![](media/image1.wmf){width="0.875in"
height="0.8597222222222223in"}***The Farm Credit System:***

***Rural America's Customer-owned Partner***

Testimony of

**Doug Stark**

**Chief Executive Officer**

**Farm Credit Services of America**

**Omaha, Nebraska**

on behalf of the

**Farm Credit System**

before the

**Subcommittee on Conservation, Credit, Energy and Research**

**House Committee on Agriculture**

March 27, 2007

Mr. Chairman and Members of the Subcommittee, thank you for the
opportunity to appear today to testify on behalf of the Farm Credit
System. My name is Doug Stark and I am the Chief Executive Officer of
Farm Credit Services of America, headquartered in Omaha, Nebraska.

FCS of America is one of the 100 cooperatively owned financial
institutions that together make up the Farm Credit System. FCS of
America serves farmers, ranchers, and rural businesses in Nebraska,
Iowa, South Dakota, and Wyoming. We have over 66,000 customer/owners and
940 employees. At the end of 2006, we had some \$10.4 billion in loans
outstanding. As a cooperative, a sizeable portion of our profits are
shared directly with our customer/owners with the balance staying in the
organization for their use and that of future generations. We just
completed a distribution of \$45 million in profits, which brings the
total distribution over the last three years to \$150 million to these
customer/owners.

The Farm Credit System, in total, has more than 460,000 customers and
serves every State in the Union. Farm Credit was created by Congress
more than 90 years ago to ensure that America's farmers and ranchers had
access to competitively priced credit in good times and bad. Over the
years, Congress added to Farm Credit's mission to ensure that
farmer-owned cooperatives, farm-related businesses, rural homebuyers and
rural utilities also enjoyed the benefits of a lender dedicated to
meeting their financial needs.

The hallmark of the Farm Credit System continues to be our cooperative
structure, meaning "customer-ownership." Each Farm Credit lending
institution is owned by its customers, those farm families, individuals
and businesses who borrow from us. Many our Farm Credit institutions,
like us, have put our profits back in the hands of producers in the form
of patronage refunds. Last year alone, Farm Credit paid its
customer/owners \$644 million in patronage refunds.

By any measure, Congress' decision 90 years ago has been a success.
Today, the agricultural producers, rural businesses, and others that are
eligible to receive financing from Farm Credit enjoy vigorous
competition to meet their lending needs. Farm Credit provides a constant
source of liquidity in these markets -- irrespective of financial
conditions in the industry. Farm Credit reverses the traditional flow of
funds out of rural areas. We are very efficient in accessing the world's
financial markets and delivering these funds to rural America.

Today, Farm Credit sells debt on the nation's money markets on a daily
basis to bring capital to rural America on behalf of our
customer/owners. Demand for Farm Credit debt is strong worldwide. This
strong demand from investors ensures that Farm Credit can pass on
competitive interest rates to agricultural producers and our other
customers. Farm Credit works diligently to protect the demand for its
debt securities. The financial markets, through various rating agencies,
expect Farm Credit to withstand a vigorous evaluation irrespective of
its GSE status. Our ability to issue debt on a daily basis at
competitive rates is one of the primary benefits we can bring to rural
America.

To protect the demand for Farm Credit securities, we maintain financial
strength throughout the Farm Credit System. We maintain a very strong
capital base. At yearend 2006 Farm Credit had some \$24 billion in
capital which represents 15% of our total assets. In addition, we fund
an insurance fund which insures investors in System debt securities.
That fund held over \$2.3 billion at the end of last year. Offsetting
these strong financials in the minds of investors, however, is Farm
Credit's lending focus on a single sector of the economy. We remain
largely a monocline lender and investors understand that limited
diversity in a loan portfolio concentrates risk. Our status as a GSE,
however, reassures investors who look intensely at portfolio
concentration. This GSE status continues to be critical our ability to
continue to bring benefits to rural America and agriculture. The
benefits of Farm Credit's GSE status flow entirely to our
customer/owners who reinvest in their own operations and stimulate local
economies through their local spending.

One item I would like to highlight from the statement is our results in
serving young, beginning, and small farmers. Our customer/owners are
committed to helping continue the transition in agriculture to the next
generation of producers. They are also committed to ensuring a future
for small producers. During 2006, Farm Credit made more than 58,000
loans to beginning farmers for well over \$9 billion. This represents
about 18% of the total loans made by Farm Credit in 2006. We are proud
of the success we have had in meeting the needs of these producers.

**Farm Credit HORIZONS**

The preamble to the Farm Credit Act called for the System to "serve
agriculture and rural America" and because of this commitment to
agriculture and rural America, Farm Credit undertook a project called
HORIZONS. Over two years ago, the Farm Credit Council board, comprised
of farmer directors from all over the Farm Credit System, joined the
Presidents Planning Committee, a leadership group, to sponsor a
strategic planning initiative known as the HORIZONS Project. The purpose
of the project was very straightforward -- to study how U.S. agriculture
is changing as a result of global competition, technological advances,
the changing tastes of consumers worldwide, and a host of other factors.

Our farmer/owners wanted to know how the businesses that agriculture
relies on are changing and how changes in rural economic conditions are
impacting future opportunities for all producers, especially young,
beginning, and small producers. In addition, we studied how current
regulations and law impact the ability of Farm Credit System
institutions to meet the needs of customers in today's marketplace and
the one we see developing. In the process, we sought out the advice and
guidance of numerous academics as well as farm, commodity, and rural
organizations throughout the country that represent our marketplace.

The HORIZONS project findings were published in a report we issued in
January, 2006. We have, informally, provided copies of this report to
members of Congress and their staff, along with rural stakeholder groups
across the country. To date we have distributed some 50,000 copies of
the report. In addition, we have distributed to our customer/owners and
others over 400,000 brochures summarizing the report's findings and
conclusions. In response, we heard back from tens of thousands of
farmers indicating their support for our effort. These farmers
appreciate that the Farm Credit System they own is concerned for and
actively engaged in improving the future of U.S. agriculture and rural
America.

A copy of the final report from the HORIZONS project is included along
with my statement today. I ask that the report be included in the
hearing record.

The HORIZONS report noted that advancements in technology, the growth of
suburban areas, and economic pressures both within and without the U.S.
have had the twin impact of both forcing change in agriculture and rural
America \-- while at the same time fostering exciting new opportunities.
The report noted how farmers are more dependent than ever on
farm-related businesses that provide farmers both critical inputs and
marketing opportunities for their production; how farmers have become
increasingly reliant on diversifying their income sources; and how
vitally important rural job opportunities are especially to young and
beginning farmers struggling to build equity in their operations. The
report also points out how Farm Credit is constrained by several
provisions in the Farm Credit Act that prevent us from directly meeting
the needs of today's agriculture as it changes.

In short, the report confirmed what all of us in agriculture had been
feeling for many years. The world has changed dramatically. From markets
to production to technology to consumer demands, agriculture has
changed. From population shifts, to employment trends, to demographic
changes, our rural communities have changed as well. We see the pace of
change accelerating into the future.

Having studied and documented the changes, we have identified a number
of things that Farm Credit can do to help agricultural producers and
rural communities adapt to the new and evolving realities they face. As
a GSE, Farm Credit has been given a mission by the Congress. That
mission is to help ensure the health and wellbeing of U.S. agriculture
and rural communities. We believe that it is an important part of that
mission to make recommendations about how we might best accomplish that
mission. That is the reason we are here today.

**Legislative Recommendations**

Specifically, there are two areas where our basic lending authority
could be changed to provide more benefits to farmers and rural
communities. In addition, we recommend that two technical changes be
made to the law governing Farm Credit's cooperative stock.

The changes to our basic lending authority are incremental in nature. In
both cases, the changes we propose are not new types of lending
authority. Instead, both are changes designed to adapt our current
lending authority to modern business structures or rural economies. If
enacted, these changes would address the shortcomings we have found in
our ability to help farmers, ranchers and rural residents.

[Farm and Fishing-related Businesses]{.underline}

The first proposal relates to Farm Credit's ability to serve the needs
of f*arm- and fishing-related businesses.*

Today some farm- and fishing-related businesses can receive financing
from Farm Credit but not others. Some marketing and processing firms are
eligible but not others. This is confusing to our customers, makes no
sense in today's marketplace, and limits the benefits provided by Farm
Credit financing to a select few businesses that meet antiquated
guidelines in the Farm Credit Act.

Let me offer a few examples.

A *feed mill* owned by a farmer is eligible for Farm Credit borrowing if
that farmer processes a bushel of his own grain through it. However, if
that same farmer stops processing his own grain, he looses eligibility.
Similarly, if that same farmer reorganizes the family business and
transfers ownership to his daughter as a part of his estate planning and
that daughter does not grow any grain, the feed mill can no longer
benefit from Farm Credit financing.

Another example is that of an *apple processing plant* currently owned
by an apple grower and financed by Farm Credit. The plant is going to be
shut down because the current owner is ready to retire and does not want
to make an investment to upgrade equipment. The plant is critically
important for the local apple industry. Under current law, Farm Credit
can't directly finance an interested buyer who wants to purchase and
refurbish the plant unless that buyer grows apples that will be
processed by the plant.

A third example would be a *custom spraying company* that seeks to
expand its operation. Let's say the company approaches Farm Credit
because we have previously financed the equipment they use for applying
their product directly on farms. We must decline the loan because their
expansion involves their local retail outlet for agricultural chemicals
\-- rather than the on-farm application of product.

We are asking Congress to recognize the modern business structures in
agriculture. We are recommending that eligibility for Farm Credit
financing in this area be determined by the activities undertaken by the
company -- and not determined by the corporate structure under which the
company operates. Under the proposal, businesses that are PRIMARILY
ENGAGED in:

***Processing, preparing for market, handling, purchasing, testing,
grading, distributing, or marketing farm or aquatic products***

would be eligible for Farm Credit System financing.

In addition, the proposal would make eligible businesses that are
PRIMARILY ENGAGED in:

***Furnishing farm or aquatic business services, capital goods, or
equipment to farmers, ranchers, or producers or harvesters of aquatic
products.***

These are the very businesses that farmers and aquatic harvesters
directly depend on to support their operations. These are the businesses
that are one-step away from the farm gate. Farm Credit already finances
many of these types of businesses. The outdated provisions of the Farm
Credit Act, however, prevent us from fully serving the needs of this
important sector of the agricultural economy.

[Rural Home Mortgage Lending]{.underline}

We believe that more rural residents should be able to obtain a
competitively-priced Farm Credit mortgage loan.

For the last 36 years, Farm Credit's ability to provide home mortgage
financing for rural homebuyers has been strictly limited to rural areas
with less than 2500 in population. Congress gave Farm Credit home
mortgage lending authority in 1971 and included the 2500 population
limit. Rural America has changed since 1971 and this number is outdated
and deserves to be updated.

In a number of rural areas around the country, medium-sized towns are
annexing surrounding towns. In other rural areas, city and county
governments are consolidating to create one middle-sized jurisdiction.
In both of these instances, homebuyers lose eligibility for Farm Credit
financing.

Today, the Farm Credit Act gives the Farm Credit Administration the
authority to define "rural" for the purposes of Farm Credit's home
mortgage lending authority. The law essentially though requires a two
tiered test to determine eligibility. First, it must meet the definition
of rural, which FCA defines as "open country." Secondly, no matter how
open or rural the area is, it can't have a population greater than 2500.

We propose to modify the definition of "rural" to conform it to the
definition Congress included in the 2002 Farm Bill. The 2002 Farm Bill
changed the definition of "rural" as it appears in the Consolidated Farm
and Rural Development Act (Con Act). The Con Act governs USDA rural
development, housing and many other lending programs.

The definition adopted by Congress for the Con Act is as follows
(emphasis added):

***"rural area" shall mean any area [other than]{.underline}---***

***(A) a city or town that has a population of greater than 50,000
inhabitants; [and]{.underline}***

***(B) the urbanized area contiguous and adjacent to such a city or
town.***

We recommend that Congress update Farm Credit rural housing limit to
include this definition.

This proposal has been subject to a great deal of mischaracterization.
Our proposal, and our intent, has never included authorizing home
mortgage lending in urbanized areas like Beverly Hills, CA; Darien, CT;
or McLean, VA. None of these places, or places like them could ever be
described as "rural" irrespective of their population.

In addition, this proposal to redefine "rural" has no impact on any
other authority than Farm Credit's home mortgage lending authority. We
understand that opponents of the provision argue that it would permit
"Farm Credit to lend to anything in towns of less that 50,000 in
population." That is simply not true. This proposal would apply only to
home mortgage lending activity.

The proposal also does not alter significant existing limitations on
Farm Credit's home mortgage lending authority. Currently, other than the
"rural" definition, there are three additional restrictions on home
lending by Farm Credit. We do not propose to change these. For a rural
home to be eligible for FCS financing, it must be:

-   Moderately priced

-   Single-family, owner-occupied; and

-   Loan-to-value ratio no greater than 85% (unless a guarantee).

Finally, there is an overall limitation on the amount of home mortgage
lending available for Farm Credit. By statute, home mortgage loans can
represent no more than 15% of Farm Credit's total loan portfolio.
Measured against today's Farm Credit portfolio, this means Farm Credit
can have no more than \$13 billion in rural home mortgage loans. By
comparison, the U.S. home mortgage market is some \$9 trillion. If Farm
Credit maxed-out its portfolio limit in home mortgage loans, it would
still amount to only 0.14% of the U.S. market for home loans.

[Modernizing Cooperative Stock Requirements]{.underline}

Our final two recommendations do not affect our lending authorities.
Instead, these recommendations are designed to modernize certain aspects
of the cooperative stock owned by Farm Credit System customers.

We remain committed to our cooperative structure and farmer-ownership
and control. Nothing we propose has any impact on our cooperative
structure nor does it impact farmer-ownership or control of FCS
institutions.

Instead we propose to lower the barrier to entry for customers of Farm
Credit System associations. We ask that Congress give local FCS boards
of directors the ability to determine how much investment is necessary
for a farmer to maintain in order to borrow from Farm Credit. Today,
when a farmer wants to borrow from Farm Credit, he or she is required to
purchase cooperative stock in amount equal to the lesser of \$1000 or 2%
of the loan he or she receives.

This minimum stock purchase requirement was put in place in 1987 as a
way to ensure that Farm Credit institutions had adequate capital to
support their operations. This minimum level is no longer necessary to
capitalize FCS institutions.

Today, Farm Credit capitalizes itself based on retained earnings from
its ongoing operations. At year end, borrower stock represented only
5.4% of Farm Credit's total \$24 billion in capital. This amount is
financially irrelevant to Farm Credit's ongoing financial strength. As a
result, it only serves today as an unnecessary cost and as a barrier to
entry for farmers who want to borrow from Farm Credit. This is
especially true for young, beginning, and small producers.

We are asking Congress to eliminate the minimum stock purchase
requirement from law. **Very importantly, though, we will keep the
requirement that borrowers purchase some stock as a condition of
borrowing from Farm Credit.** This ensures that we maintain our
customer-ownership, cooperative structure.

Eliminating the minimum stock requirement would not affect the amount of
farmer control over the Farm Credit System. Under our rules -- which
would not be changed by the proposal -- any farmer, irrespective of how
much stock he or she has in Farm Credit, is permitted one vote in the
organization. This one-person, one-vote principal is an important part
of our cooperative structure and ensures that small farmers are well
represented in the organization. So, the proposal to lower the amount of
stock required would not affect governance or voting in the
organization.

The final part of our stock recommendation applies only to CoBank. We
recommend that Congress give CoBank's customer/owner-elected board of
directors the authority to determine which of its customers is allowed
to hold voting stock in the organization.

Today, CoBank lends directly to farmer-owned cooperatives, rural
electric cooperatives, rural telephone cooperatives, and other
non-cooperatively structured rural utilities -- in particular, small
rural telephone companies and rural water systems. CoBank's cooperative
customers are permitted by law to vote for directors to CoBank's board
of directors. CoBank's non-cooperatively owned customers -- those rural
telephone companies and water systems -- are not permitted to vote.
These customers are required to purchase stock and become a member of
CoBank as a condition of getting a loan but are not allowed a voice in
CoBank's governance. This is simply unfair to these customers.

We recommend that CoBank's Board of Directors be allowed the discretion
to permit these customers to vote in CoBank board elections.

Mr. Chairman, these four proposals constitute our recommendations for
updating the Farm Credit Act to meet the needs of our customers. I think
you can readily see that they are consistent with the System's
traditional mission. These are in fact quite modest and incremental
changes that nonetheless will prove very advantageous to agriculture and
rural communities, by offering greater access to a reliable, dedicated,
customer-owned source of credit.

Thank you for holding this hearing today and I would be pleased to
answer your questions.