Remarks by 
John D. Hawke, Jr.
Comptroller of the Currency
Before a Conference on Agricultural Credit Risk Management
St. Louis, Missouri
February 17, 2000

Ever since its founding, St. Louis has been the gateway 
between urban and rural America.  This is where the west -- 
and the farm belt -- begin.  And so it's fitting that we 
launch our discussion of agricultural lending and risk 
management in the 21st century here, too.   
	As a business and as a way of life, farming in America 
has never been for the lazy or timid.  The risks are great; 
the rewards at best uncertain.
	The risk/reward ratio for farmers has been most 
unfavorable of late.  At a time of remarkable growth in the 
nonfarm economy -- with most Americans enjoying record  
prosperity -- net farm income was down last year, for the 
second year in a row.  Too many American farmers are hurting 
today. 
Their pain stems from some familiar factors -- and some 
not so familiar ones.  Recession in East Asia.  One of the 
worst droughts on record.  Foreign competition.  A strong 
dollar.  Silos bulging with years of surplus. 
Not surprisingly, people are wondering aloud whether a 
repeat of the early 1980s is in the offing.  Then, too, we 
saw declining crop and livestock prices, shrinking foreign 
markets, and a rising dollar.  And the cost -- to individual 
farmers and the financial institutions that served them -- 
was immense.  
Between 1980 and 1988, some 200,000 to 300,000 farmers 
underwent bankruptcy, foreclosure, or financial 
restructuring.  Agricultural banks failed in numbers not 
seen since the 1920s, when they were harbingers of the more 
widespread financial devastation of the Great Depression.  
Three hundred and four ag banks went under between 1984 and 
1989, representing at their peak nearly 60 percent of all 
bank failures -- at a time when there were many. 
So it's natural that questions should be raised about 
the current distress in the agricultural economy, and 
whether it points to another bitter harvest of ag bank 
failures to follow.  
Like most questions about the future, it's not one that 
can be answered easily or definitively.  But the evidence 
gives us real basis for optimism that the financial system 
may well be spared the spillover effects of the current farm 
distress. 
That would be a great blessing, and not only for the ag 
banks themselves, their owners, and employees.  During the 
1980s, ag bank failures made the farm crisis more painful 
and more personal.  Fewer lenders meant fewer choices and 
higher costs for borrowers.  That was often enough to spell 
ruin for farmers who were already operating close to the 
edge. 
Credit availability could prove just as decisive today.  
Farmers may be able to ride out the hard times if they are 
able to obtain the financing they need to tide them over 
until better times return.  If not, heartbreak may once 
again become a commonplace on our farms.  It's an 
irrefutable fact: the condition of our agricultural banks is 
inextricably linked to the health of America's agricultural 
economy. 
One of this great city's most famous adopted sons, 
Cardinals' pitcher Jay Hanna Dean -- better known as Dizzy -
- was sometimes accused of tooting his own horn too loud and 
too often.  He saw things differently.  "If you've done 
it," he reasoned, "it ain't braggin.'"  
Ag bankers today can brag, about the successes they've 
achieved to date and the things they're doing to safeguard 
the future.  Many of the traditional benchmarks of bank 
health look good right now.  In 1998 -- the last full year 
for which reliable statistics are available -- farm banks 
reported increased earnings, strong loan growth, good asset 
quality, and capital at historically high levels, both in 
absolute dollar terms and as a percentage of assets.  
Preliminary 1999 statistics show only a slight deterioration 
in these numbers. 
		Yet these trends tell only half the story -- and that 
story demands both qualification and explanation.  First, 
we cannot ignore the fact that some indicators of ag bank 
health are trending down -- only slightly, in most cases, 
but down nonetheless.  The proportion of farm banks that 
had nonperforming loans greater than 25 percent of capital 
increased from three and a half to five percent between 
1998 and 1999.  The OCC's most recent survey of credit 
underwriting practices predicts rising credit risk in ag 
lending for 2000.  Farm loan restructurings and renewals 
are up.  More and more commercial lenders are resorting to 
subsidized Farm Service Agency financing to cope with a 
rising number of weakened borrowers.  
		Like bankers all over the country, ag bankers have to 
deal with dwindling core deposits and a growing reliance on 
higher cost wholesale funds in order to sustain loan 
growth.  And, while ag banks -- defined as banks with ag 
loans to total loans greater than 25 percent -- have made 
some progress toward product and geographic diversification 
in recent years, they are still inordinately exposed to the 
perils of concentration inherent in their business.  
The second caveat concerns the future.  There is simply 
no guarantee that ag banks will continue to perform as they 
have should farm conditions worsen -- or even if they get no 
better.  If we should experience still another year of 
declining farm income -- which is exactly what the official 
projections call for -- then all bets are off.  
The USDA estimates that government payments to farmers 
-- which reached a record $22 billion in 1999 -- will drop 
by almost 20 percent this year.  New production capacity is 
coming on line from countries like China and even India  -- 
countries that not very long ago were big net importers of 
grain.  The possible combination of lower government 
payments and still-depressed crop prices will surely test 
the resourcefulness of farmers and farm lenders.  With all 
of these trials looming, the worst thing we could do today 
is to get caught up in an excess of self-congratulations. 
Yet some cautious optimism is in order.  That the 
future is unknowable and that significant risks lie ahead 
does not change the fact that ag banks have shown much 
greater resilience during this agricultural downturn than in 
previous ones.  The question we want to consider is why. 
There's no short answer.  A long list of macro and 
micro factors have helped blunt the impact of today's farm 
income shortfall.  As analysts have noted, the parallels 
between agricultural conditions in the early 1980s and those 
of today are valid only up to a point.  In the earlier 
period, many farmers were undone by rising interest rates, 
which doubled or even trebled the cost of financing and 
automatically deflated the value of the land that secured 
that debt.  By comparison, largely as a result of today's 
benign interest rate environment, land values are holding 
firm, despite depressed commodity prices.  That's a big 
reason why farmers' total equity rose last year for the 
tenth straight year even as real farm income was trending 
downward. 
Farmers are also benefiting from the general economic 
prosperity and low inflation of our times, which stand in 
sharp contrast to the deep recession of the early 1980s.  
Credit is just one farm input whose cost has been stable of 
late.  In 1998, total farm expenses dropped for the first 
time in more than a decade, and the preliminary 1999 data 
suggest an increase for last year of barely one percent.  
Even the recent run-up in energy prices should affect 
operating balance sheets only at the margin.  
	But perhaps the key variable is the fact that, no 
matter how you choose to measure it, farmers today are 
substantially less leveraged than they were in the early 
'80s.  In 1981, farmers carried debt equal to about five and 
a half times their cash income.  Today the ratio is about 
three to one.  Adjusted for inflation, farm debt today 
stands at about the same level that it was in 1965.  And 
farmers' debt-to-assets ratio, which peaked at 23 percent in 
1985, is now about 16 percent.  If one of the lessons of the 
farm crisis of early 1980s was to avoid excessive debt, it's 
a lesson that American farmers have clearly taken to heart.  
It's a lesson that other Americans businesses and consumers 
could benefit from, as well. 
	That's not the only lesson farmers have had to 
internalize in order to stay afloat.  In today's challenging 
environment, they're learning to be just as attentive to 
their finances as to their fields and crops.  That's why the 
most sophisticated farmers are increasingly taking advantage 
of forward sale and marketing arrangements for their crops 
and livestock, as well as hedging, production controls and 
other stratagems to help offset price volatility and assure 
themselves a predictable income stream.  Indeed, the most 
prosperous farmers today are those who had the acumen to 
lock in grain prices at a profit.  By contrast, today's most 
troubled farmers are those who decided to operate on a 
current basis, in hopes of a price recovery -- a recovery 
that obviously hasn't occurred and, frankly, is unlikely to 
occur any time soon. 
	Farm lenders deserve considerable credit for the 
relative health of the today's ag balance sheet -- and for 
their customers' more sophisticated approach to risk 
management.  After the experience of the 1980s, many ag 
bankers vowed to change the way they did business.  Many 
have.  There's proof of that to be had in the terms of the 
loans they make -- as well as in the loans they refuse to 
make.  Ag bankers today are more likely to insist on higher 
down payments and extensive financial analysis to determine 
the borrower's ability to generate adequate cash flow.  No 
longer are bankers so willing to extend a loan based on 
collateral values or speculative expectations.  No longer 
are they so quick to offer new loan products -- or to enter 
new markets -- without having the necessary managerial 
expertise on board.  They increasingly use external risk 
reviews to augment internal risk identification procedures.  
More and more, they've become leaders in the use of 
government guarantee programs to control credit risk while 
allowing their weaker borrowers to continue farming.  
So, although much more remains to be done, the best ag 
bankers have become some of the best risk managers in the 
entire banking industry.  In this challenging agricultural 
climate, they've had no choice.  I can tell you this: 
tomorrow's challenges will demand no less. 
As I've already suggested, one of the most impressive 
developments of recent times is the way ag bankers are 
working with their farm customers to help them manage their 
own credit risk.  With us here today are bankers who have 
adopted a variety of creative approaches to help their 
customers become better risk managers.  We've heard about 
one bank that requires borrowers to develop and submit 
marketing plans as part of the loan application process.  
Loan officers complete break-even analyses on cattle 
borrowers, and routinely require hedging as a condition for 
loans.  This is a bank that even operates its own 80-acre 
farm to help it stay abreast of developments in the field.  
Then there's the bank that's organized a club for farm 
borrowers.  The bank brings in local university experts to 
discuss such topics as marketing alternatives, price risk, 
business planning and budgeting, financial risk management, 
production risk, international conditions, and human 
resource management.  And then it makes these university 
experts available as a kind of financial extension service 
to borrowers who need them.  We'll hear more about this 
innovative arrangement tomorrow morning. 
The OCC applauds these trends, which we view as 
critically important to maintaining the health of ag banks 
in these difficult times and into the challenging future 
that we now face.  
We support these risk management initiatives in various 
ways.  We believe that holding conferences such as this will 
help spread the word about the exciting developments that we 
see and promote better communication between ag bankers and 
their examiners.  For our part, we view your input as 
crucial in helping us understand current conditions and the 
impact of our policies on your business. 
As supervisors, we, too, have tried to make 
constructive use of the lessons of the recent past.  The 
experience of the 1980s underscored the need to avoid broad 
swings between the extremes of excessive forbearance and 
rigor in classifying farm loans -- or any other loans.  It 
highlighted the importance of a balanced, flexible, and 
consistent approach to supervision -- one that encourages 
examiners to judge each loan relationship on its merits 
while ensuring that banks adhere to prudent lending 
practices and accurate disclosure of the risks embedded in 
their loan portfolios.  And we also learned from experience 
that supervisors should encourage bankers to work with 
borrowers --  farmers and others -- who may be experiencing 
temporary difficulties, so that credit -- the lifeblood of 
our entire economy -- is not unduly restrained. 
The OCC's supervisory policies, recently memorialized 
in our Agricultural Lending handbook, emphasize that 
examiners must take into account prudent efforts by bankers 
to work with their troubled farm borrowers when classifying 
credit risk.  It advises examiners not to automatically 
criticize loans solely due to negative cash flows, or 
because farmers may need more time to service their loans, 
or because previous debt has been carried over.  
And it advises examiners to carefully weigh the full 
range of relevant factors affecting the condition of the 
farm credit.  Is the loan performing according to its 
original or reasonably modified terms?  Is the collateral 
sufficiently liquid and controlled to protect the loan?  Is 
the borrower's financial condition -- and financial track 
record -- fundamentally sound?  
The answers to these questions -- rather than some 
arbitrary framework -- are supposed to guide our examiners 
in determining the appropriate supervisory response to take.  
If we get it right -- and I believe that we do, most of the 
time -- we can avoid both unnecessary overreaction to 
adverse conditions and the excessive latitude that can lead 
to more serious problems later on. 
Obviously, you and your customers are the two key 
parties to the lending transaction.  But the law -- and the 
needs of our general economy -- prescribe an important role 
for us as supervisors, as well.  In the spirit of 
communication that brings us together here in St. Louis, I 
wanted to take this opportunity to explain to you why we 
take the approach we do and what we aim to achieve by it.  
And what we aim to achieve is this: a safe, sound, and 
competitive banking system fully capable of fulfilling its 
historic role in financing our nation's agricultural sector.  
If banks are to remain a reliable source of agricultural 
loans in both good times and bad, they must remain 
financially strong.  That's the goal that I as Comptroller 
am committed to achieving.
I want to thank you for your commitment to that goal 
and encourage you to continue working creatively to 
safeguard the health of the farm economy and the agrarian 
way of life.  These are things that mean much to our people 
-- all of our people.  We're counting on you.