from them. The Farm Credit System even pays
for the cost of the independent Federal regulatory agency that examines
System institutions and writes the regulations that govern the
operations of Farm Credit System institutions. In addition, System
institutions support their own insurance fund that protects investors
that buy System consolidated notes and debentures used to fund credit
operations. Unlike commercial banks, System institutions do not borrow
from the Federal Reserve. As a GSE System institutions obtain their
loanable funds by issuing paper to the private financial markets. This
access to dependable funding is essential to the ability of the System
to fulfill its mission, and no taxpayer dollars are directly involved.
GSE funding is by no means exclusive to the Farm Credit System.
Commercial banks have direct access to GSE funding as well. Commercial
banks obtain GSE funds through Fannie Mae and Freddie Mac. They have
direct access to GSE funds through Farmer Mac for agricultural lending
activities. Commercial banks even own their own GSE, the Federal Home
Loan Bank System, which provides commercial banks advances of GSE funds
for housing, small business and agricultural lending as well as pays
them the extra bonus of patronage based on their use of Home Loan Bank
advances. The Federal Home Loan Banks that are owned by the banks are
fully tax-exempt. Banks also have direct taxpayer backing on the major
source of their loanable funds through the Federal Deposit Insurance
Corporation (FDIC). Thomas Hoenig, the vice-chairman of the FDIC,
recently noted his view that, ``the government safety net of deposit
insurance, central bank loans, and ultimately taxpayer support provides
a multibillion dollar subsidy to commercial banks . . .'' \6\
---------------------------------------------------------------------------
\6\ http://www.fdic.gov/about/learn/board/hoenig/govsubsidy.pdf.
---------------------------------------------------------------------------
The size of the Federal safety net for commercial banks is
substantial. In 2010, the Federal Reserve Bank of Richmond published a
paper that focused on identifying the extent of taxpayer backing for
financial institutions. The paper notes a distinction between certain
liabilities of commercial banks that are ``explicitly guaranteed'' by
taxpayers and those of GSEs that are ``implicitly guaranteed.'' \7\ The
estimates of the level of direct taxpayer explicit guarantee for
commercial banks and savings firms was updated in a follow up study
published in 2013 using data available through the end of 2011. They
found that the explicit Federal guarantee for commercial banks and
savings firms had grown to a staggering $7.156 trillion at that
time.\8\ It is unfortunate that the facts get in the way of the picture
that the ABA and ICBA want to paint, but the facts are clear that
commercial banks have far more taxpayer backing than does Farm Credit.
---------------------------------------------------------------------------
\7\ How Large Has the Federal Financial Safety Net Become? Nadezhda
Malysheva and John R. Walter, Federal Reserve Bank of Richmond,
Economic Quarterly--Volume 96, Third Quarter 2010, pages 273-290.
\8\ https://www.richmondfed.org/publications/research/
special_reports/safety_net/pdf/safety_net_methodology_sources.pdf.
---------------------------------------------------------------------------
Farm Credit institutions do have the benefit of specific tax
treatment that helps them provide long-term mortgage credit to farmers
and ranchers across the U.S., but Farm Credit institutions are not tax-
exempt entities. Corporate taxes are paid by Farm Credit institutions
on income derived from short and intermediate term loans, and loans
made under title III of the Farm Credit Act to cooperatives, rural
utilities, etc. As cooperatives, System institutions also distribute
patronage to the farmers and cooperatives that own those institutions.
Those owners pay ordinary income tax on that patronage. Subchapter S
commercial banks, which make up the majority of agricultural banks, pay
little to no Federal tax at the institution level for income derived
from all of their business. Like cooperatives, taxes are paid by the
owners on the bank profits that are directly passed through to those
owners, but since these taxes are paid by the owners, and not by the
bank itself, Federal tax obligations do not impact on the ability of
these institutions to price products competitively. The reality is
commercial banks have considerable direct backing by taxpayers.
Farm Credit System Lending Improves Credit Availability in Rural
America
The existence of the Farm Credit System in the agricultural credit
markets does not harm commercial banks as they suggested in their
testimony. ICBA relies on surveys of their own members--commercial
banks--to conclude that the System is adversely affecting bankers.
Anecdotal stories from bankers hardly qualify as evidence of harm.
Surveys of Farm Credit institutions would conclude the same thing--that
System institutions lose credits to bankers all the time as well. What
is playing out is competition. The beneficiaries of this competition
are farmers and ranchers across the U.S. It results in agriculture
having access to competitive rates and terms for an input critically
important for the success of today's farming operations.
Ask farmers or rural business owners if they are better off having
one, two or more lenders competing for their business. We all know that
asking bankers this question will result in a different answer. There
is limited credibility, if any, in the ICBA survey of bankers other
than to provide a picture painted by bankers eager to minimize their
competition and maximize their profits.
An interesting study conducted by two Iowa State economists in 2005
noted that commercial banks in rural communities in the Midwest may be
focusing too much on agricultural credit to the detriment of Main
Street. They noted that, ``banks that specialize in farm lending are
more profitable,'' but that ``agricultural credit demands may crowd out
nonfarm demands for bank loans in farming-dependent rural areas.'' They
also noted that, ``Price discrimination and barriers to entry may
result in less credit being extended in rural areas than is optimal.''
\9\ The point of this is the exact opposite that the ICBA bankers would
have you believe--competition in credit markets is a good thing. Both
banking organizations failed to mention that the real challenge for
smaller banks is not the Farm Credit System but broader competition
from larger banks.\10\
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\9\ Are Rural Credit Markets Competitive? Is There Room for
Competition in Rural Credit Markets? Maureen Kilkenny and Robert W.
Jolly; Choices Magazine; 1st Quarter 2005, pages 25-29.
\10\ Agricultural Lending Shifts to Large Banks, Nathan Kaufman and
Maria Akers, Agricultural Finance Databook, Federal Reserve Bank of
Kansas City, July 2013.
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``Similar-Entity'' Lending Helps Farm Credit Partner with Commercial
Banks and is Consistent with the Intent of Congress
Both the ABA and the ICBA have pointed to several recent lending
transactions that Farm Credit System institutions have participated in
and suggested that those are ``illegal'' and inconsistent with what the
Farm Credit Act allows. These transactions are not illegal and are
specifically provided for in the Farm Credit Act. Further, they are
exactly what the Congress contemplated when the authority to engage in
these types of transactions was provided to the System in 1992 as a
part of the Farm Credit Banks and Associations Safety and Soundness Act
of 1992, P.L. 102-552 and then expanded in 1994 in the Farm Credit
System Agricultural Export and Risk Management Act of 1994, P.L. 103-
376.
In providing this authority to the System, the Congress recognized
the growing capital needs of agriculture. The Congress noted at that
time that in order for those needs to be met, Farm Credit System
institutions and commercial banks would need to work together by
sharing participations in loans back and forth to spread risk and
continue to make the capital available to agriculture and rural America
that is vital to its continued economic growth. The ABA and ICBA may
want to rewrite history to fit their own goals, but the words spoken by
the leaders in the Senate upon final passage of the 1994 legislation
that expanded the similar-entity lending authority within the Farm
Credit System are the ones that matter in explaining this authority.
Senator Patrick Leahy described these provisions as follows, ``The
Act will accomplish something additional that I believe both the Farm
Credit System and private banks have been seeking for some time and
will find mutually beneficial. It creates the opportunity for farm
credit institutions and private banks to manage and reduce their
concentration of loan loss risk in terms of geography, industry, and
account exposure by expanding the System's ability to purchase and sell
loan participations from commercial banks and other non-System
lenders.'' \11\
---------------------------------------------------------------------------
\11\ Senator Leahy, Page S14235, Congressional Record, October 5,
1994.
---------------------------------------------------------------------------
Senator Lugar added to Senator Leahy's explanation providing
additional detail regarding how this authority would help the Farm
Credit System manage the risk associated with the large loans it was
involved with to support agriculture and rural America. Senator Lugar
said, ``. . . these changes will enhance the System's ability to reduce
its concentration of risk in terms of geography, industry, and account
exposure. System institutions both purchase and sell participations
from and to other lenders, a practice that is important particularly in
the case of larger loans. For example, CoBank recently administered a
$650 million syndication for Farmland Industries, Inc., a major farmer-
owned marketing and supply cooperative. Seven commercial banks joined
CoBank to provide funding for the syndication, illustrating the growing
number of cases where banks and System institutions are working
together harmoniously to meet the credit needs of rural America.''
Lugar went on to say, ``It is important to note that the
legislation will not give System institutions an unfair advantage over
the commercial banking industry. For example, in the case of loans to
agricultural entities that are similar to System borrowers, the System
would be prohibited from providing 50 percent or more of the funds for
such loans, ensuring that the System's use of loan participations will
be limited to those cases where commercial lenders desire to involve
the System, and that the System still will not be able to originate
loans of this type.'' \12\
---------------------------------------------------------------------------
\12\ Senator Lugar, Page S14235, Congressional Record, October 5,
1994.
---------------------------------------------------------------------------
As noted by Senator Lugar, the similar-entity lending authority
contains very specific limitations regarding the ability of the System
to hold a majority of one of these loans and the ability of the System
to have these types of transactions to be a major portion of its total
assets. The law limits these to no more than 15% of total assets of the
participating System institution. The ABA and ICBA should stop their
disinformation efforts regarding these transactions and instead
embrace, as their own members have done, the opportunity to work with
Farm Credit institutions to enhance the agricultural and rural economy.
Focus of Financial Institutions Should be on Improving Rural Economy
The Farm Credit System on a daily basis works with commercial banks
across America. In addition, when Farm Credit provides financing for a
rural electric cooperative, a rural water system, a rural telephone
company, an agricultural cooperative, and to individual farmers and
ranchers, all of this activity is enhancing the rural economy. The Farm
Credit System allows rural areas to benefit from both national and
international capital markets by moving this capital efficiently from
those national markets into rural communities.
The credit needs in rural America are greater than either the
commercial banks or the Farm Credit System can alone finance. We would
welcome a discussion on how Farm Credit and commercial bankers can work
together even more to improve the rural economy.
Thank you and the Subcommittee for your efforts on behalf of
agriculture and rural America.
Sincerely yours,
Kenneth E. Auer,
President and CEO.
______
Submitted Letter by Jo Ann Emerson, Chief Executive Officer, National
Rural Electric Cooperative Association
July 3, 2014
Hon. Eric A. ``Rick'' Crawford, Hon. Jim Costa,
Chairman, Ranking Minority Member,
Subcommitte on Livestock, Rural Subcommittee on Livestock, Rural
Development, and Credit, Development, and Credit,
House Committee on Agriculture, House Committee on Agriculture,
Washington D.C.; Washington D.C.
Dear Chairman Crawford and Ranking Member Costa:
On behalf of the National Rural Electric Cooperative Association
(NRECA), thank you for the opportunity to submit a letter as part of
the record for your Subcommittee's June 25, 2014 hearing about credit
availability in rural America. As the trade association representing
the nation's more than 900 rural electric cooperatives which serve over
42 million Americans in 47 states, NRECA understands that the
availability of credit in rural America is absolutely critical to our
rural electric consumer owners and their communities. NRECA appreciates
the Subcommittee's consideration of our perspective.
Rural electric cooperatives often serve as the hub for economic
development in their community. Working with other businesses, local
government officials, and community leaders, our members seek to
constantly improve the quality of lives of their members. One way they
do this is to invest in upgrading their electric infrastructure to
create jobs and improve the delivery of affordable, reliable
electricity. Key to this investment is the availability of capital for
the cooperatives.
Electric cooperatives' unique business model as not-for-profit,
member-owned electric utilities have driven their emergence as leaders
in developing innovative financial solutions for rural America. In 2007
we approached the Congress with a unique concept that would allow rural
electric cooperative borrowers to benefit from the secondary market
activities of the Federal Agricultural Mortgage Corporation, also known
as Farmer Mac. The idea was to allow Farmer Mac to use its established
access to the capital markets to lower interest costs on rural electric
cooperative loans similar to the way it already did for agricultural
real estate loans. By lowering interest costs on rural electric loans,
the rural electric cooperatives were able to pass those savings on to
your constituents and thereby make available more dollars in the local
economies. Congress acted on our request in the 2008 Farm Bill and
expanded Farmer Mac's charter to allow authorized secondary market
activities for electric cooperative loans made by lenders organized as
cooperatives such as our sister cooperative, the National Rural
Utilities Cooperative Finance Corporation (CFC).
We are pleased to report that this action by Congress had a
profound effect. Since Farmer Mac first began participating in the
rural electric lending sector, Farmer Mac has worked to provide more
than $5 billion of capital to rural America through secondary market
purchases of electric co-op loans and securities. Through our
relationship with Farmer Mac, NRECA member cooperatives have been able
to diversify their funding sources and add an important liquidity
management tool, as Farmer Mac provides CFC with access to external
financing beyond CFC's own offerings of securities in the capital
markets. As not-for-profit cooperatives, the rural electric
cooperatives pass these savings on directly to their consumer owners,
allowing your constituents to continue to receive affordable and
reliable electric power along with upgraded facilities.
Rural electric systems currently serve approximately 42 million
Americans or 12 percent of all consumers of electricity in the United
States and its territories. The provision in the 2008 Farm Bill that
expanded Farmer Mac's authorities has directly benefitted these rural
communities that you and we serve. The resulting innovative partnership
between Farmer Mac and the rural electric cooperatives allows NRECA to
better meet the financial needs of its members and allows Farmer Mac to
further support rural communities in fulfillment of its mission. Farmer
Mac's ability to provide electric cooperatives with a stable and
reliable source of credit, as well as liquidity and lending capacity
that will help stimulate economic growth and job creation in the rural
communities is extremely helpful and appreciated.
Sincerely,
Jo Ann Emerson, CEO, NRECA.
______
Submitted Letter by Sheldon C. Petersen, Chief Executive Officer,
National Rural Utilities Cooperative Finance Corporation (CFC)
July 8, 2014
Hon. Eric A. ``Rick'' Crawford,
Chairman,
Subcommittee on Livestock, Rural Development, and Credit,
House Committee on Agriculture,
Washington, D.C.
Chairman Crawford, Ranking Member Costa, and Members of the
Subcommittee:
On behalf of the National Rural Utilities Cooperative Finance
Corporation (CFC), thank you for the opportunity to comment following
your Subcommittee's June 25, 2014, hearing on credit availability in
rural America. As the only lender created and owned by America's
electric cooperative network, CFC plays an important role in providing
credit to rural America, and we appreciate the Subcommittee's
consideration of our perspective.
CFC, a nonprofit finance cooperative, was organized by local,
consumer-owned and controlled electric cooperatives in 1969 in response
to their growing need for capital. Initially, rural electric
cooperatives formed CFC as a source of available financing to
supplement loan programs administered by the Rural Utilities Service of
the United States Department of Agriculture. Today, CFC is owned by
more than 1,000 electric cooperative organizations in 48 states and
continues providing members with flexible financial products and
services.
Since its creation 45 years ago, CFC has provided billions in
direct funding to the nation's rural electric cooperatives, and we
continue to work to bring them low-cost private capital so they can
acquire, construct, and operate electric distribution, generation,
transmission and related facilities. The ultimate beneficiaries of
CFC's lending activities are rural electric consumers, the communities
served by rural electric cooperatives, and the nation as a whole.
In CFC's role as a lender to rural electric cooperatives, we are
continually looking for new opportunities to serve our member-owners'
evolving needs. By providing a secondary market for loans to rural
electric cooperatives, the Federal Agricultural Mortgage Corporation
(Farmer Mac) is helping us fulfill this mission.
In the 2008 Farm Bill, Congress acted on the request of our
national trade association, the National Rural Electric Cooperative
Association (NRECA), to provide clear authority for Farmer Mac to
invest in rural utility loans in much the same manner as they already
did for agricultural real estate loans. Specifically, Congress revised
Farmer Mac's charter to authorize secondary market activities loans to
electric cooperatives made by lenders organized as cooperatives, such
as CFC. The rationale for this proposal was that Farmer Mac could use
its established access to the capital markets to provide additional
liquidity to rural utility lenders and also potentially lower interest
costs on rural electric cooperative loans with the resulting savings
ultimately passed through to rural electric consumers.
We are pleased to report that this action by Congress and the
relationship with Farmer Mac has produced an important liquidity
management tool and has helped CFC diversify its funding sources. This
allows CFC to offer additional capital for lower-cost financing in many
cases, directly benefiting the nation's electric cooperatives by
ensuring they can deliver safe, reliable and affordable electric power
to folks no matter where they may live.
Today, electric cooperatives currently serve approximately 42
million Americans, or 12 percent of all consumers in the United States
and its territories. The changes Congress enacted in the 2008 Farm Bill
that expanded Farmer Mac's authority directly benefit rural communities
that you represent. The resulting innovative partnership with Farmer
Mac enables CFC to better meet the financial needs of its members and
allows Farmer Mac to further support rural communities.
Together, Farmer Mac and CFC provide electric cooperatives with a
stable and reliable source of credit, as well as liquidity and lending
capacity that stimulates economic growth and job creation across rural
America.
Sincerely,
Sheldon C. Petersen,
CEO.
______
Submitted Letter by Brad Thaler, Vice President of Legislative Affairs,
National Association of Federal Credit Unions
June 24, 2014
Hon. Eric A. ``Rick'' Crawford, Hon. Jim Costa,
Chairman, Ranking Minority Member,
Subcommitte on Livestock, Rural Subcommittee on Livestock, Rural
Development, and Credit, Development, and Credit,
House Committee on Agriculture, House Committee on Agriculture,
Washington D.C.; Washington D.C.
Re: Credit Availability in Rural America
Dear Chairman Crawford and Ranking Member Costa:
On behalf of the National Association of Federal Credit Unions
(NAFCU), the only trade association that exclusively represents the
interests of our nation's Federal credit unions, I write today in
conjunction with tomorrow's hearing entitled ``A review of credit
availability in rural America.'' As you are aware, in many rural areas
of the country, there are a limited number of financial institutions
providing agricultural lending. Credit unions are proud that they have
been making safe and affordable agricultural loans for a number of
years, including through the economic crisis.
As the Subcommittee considers the issue of credit availability in
rural America, we urge you not to overlook the potential that currently
exists to do more with our nation's credit unions. Our nation's credit
unions have money to loan to small businesses; however, an outdated and
arbitrary business lending cap stands in their way. Representatives Ed
Royce and Carolyn McCarthy have introduced the Small Business Lending
Enhancement Act (H.R. 688), a bill that would raise the member business
lending cap in a sound way for eligible credit unions and help extend
credit to the small businesses that drive our economy without spending
a dime of taxpayer funds. We urge you to support this effort.
Additionally, while the National Credit Union Administration (NCUA)
took action in 2012 to help credit unions do more to serve low-income
and rural areas, recent actions by the agency could hamper that
availability of credit. In January of this year, the NCUA issued a
proposed risk-based capital rule for credit unions. If implemented as
proposed, the new rule could have a chilling effect of reducing lending
in rural areas as the agency's proposed ``risk-weights'' for member
business loans may negatively impact the ability of credit unions to
provide agricultural loans to their members. Several Members of
Congress have already weighed in with their concerns about the
proposal's potential negative impact on agricultural and rural lending.
We would urge the Subcommittee to follow developments on this issue as
well.
We would welcome the opportunity to discuss these issues further.
If my colleagues and I can be of assistance to you, or if you have any
questions regarding this issue, please feel free to contact myself or
NAFCU's Director of Legislative Affairs, Jillian Pevo, at [Redacted].
Sincereley,
Brad Thaler,
Vice President of Legislative Affairs.
CC: Members of the Subcommittee on Livestock, Rural Development, and
Credit.
______
Submitted Statement by National Association of REALTORS'
Introduction
The National Association of REALTORS' (NAR) offers this
statement on the importance of access to credit in rural areas. NAR
represents a wide variety of housing industry professionals committed
to the development and preservation of the nation's housing stock and
making it available to the widest range of potential American
households. The Association has a long tradition of support for
innovative and effective Federal housing programs and has worked
diligently with the Congress to fashion housing policies that ensure
Federal housing programs meet their missions responsibly and
efficiently.
Prospective homebuyers nationwide have found significant barriers
to obtaining mortgage financing. Credit standards remain very tight,
and those wishing to purchase a home--especially first-time buyers--are
facing many obstacles to finding a safe, affordable home loan. The
situation is especially difficult in rural areas, where rental housing
is often lacking and access to mortgage finance is challenging. Nearly
all of the counties with the highest poverty rates in America are
rural. The lack of multi-family and other rental units in rural
communities means families have few options other than to purchase a
home. As a result, access to safe, affordable mortgage financing is
important in these areas. NAR thanks you for holding this hearing to
discuss these issues.
Housing in Rural Communities
Nearly 20 percent of the U.S. population lives in rural areas or
small towns. Many jobs in these communities are low-wage, and incomes
in rural areas are often lower than national averages. According to the
U.S. Census, the number of rural citizens living in poverty increased
to 8.5 million in 2012, from 8.0 million in 2011. Overall, in 2012,
rural median household incomes ($41,198) were about 20 percent lower
than national median household incomes ($51,017) and 22 percent less
than median urban household incomes ($52,988).\1\
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\1\ Income, Poverty, and Health Insurance Coverage in the United
States: 2012, Issued September 2013, By Carmen DeNavas-Walt, Bernadette
D. Proctor, Jessica C. Smith, p. 60-245.
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Housing conditions in rural areas can be inferior to homes in urban
or suburban neighborhoods. Housing choices can be limited due to
differences in infrastructure requirements, lack of public transit, and
access to other amenities. The availability of rental housing is often
scarce. The approximately 7.1 million renter-occupied units in rural
communities comprise only 28.4 percent of the rural and small town
housing stock.\2\
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\2\ Housing Assistance Council, Taking Stock: Rural People, Poverty
And Housing In The 21st Century, December 2012.
---------------------------------------------------------------------------
The lack of rental housing means homeownership is frequently the
only option for rural families. Although homeownership rates are higher
in rural areas than the national average, many rural families face
significant obstacles in finding safe, affordable, decent housing.
According to a report by NeighborWorks, in rural areas, ``the housing
stock itself varies as greatly as the character of rural areas, but two
common trends are that (1) it is overwhelmingly comprised of single-
family homes; and (2) a higher percentage of the stock is in
substandard condition compared to metropolitan areas.'' \3\
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\3\ Landscapes of Foreclosure: The Foreclosure Crisis in Rural
America, Adam Wodka, The Edward M. Gramlich Fellowship in Community
Development, November 2009.
---------------------------------------------------------------------------
These findings make it even more important to help rural families
find quality housing.
Federal Housing Programs
Federal housing programs are instrumental in providing affordable
housing opportunities to low- and moderate-income rural homebuyers. The
National Association of REALTORS' strongly supports Federal
housing programs that target rural communities and provide sufficient
Federal assistance needed to meet the housing needs of rural
communities.
The Rural Housing Service (RHS) 502 loan program provides
opportunities for homeownership for these families. In FY 2013, the RHS
helped nearly 170,000 rural American families become homeowners, nearly
80 percent of whom were first-time homebuyers. The program includes
guaranteed and direct loans. Section 502 loans can be used to build,
repair, renovate or relocate a home, or to purchase and prepare sites,
including providing water and sewage facilities. The guaranteed loans
are funded by private lenders and insured by the RHS.
In many rural communities, the Section 502 direct loan program is
the only housing assistance available. Section 502 homeownership direct
loan program loans are used primarily to help low-income households
purchase homes. These loans may also be used to refinance debts when
necessary to avoid foreclosure, or when required to make necessary
house repairs affordable. NAR strongly supports the availability of
sufficient Federal resources to ensure the Section 502 direct loan
program responsibly addresses the housing needs of low- and moderate-
income \4\ rural families.
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\4\ At least 40 percent of appropriated Section 502 direct loan
funds must be used to assist families with incomes less than 50 percent
of area median income (AMI).
---------------------------------------------------------------------------
In recent years, the Section 502 program has been in jeopardy of
depleted funding or commitment authority before the end of the fiscal
year. NAR would encourage Congress to provide adequate funding and
commitment authority to meet the needs of rural communities.
It also should be noted that FHA is also a very valuable program
for families living in rural areas. Some homes, due to their rural
nature, do not meet FHA standards and are more appropriately suited to
the programs of the RHS. But for others, FHA has been a very important
option for home buying families. FHA provided the majority of mortgage
financing options during the housing crisis, and continues to be a
critical tool for affordable, safe housing. FHA's countercyclical role
allowed more than four million families to purchase a home during the
height of the economic crisis.
Suggestions To Expand Access
Update Definition
NAR was pleased that Congress approved language as part of the farm
bill to grandfather existing communities currently participating in the
RHS programs as eligible for continued participation. Without that
language, more than 900 communities would have lost access to these
valuable housing programs. The definition of ``rural'' used by RHS has
not been changed since 1974, despite the rapidly changing demographics
of our country. The existing definition requires communities to: (1) be
outside of a metropolitan statistical area (MSA), (2) be ``rural in
character'', (3) have a serious lack of mortgage credit, and (4) have a
population under 20,000. Communities and populations have changed
dramatically in the last 80 years. Relying on a decades old definition
is unrealistic and won't meet the needs of rural communities. NAR urges
Congress to look at ways to update this definition, and ensure that our
rural communities have access to the programs they need.
Direct Endorsement for 502 Guaranteed Loans
RHS has proposed language to make the Section 502 Guaranteed loan
program a direct endorsement program. Today, every loan must be
approved by staff of the Rural Housing Service. In recent years,
staffing has been dramatically reduced, and borrowers are now
experiencing significant delays in loan approval. Both the Veterans
Affairs loan guaranty and the FHA mortgage insurance program utilize
private landers for direct endorsement. Adding RHS to this list would
create great efficiencies for the Service and for homebuyers. RHS, in
turn, would have additional staff time to focus on a strengthened
lender monitoring process and risk management. We strongly urge
Congress to provide RHS with direct endorsement authority to ease
burdens on the agency and accelerate processing for borrowers.
Resist Calls To Limit Access
Since the beginning of the economic recovery, there have been calls
to restrict the role of the Federal Government in housing programs.
Both RHS and FHA have been shown to provide great benefits to American
families, and our economy as a whole. Since its inception in 1949, RHS
has provided more than 3.69 million families with the ability to obtain
the dream of homeownership. FHA was a driving force pulling our nation
out of the economic recession. Moody's has estimated that without FHA's
role during the housing crisis, housing prices would have dropped an
additional 25 percent, and American families would have lost more than
$3 trillion of home wealth.
These programs offer significant benefits to American families,
with little cost to the taxpayer. Changes to these programs should only
be made to enhance access for more qualified buyers. NAR strongly
opposes any changes that further constrain mortgage financing.
Conclusion
Rural families face unique challenges in accessing mortgage credit.
NAR encourages you to consider changes to programs that will make it
easier for these families to obtain safe, affordable, decent homes in
the communities in which they chose to live, and looks forward to
working with you to achieve that goal.
______
Submitted Questions
Response from Hon. Jill Long Thompson, Ph.D., Board Chair and Chief
Executive Officer, Farm Credit Administration
Questions Submitted by Hon. Collin C. Peterson, a Representative in
Congress from Minnesota
Question 1. You mentioned the Farm Credit System Insurance Fund
currently holds more than $3.6 billion. Can you walk me through the
structure of the Insurance Fund and provide more detail on its creation
during the credit crisis of the late 1980s? Is it part of the Farm
Credit Administration or a separate entity?
Answer. In the Agricultural Credit Act of 1987, Congress
established the Farm Credit Insurance Fund to provide insurance for the
timely payment of principal and interest on obligations issued on
behalf of Farm Credit System (System) banks.
In the 1987 Act, Congress also established the Farm Credit System
Insurance Corporation (FCSIC), which administers the Fund. FCSIC sets
and assesses the premiums that System banks must pay into the Fund.
Money in the Fund that is not being used must be invested in
obligations of the United States or in obligations guaranteed as to
principal and interest by the United States.
In addition to using the Fund to insure timely payment of principal
and interest on System-wide and consolidated debt, FCSIC must use the
Fund to ensure the retirement of protected borrower stock at par value.
FCSIC may also use the Fund to cover its operating costs and
provide assistance to troubled System banks and associations. In
addition, if the Farm Credit Administration (FCA) places a System bank
or association in conservatorship or receivership, FCSIC must act as
the conservator or receiver.
As a former Member of the U.S. House of Representatives, having
served on the Agriculture Subcommittee with jurisdiction over credit
from 1989 to 1995, I believe the statute implies the Farm Credit System
Insurance Corporation is part of the Farm Credit Administration. More
significantly, the language of the statute makes it clear that FCSIC as
an entity was not intended to be an additional cost for the Farm Credit
System and the farmers and ranchers it serves. The Farm Credit Act
directs FCSIC to carry out its role using the staff, examination
information, and other resources of FCA whenever possible.
By statute, FCSIC is a U.S. Government-controlled corporation
``managed by a Board of Directors that shall consist of the members of
the Farm Credit Administration Board . . . chaired by any Board member
other than the Chairman of the Farm Credit Administration Board.'' In
addition, ``to the extent practicable, the Corporation shall use the
personnel and resources of the Farm Credit Administration to minimize
duplication of effort and to reduce costs.''
Question 2. Testimony from the second panel mentions a $10 billion
line of credit that was requested through the Treasury Department's
Federal Financing Bank for the Farm Credit System Insurance Fund
(FCSIC). Can you tell us more about the situation with the Insurance
Fund and the letter of credit?
Answer. It is FCA's understanding that FCSIC entered into the
agreement with the Federal Financing Bank to ensure ``back-up''
liquidity, up to $10 billion, for System banks in the event of a
general market disruption. An advance from the Federal Financing Bank
would not be available for deteriorating credit conditions in the Farm
Credit System. Any advance from the Federal Financing Bank would be
fully collateralized by the System. The agreement must be renewed
annually.
Question 3. Were you aware of the Brookings Institution report
commissioned by the Insurance Fund? This report goes into detail
regarding the FCSIC discussions with the Federal Financing Bank. Were
you aware whether this report was officially shared with the Committees
of jurisdiction? Has the FCA taken a position on whether to ask
Congress to reconsider if the structure set up in 1987 is adequate to
handle extraordinary circumstances?
Answer. Yes, FCA was aware that FCSIC contracted with the Brookings
Institution for the report, and we informed staff of the House
Committee on Agriculture and the Senate Committee on Agriculture,
Nutrition, and Forestry about the report, which was published on the
Brookings website.
FCA has not taken a position on whether to ask Congress to
reconsider the FCA/FCSIC structure as provided by Congress. The
structure allowed for the agreement with the Federal Financing Bank,
and this agreement should be adequate to handle the extraordinary
circumstances of a liquidity crisis. Nevertheless, projecting the
effects of the next crisis is very difficult.
In the wake of the volatile market conditions that began in 2008,
FCA took a close look at whether the System could continue to fund
borrowers under adverse market conditions unrelated to the agriculture
economy. The System is the only federally chartered set of financial
institutions that did not have a designated source of emergency funding
in the event of a market shutdown.
Question 4. The issue of ``cherry-picking'' customers is raised in
testimony from the second panel. Is there anything that a commercial
bank can do if they feel that one of their customers has been enticed
away by a lower interest rate? Is there anything in the Farm Credit Act
or your regulations that prohibits this?
Answer. FCA is charged with ensuring the safety and soundness of
the System. Part of this responsibility is to examine whether the
System is appropriately pricing its loans. Our examiners regularly
review loan pricing practices during examinations. We also review
inquiries received from the public, including commercial banks.
Congress established the System for serving agriculture and rural
America. Providing a stable and reliable funding source for that
industry, in a safe and sound manner, and at competitive rates, helps
ensure that the System fulfills that mission.
Three sections of the Farm Credit Act address loan pricing by the
System under typical market conditions. Those sections are 1.8(b),
2.4(c)(2), and 3.10(a). Section 1.8(b) states, ``. . . it shall be the
objective to provide . . . credit . . . at the lowest reasonable costs
on a sound business basis taking into consideration the cost of money
to the bank, necessary reserve and expenses of the bank and
associations, and providing services to members.'' Sections 2.4(c)(2)
and 3.10(a) are consistent with section 1.8(b). Therefore, just as a
money center bank or a medium-sized or community bank considers these
factors in determining its rates, so must a System institution.
Contrary to some misunderstanding, section 1.1(c) of the Farm
Credit Act does not prohibit System lenders from charging interest
rates below other lenders. That provision was added to the Farm Credit
Act in 1986 to prohibit System institutions from using special
regulatory accounting practices to charge rates below the competitive
market. The legislative history of the provision indicates that
Congress did not intend the language in section 1.1(c) to be a
provision of positive law or to constitute a formula for determining
interest rates. (See the 1994 General Accounting Office report, ``Farm
Credit System Repayment of Federal Assistance and Competitive
Position.'') When this provision was added to the Farm Credit Act, it
applied to those System institutions that were temporarily using
regulatory accounting practices. Therefore, section 1.1(c) did not
override sections 1.8(b), 2.4(c)(2), and 3.10(a) of the Farm Credit
Act.
Question 5. There is a question of whether CoBank's loan to Verizon
to buy-out Vodaphone's interest in Verizon Wireless was an eligible
loan under the Farm Credit Act. Can you share with us the FCA's
position on this?
Answer. CoBank, ACB, has authority to lend to entities providing
telephone services in rural areas. Section 3.8 of the Farm Credit Act
specifically provides CoBank with this authority, which includes rural
wireless carriers. Over the past 25 years, CoBank was an early and
active lender for many of the communications companies providing
wireless telephone services in rural areas. With the evolution of the
wireless industry, there has been continued consolidation, with smaller
ventures, many financed by CoBank, being acquired by Verizon or other
communications companies.
Further, under section 3.1 of the Farm Credit Act, Congress granted
banks for cooperatives authority to participate in loans to ``similar
entities'' for risk management purposes. A similar-entity is a party
that is ineligible for a loan from the System but has operations that
are functionally similar to the activities of eligible borrowers. To be
considered a similar-entity, a party must derive a majority of its
income from, or invest a majority of its assets in, the conduct of
activities that are performed by eligible borrowers. Verizon Wireless
has operations functionally similar to those of directly eligible rural
wireless carriers.
The statute limits the System's similar-entity lending in a couple
of ways. The Farm Credit Act requires non-System lenders to hold 50
percent or more of the principal amount of all similar-entity loans and
restricts the cumulative amount of any System institution's similar-
entity participations to 15 percent of its total assets. In addition,
participations to a single credit risk cannot exceed ten percent of the
institution's total capital. The System's involvement in the syndicated
credit was well below the statutory limitations.
Loans to similar entities are multi-lender transactions often
involving large companies. Before purchasing a similar-entity credit,
the System institution must determine that the credit is within its
similar-entity authorities and satisfies its credit underwriting
standards. We review the System's participation in similar-entity
credits.
Question 6. Can you explain to the Committee what the role is of
the Farm Credit System institutions which are participating in loans,
such as the Verizon Wireless buy-out, or in building a local hospital,
another example raised in testimony?
Answer. System institutions participate in loans, as authorized by
the Farm Credit Act, to diversify their loan portfolios and earnings.
This enables them to meet their mission of providing a stable source of
credit through good times and bad for farmers and ranchers, their
cooperatives, and other agribusinesses and rural service organizations.
The legislative history is clear that Congress expanded the System's
lending authority to include similar entities as a means to provide the
System with increased portfolio diversification.
Likewise, on a very limited basis, as authorized by FCA under pilot
programs or case-by-case approvals, System institutions have used their
investment authorities to make investments in rural communities. These
investments include bonds that finance improvements to deteriorating
rural hospitals, rural medical clinics, assisted-living facilities, and
other rural infrastructure projects that are critical to the well-being
of farmers and ranchers and their communities. They constitute less
than two percent of the System's total assets.
These loan participations and rural investments are most often not
completed in isolation, or in competition with local lending
institutions, but rather in partnership with other local lending
institutions, and many times in coordination with the USDA's Rural
Development Agency.
Response from Chris Beyerhelm, Deputy Administrator for Farm Loan
Programs, Farm Service Agency, U.S. Department of Agriculture
Question Submitted by Hon. Joe Courtney, a Representative in Congress
from Connecticut
Question. The USDA Farm Service Agency guaranteed loan program is a
very important program in my district. The program is used extensively
by lenders in my District and across Connecticut. During the 2012 Farm
Bill deliberations, I worked with Congressman Owens, then a Member of
this Committee, to encourage language to be included in the farm bill
that provides more flexibility for the types of business structures
eligible for FSA loans and loan guarantees. Chairman Lucas and Ranking
Member Peterson included this increased flexibility when drafting the
farm bill this Congress.
We have had situations where family farms that are structured as
family trusts and Limited Liability Companies were not eligible for FSA
guarantees. Could you check on the status of implementation of these
farm bill provisions and report back to my office?
Answer. The provisions you mentioned are included in sections 5001,
5002, 5101, and 5201 of the 2014 Farm Bill. To implement these sections
as quickly as possible, FSA is using an expedited rule making process
and plans to publish an interim rule that will become effective upon
publication. The Federal Register document has been drafted and is
currently in clearance. FSA anticipates publication of the interim rule
this fall. In the meantime, FSA is developing training materials and
other guidance for employees and customers to help ensure effective
implementation.