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S. HRG. 107–590

AGRICULTURE CREDIT

HEARING

BEFORE THE

COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MAY 16, 2001

Printed for the use of the

Committee on Agriculture, Nutrition, and Forestry

(

Available via the World Wide Web: http://www.agriculture.senate.gov

COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

RICHARD G. LUGAR, Indiana Chairman

JESSE HELMS, North Carolina

THAD COCHRAN, Mississippi

MITCH MCCONNELL, Kentucky

PAT ROBERTS, Kansas

PETER G. FITZGERALD, Illinois

CRAIG THOMAS, Wyoming

WAYNE ALLARD, Colorado

TIM HUTCHINSON, Arkansas

MICHEAL D. CRAPO, Idaho

TOM HARKIN, Iowa

PATRICK J. LEAHY, Vermont

KENT CONRAD, North Dakota

THOMAS A. DASCHLE, South Dakota

MAX BAUCUS, Montana

BLANCHE L. LINCOLN, Arkansas

ZELL MILLER, Georgia

DEBBIE A. STABENOW, Michigan

BEN NELSON, Nebraska

MARK DAYTON, Minnesota

KEITH LUSE, Staff Director

DAVID L. JOHNSON, Chief Counsel/Deputy Staff Director

ROBERT E. STURM, Chief Clerk

MARK HALVERSON, Staff Director/Chief Counsel for the Minority

(II)

(III)

C O N T E N T S

Page

HEARING(S):

Agricultural Credit .................................................................................................. 01

Wednesday, May 16, 2001

STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, Committee

on Agriculture, Nutrition, and Forestry ............................................................. 01

Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, Committee

on Agricuture, Nutrition, and Forestry .............................................................. 12

Lincoln, Hon. Blanche L., a U.S. Senator from Arkansas .................................... 03

WITNESSES

Panel I

Conklin, Neil, Director, Market and Trade Economics Division, Economic

Research Service, U.S. Department of Agriculture, Washington, DC ............. 01

Cooksie, Carolyn B., Deputy Administrator for Farm Loan Programs, Farm

Service Agency, U.S. Department of Agriculture, Washington, DC ................ 04

Dyckman, Lawrence J., Director of Agricultural Issues, U.S. General

Accounting Office, Washington, DC, accompanied by Charles Adams,

Assistant Director ................................................................................................ 07

Panel II

Canada, Gary R., President, Bank of England, England, Arkansas, on behalf

of American Bankers Association ....................................................................... 21

Edelman, Henry D., Chief Executive Officer, Farmer MAC, Washington, DC .. 16

Evans, Jr., John, Chief executive Officer, D.L. Evans Bank, Burley, Idaho,

on behalf of Independent community Bankers of America ............................... 19

Penick, Jay B., President and Chief Executive Officer, Northwest Farm Credit

Services, Washington, DC, on behalf of the Farm Credit Council ................... 14

Panel III

Brost, Frank, Rapid City, South Dakota, Chairman, Tax and Credit

Committee, National Cattlemen’s Beef Association .......................................... 30

Carter, David, President, Rocky Mountain Farmers Union, on behalf of the

National Farmers Union, Washington, DC ........................................................ 28

Hoefner, Ferd, Washington Representative, Sustainable Agriculture Coalition,

Washington, DC ................................................................................................... 32

APPENDIX

PREPARED STATEMENTS:

Harkin, Hon. Tom ............................................................................................ 40

Brost, Frank ...................................................................................................... 139

Canada, Gary .................................................................................................... 119

Page

IV

PREPARED STATEMENTS—CONTINUED

Carter, David .................................................................................................... 130

Conklin, Neil ..................................................................................................... 43

Cooksie, Carolyn B. .......................................................................................... 51

Dyckman, Lawrence J. ..................................................................................... 56

Edelman, Henry D. ........................................................................................... 72

Evans, Jr., John ................................................................................................ 108

Hoefner, Ferd .................................................................................................... 145

Penick, Jay ........................................................................................................ 64

DOCUMENT(S) SUBMITTED FOR THE RECORD:

Baucus, Hon. Max ............................................................................................ 170

Letter to Dan Glickman, Secretary of Agriculture from Hazell Reed,

Chair USDA Advisory Committee on Beginning Farmers and Ranchers

Delaware State University ........................................................................... 172

Letter to Hazell Reed from Dan Glickman ..................................................... 176

News from ICBA, Independent Community Bankers of America ................ 171

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HEARING ON AGRICULTURAL CREDIT

WEDNESDAY, MAY 16, 2001

U.S. SENATE, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY, Washington, DC.

The committee met, pursuant to notice, at 10:16 a.m., in room

SR–328A, Russell Senate Office Building, Hon. Richard G. Lugar,

Chairman of the Committee, presiding.

Present or submitting a statement: Senators Lugar, Harkin,

Conrad, and Lincoln.

STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR

FROM INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

The CHAIRMAN. The hearing will come to order.

The chair now calls on Mr. Neil Conklin, Director of the Market

and Trade Economics Division of the Economic Research Service,

United States Department of Agriculture; Ms. Carolyn Cooksie,

Deputy Administrator for Farm Loan Programs at the Farm Service Agency of USDA; and Mr. Lawrence Dyckman, Director of Agricultural Issues at the General Accounting Office, who will be accompanied by Mr. Charles Adams.

Ms. Cooksie and gentlemen, we much appreciate your coming to

the committee today to offer testimony.

Let me just say at the outset—and this will be true for each of

our three panels—that the prepared testimony that you have submitted to the committee will be published in full in the record of

the committee, so you will not need to ask individually for that permission; and we will ask each one of you to try to summarize your

testimony in five minutes so that we can proceed rapidly through

those initial summaries that you have and the questions by members of the committee who are very much interested in the credit

area.

I will ask you to testify in the order that I called upon you, which

would be first of all Mr. Conklin.

STATEMENT OF NEIL CONKLIN, DIRECTOR, MARKET AND

TRADE ECONOMICS DIVISION, ECONOMIC RESEARCH

SERVICE, U.S. DEPARTMENT OF AGRICULTURE,

WASHINGTON, DC

Mr. CONKLIN. Thank you very much, Mr. Chairman, members of

the committee.

Thank you for this opportunity to provide an overview of the current credit conditions facing America’s farmers and farm lenders.

2

The overall financial health of farmers and their lenders remains

solid, despite low prices for major farm commodities over the last

several years.

Generally favorable farm economic conditions from 1990 through

1998 contributed to this financial strength. In addition, large Federal payments to farmers have mitigated the negative effect of

lower prices on farm financial conditions and have played a key

role in stabilizing farm income and balance sheets.

Much of the financial viability of the farm economy continues to

rest on its sound balance sheet. Throughout the 1990’s and especially since 1992, asset value growth has been strong, and equity

positions have generally improved. Balance sheet improvement can

largely be attributed to the strength of farm real estate markets.

The recent strength in farm real estate markets suggests that

farmers and lenders do not believe that farm incomes will decline

precipitously in the near future.

For the majority of family farmers, off-farm income is at least as

important to creditworthiness and overall financial health as farm

income. The ability of small farm operators to repay debt is primarily determined by off-farm economic conditions. Even for large

family farms, close to half of total household income comes from

off-farm sources. Government payments not only contribute to farm

income but also impact farm debt and assets. The value of most agricultural land depends largely on its expected future earnings, and

a rise in available cash from Government payments or other

sources can impact the overall amount and composition of debt.

Government payments also help farmers to meet debt repayment

obligations.

To illustrate the importance of Government payments, I would

like to talk a bit about one indicator of farmers’ financial health,

one that we call ‘‘debt repayment capacity utilization.’’ The term

sounds a little bit intimidating, but as most of us know from our

own personal experience, as we use more of our borrowing capacity

as defined by our credit cards or our line on our home equity loan,

our financial options become more limited.

Today, farmers are using an estimated 65 percent of their borrowing capacity. This is substantially above the low levels of the

mid-1990’s. If it were not for Government payments, they would be

using even more of their borrowing capacity—around 80 percent.

Not all farm operators are frequent users of borrowed capital.

USDA’s Agricultural Resource Management Study showed that

only 42 percent of all farms carried debt from 1999 into 2000.

Large farms are much more likely to borrow, and their borrowing

needs are greater. Over 70 percent of large farms have debt. For

these larger operations, which produce two-thirds of the Nation’s

food and fiber, credit availability and costs are a significant issue.

The position of commercial agricultural lenders reflects the generally healthy state of farmers’ finances in recent years. Lenders

continue to have ample funds to lend to creditworthy borrowers,

and farm debt has continued to grow. Major groups of farm lenders, including the Farm Credit System, commercial bankers, and

insurance companies, as well as the Farm Service Agency, continue

to enjoy historically healthy loan portfolios.

3

Just as Federal payments have been important to farmers, they

benefit farm lenders. Federal payments increase the size and reduce the risk of cash-flows associated with farming and the ownership of farm land. By increasing and stabilizing these cash-flows,

Federal payments enable lenders to offer farmers credit on more

attractive terms than they would otherwise be able to.

Just as lenders profit from Federal farm payments, they may be

vulnerable to decreases in payments and any ensuing fall in land

values.

In conclusion, farmers and their lenders continue to benefit from

strong balance sheets bolstered by high levels of Government support. Thanks largely to this support, there remains no widespread

evidence of financial distress even as the sector experiences its

fourth year of low prices for many farm commodities. For most

small farms and even many larger farms, the non-farm economy

and the current unprecedented economic expansion have become

more important sources of prosperity than farm markets and Federal payments.

An important issue, however, is the divergence between low levels of market receipts and rising farm real estate values. Already,

ERS estimates that on average, 25 percent of the value of U.S.

farm land represents capitalized Government payments. If more

than a short-term idiosyncracy, this divergence may lead to an

unsustainable dependence on Federal payments which, if curtailed,

could precipitate a painful period of adjustment for farmers, farm

land owners, rural communities, and their lenders.

That concludes my summary, Mr. Chairman. Thank you again

for the opportunity. I will be happy to answer any questions.

The CHAIRMAN. Thank you very much for that testimony.

[The prepared statement of Mr. Conklin can be found in the appendix on page 43.]

The CHAIRMAN. Let me intrude in the batting order for just a

moment to recognize Senator Lincoln.

STATEMENT OF HON. BLANCHE LINCOLN, A U.S. SENATOR

FROM ARKANSAS

Senator LINCOLN. Thank you, Mr. Chairman. I appreciate, and

welcome to all of our witnesses here today.

I just want to say thank you for coming and testifying before the

committee today on such a very important issue and also to thank

the chairman and say how much I appreciate him holding this

hearing on a matter of critical importance to farmers in Arkansas,

especially on the state of agricultural credit.

I would also like to welcome someone who is going to testify on

the second panel who is a constituent of ours. I could share many

stories on the issue of agricultural credit, but I am going to let one

of my constituents, Mr. Chairman, tell the tale.

Gary Canada is here today on behalf of the American Bankers

Association and will testify on the second panel. I want him to

know how delighted I am and how proud I am that he is here.

Gary is president of the Bank of England and has a wonderful

grasp of issues facing agriculture and agricultural lenders. I rely on

Gary’s insight often, and I am glad that he is with us today to

share his perspective on the state of agricultural credit.

4

Mr. Chairman, our farmers and our ag lenders need certainty,

and that is probably something that we may hear echoed from

many of the individuals who testify today. The agricultural economy is dismal in my home State, and many of our farmers could

not even cash-flow a loan this year without the guarantee of increased emergency assistance.

Unfortunately, a press release promising assistance does not always convince the banker to grant a loan, because he is ultimately

left holding the bag if Washington does not come through in the

end.

Many of our Arkansas farmers were left with no choice but to

sell the family farm this year. I visited with one last Saturday

when I was home for an event.

Prices are dismal, and input costs are skyrocketing for our farmers, and the mood is as bad as I have ever seen it in the farming

community of Arkansas. Farmers just are not optimistic about the

future.

I know a little bit about farmers. I grew up with one in a seventh-generation Arkansas farm family, realizing that farmers always think it is too hot or too cold or too wet or too dry—but ultimately, they are great folks, and they depend upon us a great deal.

I am very pleased that we have many distinguished witnesses

with us here today to discuss the various issues facing our ag lending community. I apologize if I do have to excuse myself for another

meeting.

I want to thank all of the witnesses here and especially thank

Gary Canada for coming from Arkansas and sharing with many of

you all what he shares with me on a routine basis.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Lincoln, for those

thoughtful comments.

Ms. Cooksie, please proceed with your testimony.

STATEMENT OF CAROLYN B. COOKSIE, DEPUTY

ADMINISTRATOR FOR FARM LOAN PROGRAMS, FARM

SERVICE AGENCY, U.S. DEPARTMENT OF

AGRICULTURE, WASHINGTON, DC

Ms. COOKSIE. Good morning, Mr. Chairman, Senator Harkin, and

members of the committee.

I am pleased to appear before you today to review the status of

the FSA farm loan portfolio, discuss the impact of certain provisions of the 1996 Farm bill, and point out some issues of concern

for the future.

FSA offers direct and guaranteed farm ownership and operating

loans to farmers who are unable to obtain private commercial credit. The goal of FSA’s farm loan program is to assist eligible individuals and families through outreach, technical assistance, and supervised credit so that they can become successful farmers and

ranchers. Regardless of the type of loan, FSA’s financial assistance

provides a safety net for borrowers who have reasonable prospects

for economic viability in agriculture.

Mr. Chairman, I would like to begin by reviewing the present

status of the FSA loan portfolio. I am pleased to report that the

FSA farm loan portfolio is showing its best performance in many

5

years. All programs are performing well. Direct loan delinquency is

the lowest in over 20 years at 12.3 percent; the direct loan loss rate

is the lowest since 1987; and we have made progress in reducing

the number of delinquent million-dollar-plus direct loan accounts

from 748 at the end of fiscal year 1995 to only 180 at the end of

fiscal year 2000. In addition, inventory property numbers are the

lowest since 1980. The guaranteed loan portfolio is also performing

well. Delinquency is at an all-time low of 1.83 percent, and dollars

losses have remained low despite continuing growth of the portfolio. In fiscal year 2000, losses paid were only seven-tenths of one

percent of the principal outstanding.

Mr. Chairman, this is particularly noteworthy because at the

same time, the FSA loan volume has increased significantly—more

than 65 percent in recent years. In fiscal year 2001, demand for

FSA’s farm loan assistance remains strong. The lending season is

currently at its busiest and most critical time, and FSA is working

hard to rapidly process the thousands of applications coming into

county offices.

I believe there is no single factor, but a combination of several

different factors, which lead to these achievements. First, in the

1996 Farm bill there were instituted provisions which created

strong incentive for FSA borrowers to repay their loans. The 1996

Farm bill included provisions which instituted prohibitions on further FSA loan assistance to borrowers who are delinquent or who

have received debt forgiveness and a one-time, $300,000 limit on

debt forgiveness. These limitations have caused FSA borrowers to

more carefully consider the consequences of failure to repay their

FSA loans.

Provisions of the Debt Collection Improvement Act have also

been beneficial. The possibility of offset of FSA program payments

and Federal income tax refunds, and bars on participation in other

Federal credit programs, provide additional incentives for borrowers to repay their FSA loans.

Obviously, Mr. Chairman, borrowers cannot pay if they do not

have the money to make payments. The significant amount of Government farm payments over the past few years is also a major factor in portfolio performance. Also, I cannot overstate the importance of the tremendous amount of hard work by FSA field staff

in implementing the numerous program changes and in working to

help borrowers avoid or resolve delinquencies. FSA employees have

logged many long, hard hours working to assist borrowers. This is

a difficult, often frustrating task; borrowers are under stress; there

are no easy solutions, and sometimes the answer is not the one the

farmer would like to hear. It is also important to note, Mr. Chairman, that the increase in FSA loan volume and reduction of delinquencies has been achieved with no increase in farm loan staffing

levels.

Faced with a heavy work load and limited staff, we have developed ways to decrease the paperwork burden for both staff and program customers. Both the guaranteed and direct loan programs

now have abbreviated applications for loans of less than $50,000.

In February 1999, we published regulations which simplified and

streamlined the loan guarantee process. Within the next few

months, we will publish final regulations to dramatically streamVerDate 11-MAY-2000 10:00 Nov 25, 2002 Jkt 081040 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 81040.TXT SAG1 PsN: SAG1
6

line and simplify the emergency loan program for both farmers and

FSA staff.

We have also undertaken a major initiative to streamline all loan

program regulations. When this project is complete, 1,200 pages of

text will have been deleted, and the number of required forms reduced by almost 30 percent.

Now to the future. Any discussion of the future of agriculture

must include beginning farmers, since they are the future of farming. There is keen interest in this issue and rightfully so. FSA is

not able to loan all the funds the law requires to be targeted to beginning farmers. This should come as no surprise given the current

state of the farm economy. When even established farmers are

struggling financially, it is extremely difficult for someone with

modest financial resources to get started in farming.

Mr. Chairman, as you consider a new farm bill, there are two

areas from the 1996 Farm bill that should be brought to your attention. One of them imposes a lifetime ban from FSA loans for

anyone who had a farm loan debt forgiven. Certainly, there must

be limitations to avoid program abuses such as the revolving door

situation. However, you may wish to consider whether a different

approach is possible—one that will prevent the abuse targeted by

the 1996 change, but allow farmers another opportunity to become

successful farmers.

The second provision from the 1996 Farm bill that I mention is

operating loan term limits. That is a limitation on the length of

time a person may receive FSA farm operating loans. Since the agricultural economy is increasingly volatile, the committee may wish

to review this provision further. It is possible that a farmer reaching the term limit under economic conditions like these today may

have done everything right and still be unable to get private sector

financing.

Mr. Chairman, I would like to alert the committee to a few other

issues that warrant attention as the new Farm bill is developing.

One is the requirement that FSA accept an applicant’s projected

repayment ability as collateral for emergency loans if the available

collateral is not adequate to secure the loan. The result is that FSA

is making emergency loans without adequate tangible collateral.

This marks a return to past policies which resulted in multi-billiondollar losses.

Second, the issue of shared appreciation agreements is one that

I am sure most of the committee members are familiar with. These

agreements were entered into as a part of the process of writing

down or writing off debts under the provisions of the Farm Credit

Act of 1987. A significant number of these agreements are now

coming due. Under the current economic conditions, many farmers

may not be able to pay the amount due under their agreement.

However, some farmers will not be able to keep the agreement and

will face liquidation. Any additional relief from the requirements of

these agreements will require legislation.

Third, there is another situation I want to bring to the committee’s attention. As we help borrowers deal with financial problems,

one action taken to help farmers through tough times it the deferral of a loan installment to the end of the loan. This is an action

that has been taken primarily to help borrowers through weatherVerDate 11-MAY-2000 10:00 Nov 25, 2002 Jkt 081040 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 81040.TXT SAG1 PsN: SAG1
7

related cash shortfalls. As of March 31 of this year, 15,862 borrowers have these deferrals on one or more loans. Unfortunately, with

the prolonged period of low prices we are experiencing, it is likely

that many of these borrowers will not be able financially to cope

with the remaining balance when the loans mature. Current plans

are to utilize the existing loan servicing authorities in the regulations to address these situations.

However, if economic conditions do not improve, the result could

be a significant number of account liquidations. It is important that

the committee be aware of this situation.

In summary, Mr. Chairman, the loan programs have come a long

way, but success is a journey, not a destination, and we still have

a long and challenging trip ahead. We look forward to working

with the committee as you wrestle with the issues that I have

raised today and other complex farm lending issues as well.

This completes my statement. I will be glad to answer any questions.

The CHAIRMAN. Thank you very much, Ms. Cooksie. We appreciate that testimony.

Mr. Dyckman.

[The prepared statement of Ms. Cooksie can be found in the appendix on page 51.]

STATEMENT OF LAWRENCE J. DYCKMAN, DIRECTOR OF

AGRICULTURAL ISSUES, U.S. GENERAL ACCOUNTING

OFFICE, WASHINGTON, DC, ACCOMPANIED BY

CHARLES ADAMS, ASSISTANT DIRECTOR

Mr. DYCKMAN. Good morning, Mr. Chairman and members of the

committee.

With me is Chuck Adams, an assistant director, who has done

much of our farm loan program work.

I want to thank you for this opportunity to testify on the Department’s farm loan portfolio which is administered by FSA. We do

have encouraging news to report, and you have heard it from Ms.

Cooksie and Mr. Conklin. The condition of the farm loan portfolio

has significantly improved over the last several years.

With this comes a cautionary note. While we, the General Accounting Office, have removed farm loan programs from our highrisk list, the program will still need to be continuously monitored.

I will not go into much background on the loans. We have heard

that. I just want to indicate that FSA does face somewhat conflicting tasks in managing these programs. They are to provide highrisk borrowers with temporary credit so that they can stay in farming until they are able to secure commercial credit, but at the same

time, they have the responsibility of ensuring that the taxpayers’

investment is adequately protected.

As the chairman and members know quite well, these programs

are not without significant costs to the Government. FSA’s losses

totaled almost half a billion dollars during fiscal year 2000, although this is far less than the $1.2 billion of losses in 1996—and

if we go back to 1990, the losses exceeded $3 billion. We have made

progress.

The loan portfolio has improved, although it still contains many

delinquent loans. The outstanding principal owed on direct and

8

guaranteed loans totaled more than $16 billion as of September 30,

2000. Of this amount, about $2.1 billion was owed by delinquent

borrowers, and most of this, about $1.8 billion, was owed on direct

loans.

This past year, we removed the farm loan programs from our

high-risk list for two reasons. First, as I have indicated, the financial condition of the programs had improved since we first designated them as high-risk in 1990. Second, the actions taken by the

Congress and the FSA have had a significant positive impact on

the programs.

We had identified the farm loan programs as high risk because

there were billions of dollars in losses stemming from loan defaults

primarily made in the 1980’s and because more losses were likely

to occur, and they actually did occur.

The programs had evolved into a continuous source of subsidized

credit for thousands of borrowers, and the problems that the program experienced, some of which were congressionally directed,

contributed to financial risks. Because the Department field office

officials had not been complying with existing loan and property

management standards, these risks continued.

Since the mid-1990’s, FSA has addressed many loan management change and problems, and the Farm bill has altered the programs’ policies to reduce risk. For example, the Farm bill prohibited borrowers who were delinquent on FSA loans from obtaining

additional direct farm operating loans and limited borrowers to one

instance of debt forgiveness. It also required borrowers to have or

agreed to obtain hazard insurance, and it limited the length of time

that FSA loan assistance is available.

These and other changes improved the financial condition of the

programs. For example, the amount of principal owed by borrowers

who were delinquent on their direct loans and the percentage of

debt owed by such borrowers declined each year, from $4.6 billion,

or about 41 percent of the outstanding principal in fiscal year 1995,

to $1.8 billion, or about 21 percent of the outstanding principal in

fiscal year 2000. The figure on page five of my full statement

graphically displays the improvements in those programs.

While we have removed the farm loan programs from our highrisk list, USDA and the Congress need to continue to monitor their

performance, and we will help them. This is particularly important

since more recent legislation has eased some lending restrictions

that had been put in place by the Farm bill. You have heard that

from the witnesses prior to myself today.

These impacts, as well as any additional changes in economic

conditions that increase risk, will need close monitoring so that adjustments can be made if the integrity of the loan programs comes

under pressure.

Mr. Chairman and members, this concludes my statement. I will

be happy to answer any questions.

[The prepared statement of Mr. Dyckman can be found in the appendix on page 56.]

The CHAIRMAN. Thank you very much.

I appreciate the fact that each one of you has traced the history

from at least 1990 with some allusion to the problems that the

committee faced in the 1980’s, which were horrendous. Many days

9

have been consumed in thinking about how would any of this

money ever be collected and what kind of write-offs would occur

year by year in the budget. You, Mr. Dyckman, pointed out that

in 1990, about $3 billion was assessed to the budget that year. It

could have been much more. The question, philosophically, was

how much burden could the deficit take at that stage.

We have come to a point now where about half a billion dollars

is currently reflected in the budget that we just passed, which is

still a lot of money, but at the same time very different, and of

course, the Federal Credit System was resurrected in the process

of all of this.

Now, each of you has reflected the dilemma that the committee

and the Congress face as we take a look at the Farm bill. Essentially, you point out that there were fewer delinquencies, and that

the balance sheet of American agriculture has been strengthened.

You, Mr. Dyckman, say that you are wary about this, that you

have taken agriculture out of the high-risk situation but at the

same time, you are casting an eye out there, because all of you

have reflected essentially large governmental payments, with cashflow to a good number of farms, making it possible for not only the

systems that you are reflecting, but country bankers generally, to

be repaid.

At the same time, Ms. Cooksie, you point out that even more applicants are coming in; more farmers are availing themselves of

credit. For those who are not acquainted with farming, as you

pointed out to begin with, essentially, the large farmers do the

most borrowing, and they are presumably sophisticated in the use

of credit, but these are large sums that are involved, and they are

continuing to know and gaining some profit, I suppose, from

leveraging those situations, or from necessity.

Let me ask each of you as banking observers—I have reflected

from my own experience, and it is generally true of American agriculture, that well-managed farms in this country over the course

of time may earn four percent on invested capital. This is a figure

that many farmers do not use as a part of their analysis, but as

they become familiar with our analysis in the committee, they

begin to think through that. Almost every other business in our society is deeply interested in return on capital.

Four percent is a very low figure in comparison to most other

areas in which credit flows or investment flows in this country, and

it means that that is an average for a well-managed farm situation—there are a good number of farms that are at 3, 2, one, or

zero.

The problem for you issuing credit is that you are going into an

industry that has at least this particular profile or outlook as opposed to one in which the possibility of higher return seems to be,

if not everywhere, at least more promising.

I just wonder, given this predicament, in which essentially the

Congress has almost deliberately filled in the gap of net farm income, and the reason, clearly, why farms as a whole have a higher

net worth, is because this has occurred; why land values reflect

this—and you suggested that 25 percent of farm payments may be

capitalized into those land values. This is obviously an abnormal

situation.

10

Finally, anecdotally—and we could argue theoretically about

this—some would say that Government payments in fact encourage

production and some would even say overproduction, which encourages low prices, and which brings a circular problem to this. If we

were not to have the payments, however, you have testified that

probably land values might come down, and payments are capitalized into that, thus making everybody who is involved in the credit

business less creditworthy, or at least you would be somewhat

more suspect as you took a look at the situation.

We have, at least if I am correct in my assumption, a pretty low

rate of return business to begin with in all of this.

What advice do you have for us, given that analysis?

[Laughter.] Or, if you have a different analysis, please speak now

or forever hold your peace, because this is an important period that

we are coming into.

Mr. Conklin.

Mr. CONKLIN. Mr. Chairman, I do not think I would be as presumptuous as to give you or the committee advice about what we

can do about the situation, but I do think that you have put your

finger on what, as an economist, I feel is a growing longer-term

challenge for the farm sector.

As I pointed out, our best analysis at ERS shows that about 25

percent of the current value of farm land—that is for farm land

outside of urban areas—may reflect capitalized Government payments.

Now, to the extent—and this is one of the dilemmas of payments—to the extent that those payments get capitalized, and

asset values increase over time, that actually drives down the rate

of return on assets, because there is a higher asset base against

which we have whatever level of market earnings farmers are obtaining.

Although we are dealing now with a set of farm programs where

we are making payments on a different basis than we did prior to

1996, I think that at least the evidence to date as we look at what

real estate values have done is that that change did not completely

move us away from that kind of dilemma or that kind of potential

trap that existed prior to 1996; it seems still to continue to exist.

The CHAIRMAN. Ms. Cooksie, do you have any analysis of this situation?

Ms. COOKSIE. No. I wish I did. What I want to say is that by definition, as you know, we are the lender of last resort, which means

that if an applicant or a farmer can get commercial credit anywhere else in the world, he cannot get credit from us.

We also by definition are only supposed to make loans to small

family farms, which means that we tend to deal with smaller

farms, who also tend to get smaller farm payments. I can tell you

from our portfolio and when we talk to our staff in the field and

what I hear around the country that if it were not for these farm

payments, as you said earlier, there is a huge percentage of our

borrowers who would not have been able to cash-flow for the last

couple of years. As we are seeing cash-flows this year, the same

thing is true, that they would not be able to stay in business and

have any kind of cash-flow without the farm payments.

11

The CHAIRMAN. Of course, that makes very astonishing, although

true, your statement in the second paragraph that delinquencies

are at an all-time low and your lending——

Ms. COOKSIE. Is up.

The CHAIRMAN [continuing]. You are the lender of last resort for

people who are small, who have the most difficulty—and even more

interesting, I suppose, is that only seven-tenths of one percent of

principal outstanding resulted in losses, which is a remarkable

banking figure given the group that you have described.

Now, as you point out, then, the payments are the plug in this

situation, and for those who have not followed our dilemma here

before, for example, the committee often takes a look at USDA’s report—it is almost AGA-type—but it says that at some point, net

farm income—not cash, but net farm income—has been roughly

$45 billion, at least at the 1997–1998 level. If the prediction is

going to fall to $41 billion, ipso facto, $4 or $5 billion is suggested

as a plug. It may come in the form of a second AMTA payment or

various other variations that the committee and appropriators have

thought of, but we get it back up to $45 billion again, essentially.

There is almost a ‘‘hold harmless’’ situation here. Now, that does

not mean that it spreads evenly over all of American agriculture,

because some are up and some are down, and this is a total aggregate. The effect of this has been to produce a net worth of all of

agriculture which is higher each year, almost counter-intuitive to

all the testimony coming before our committee describing chaos,

bankruptcy, and difficulty.

It finally comes down to the fact that the farm program has become a careful analysis, really, of this AGA-type of what is required to keep things afloat.

Now, as you are pointing out, one effect of this, however, is growing capitalization of this in land values, so young farmers come to

us and say it is getting more expensive every year to buy this

land—even though things may be low price and high inputs, as

Senator Lincoln was saying, why is land going up?

Well, you have described why land goes up, why the net worth

of those in the business cumulatively, at least, increases. Without

getting into any more analysis—the Sparks Corporation analysis of

the structure of American agriculture explains a lot of this, and we

will have to examine that carefully, too—namely, that about

150,000 farms, eight percent, do 72 percent of the business. This

is a very concentrated group of people in production agriculture—

or 15 percent more, about 87 percent of the whole group, and this

is only 300,000 farms out of 2 million, which makes for an interesting dilemma for the other 1.7 million, who have a zero outcome

from agriculture on a net basis; some make money, but most lose,

and almost all the income comes from off-farm. As you pointed out,

that plays into this, too; some of that off-farm income has been important to the growth of our whole economy, including parts of

rural America.

Well, I appreciate this information. It is extremely helpful, and

the details that you have will be very helpful to us.

Now I would like to recognize my colleague, Senator Harkin.

12

STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR

FROM IOWA, RANKING MEMBER, COMMITTEE ON

AGRICULTURE, NUTRITION, AND FORESTRY

Senator HARKIN. Thank you very much, Mr. Chairman.

I have listened with interest to your comments and questions,

and we are in a dilemma, as you have stated, Mr. Chairman. It

just seems to me that if we continue on the same path, we further

capitalize in land values Government programs to the point where

the disparity becomes wider and wider and gets bigger and bigger

all the time, and where we really do blank out the prospects for

young farmers getting involved at all in agriculture, unless they inherit the land—if you inherit it, that is one thing, and I assume

we are going to do something about estate taxes here very shortly

in the tax bill. That is just about the only way they are going to

be able to get involved.

On the other hand, if we cut it off, there could be a terrible sort

of wrenching movement in all of agriculture in terms of its capital

assets and the debt-to-equity ratio, and everything could come

crashing down.

That somehow, it seems to me we have got to find a way out of

this with—what is the term—a soft landing somehow down the

pathway. Certainly, the 1996 Farm bill did not do that, our challenge in the next Farm bill is to find out how we can do that. We

cannot fall off the edge of the cliff, but there has got to be some

glidepath down to a softer landing on this thing so that we do not

keep increasing the fact that Government payments are capitalized

in land costs.

The other thing is that of late, I have become aware that many

of these payments that have gone out really do in fact do the opposite of what we always talk about around here. We want to keep

a family sized structure of agriculture out there, healthy rural

areas, and yet many of our programs going back many years have

had just the opposite effect of concentrating land. It was simplified

by one farmer who said the bigger you are, the higher your payment rate, and the higher your payment rate, the bigger you are,

it means you can bid up the price of land more than the smaller

farmer down the road, and therefore, you just bid up the price of

land and add it into your base. We have got a perverse effect on

land consolidation and concentration agriculture other than what

we have said we wanted to do here. That is a challenge for us in

how we are going to work this out in the next Farm bill.

That is just a musing on this and sort of a further extension of

what the Chairman was just talking about.

More specifically to an issue that came up in the 1980’s, we were

here in the 1980’s when we had the Farm Credit Act of 1987 in

which we restructured a lot of farmers to keep them in business.

One of those you mentioned was the shared equity agreements that

farmers made, and those 10 years and more are up now, and a lot

of them are coming due, and farmers are now being startled by

that—they either forgot about it or did not pay attention to it. You

mentioned it briefly in your comments. You said that ‘‘FSA has

taken extensive administrative action to mitigate the impact of

these agreements. However, even with deferral of payments and

13

development of longer-term repayment schedules, some farmers

will not be able to keep the agreement and will face liquidation.’’ However, it seems that these farmers, according to what I heard

Mr. Conklin and you say, are basically doing all right now; they are

making a living. I assume that many of them probably have good

off-farm income, obviously, either from a spouse and/or the actual

farmer during the wintertime up in our area getting a job someplace and having additional income.

[The prepared statement of Senator Harkin can be found in the

appendix on page 40.]

Senator HARKIN. Why would they face liquidation if they are

doing all right? You said that even with deferral or development

of longer-term repayment schedules they will face liquidation. Why

would that be?

Ms. COOKSIE. Well, I am not sure that I quite agree that most

farmers, particularly small farmers, are doing all right. They are

on the edge. They are making it, but I am not sure that they are

doing all right that they could take on this additional debt.

What we have seen in the shared appreciation agreement is

something that not many people thought would happen, that the

land values we have talked about have gone up, so they owe quite

substantially on their shared appreciation agreements. Most of the

borrowers that we have have such a debt structure out there now,

they cannot take on any more additional debt, plus they do not

have cash money to pay the shared appreciation agreements.

There is a problem for farmers we have seen who are not going

to be able to pay. Farmers are holding on by their teeth, some of

the small farmers that we deal with who are in these shared appreciation agreements, but I do not think they could take on the additional debt that it would take to pay these shared appreciation

agreements.

Senator HARKIN. You are saying that, basically, they are making

it, but they are not banking any money.

Ms. COOKSIE. I do not think they are banking money; we do not

see banked money in our cash-flows.

Mr. DYCKMAN. If I could just add a comment, Senator, as you

know, another thing to consider is whether or not these farmers

are getting direct payments, and many of the small farmers do not.

When we talk about the apparent prosperity in farming, a lot of

that has to do with direct payments from Uncle Sam, and many of

the small farmers do not receive those.

Ms. COOKSIE. Or very little.

Mr. DYCKMAN. Or very little.

Senator HARKIN. In proportion to how much a larger farmer

would get.

Mr. DYCKMAN. Right. As you know, we are doing a study for you

and will be issuing a report in about a month that documents the

details of that.

The CHAIRMAN. Who gets what.

Senator HARKIN. Yes, who gets what and how much and what

the proportion is.

Do you have any advice on these shared agreements? I would

hate to force them out. If we are going to make changes that might

inure to their benefit down the pike, it would be a shame to force

14

them out. If they are there, and they are making it—you are right,

they may not be banking a lot of money—but at least they are

making some form of a living. I know a lot of these former farmers,

and I know they are not in good shape, but it would not require

much to keep them in business and keep them going.

Ms. COOKSIE. That is why I mentioned it. It is one of the things

that we are going to have to look at, because there is a substantial

number of farmers out there who are in that situation. We have

done, as I said, everything administrative that we can do with the

law. We have had them defer payments up to three years; we have

changed and lowered the interest rate on the non-program loan; we

have even allowed them to take out any capital improvements they

have made on the property. We have done everything administratively, and something is going to have to be done with the statute

if we are going to actually do something to help them out.

Senator HARKIN. It is just apparent to me that if a farmer were

in those dire straights in the 1980’s on the credit crunch, and they

got in and restructured, as many of them did, and got into these

shared equity agreements, if they are still alive and farming today,

they are probably pretty good managers.

Ms. COOKSIE. Exactly. I do not want to say that shared appreciation agreements were not a good idea. Obviously, it kept them in

business for an additional 10 years, because we did write down and

restructure loans so they could stay in business. I do not think anybody thought land values would go up the way they have; I am not

sure anybody could have foreseen the commodity prices. Those are

the combinations that make it pretty unworkable for most farmers

right now.

Senator HARKIN. Thank you very much.

Thanks, The Chairman.

The CHAIRMAN. Thank you very much, Senator Harkin.

We thank each of you for your expert testimony, the papers and

preparation.

The CHAIRMAN. We call now upon a second panel to assist us,

and that will include Mr. Jay Penick, President and CEO of Northwest Farm Credit Services; Mr. Henry Edelman, CEO of Farmer

Mac; Mr. John Evans, Jr., CEO of D.L. Evans Bank; and Mr. Gary

Canada, President of the Bank of England in England, Arkansas.

Gentlemen, as I mentioned to the prior panel, all of your statements will be published in the record in full, and we will ask that

you summarize your thoughts in five minutes if you can do that.

I will ask you to testify in the order I introduced you, and that

would be first of all, Mr. Penick.

STATEMENT OF JAY PENICK, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, NORTHWEST FARM CREDIT SERVICES,

WASHINGTON, DC, ON BEHALF OF THE FARM CREDIT

COUNCIL

Mr. PENICK. Thank you, sir.

Good morning, Mr. Chairman and members of the committee.

Thank you for inviting me to testify here today and present the

Farm Credit System’s view of current credit conditions.

I am Jay Penick, president and CEO of Northwest Farm Credit

Services. We have 44 branches and 460 employees who provide

15

$3.3 billion in loans to more than 14,000 producers in Washington,

Oregon, Idaho, Montana, and Alaska.

I want to provide the committee with an update on Farm Credit’s

mission and our success in achieving it. I will provide an assessment of the rural and agricultural credit markets, and finally, I

will identify legislative changes needed if Farm Credit is to continue to fulfill its role.

First, let us take a look at Northwest agriculture. Serious stress

continues for many agricultural producers due to low prices and increased operating costs. Producers who started into this downturn

in sound financial condition are now suffering from the ongoing difficult period. In addition to low prices, we head into 2001 with low

snow pack, a dry spring, and increased energy costs.

In addition to that, 1,400 farmers in Oregon’s Klamath Basin

had their irrigation water cutoff and diverted to preserving water

levels for the endangered suckerfish and salmon. Without irrigation water, farmers will not be able to plant, and the impact on

their operations and the communities they live in will be enormous.

Farm Credit is determined to do all that we can to help our affected customers. We urge Congress to also assist these troubled

producers.

Farm Credit has a specific but critical mission—to help ensure

the health and well-being of American agriculture by providing a

dependable and competitive source of financing. For 85 years now,

Farm Credit has successfully fulfilled that mission.

Mr. Chairman, as you well know, Farm Credit is not the lender

of last resort. Congress has assigned that duty to the FSA. Farm

Credit uses FSA’s guaranteed programs aggressively to help both

young and disadvantaged as well as seasoned producers get

through difficult times.

The preferred lender program in which we are an active participant has also been successful.

Mr. Chairman, we are pleased to announce numbers just received from the Farm Credit Administration on Farm Credit’s service to beginning producers. During 2000, Farm Credit made almost

27,000 loans that benefit beginning farmers and ranchers. At a

point of comparison, during a 7-year period between 1993 and

1999, USDA’s Farm Service Agency guaranteed a total of 5,000-

plus loans to beginning farmers.

When Congress addressed the law governing the Farm Credit

Act in 1971, it stated Farm Credit’s mission very clearly—‘‘to encourage farmers’ and ranchers’ participation in the management,

control, and ownership of a permanent system of credit for agriculture responsive to the credit needs of all types of agricultural

producers having a basis for credit.’’ Each association and bank has

a board of directors, farmer director, to fulfill this mission.

Subchapter T structures are also used in nearly two-thirds of the

farm credit associations. In the past six years, Northwest has returned over $122 million of our profits to our customers.

In summary, Farm Credit has been a success story. Congress authorized the Nation’s farmers and ranchers to build a privately

owned system linking the resources of Wall Street to agriculture

and rural communities, and we are doing that.

16

Farm Credit’s financial condition remains strong, but this financial strength is due in large measure to the level of Government

payments to producers over the past several years.

On behalf of our customers, I want to thank this committee for

its efforts to assist producers through this difficult period.

It is important to note that in the Northwest, like many other

parts of the country, we have a large percentage of agriculture concentrated in commodities not traditionally supported, like potatoes,

fruit, nursery, and vegetables. It is easy to see the impact of your

support as we compare the balance sheets and earnings of supported commodities and the financial stress evident in nonsupported commodities. We expect that additional Government assistance will again be necessary in 2001 and beyond. We urge continuation of your recent work to assure adequate assistance.

Despite our current financial strength, Farm Credit institutions

see problems in the future. Fifty-five percent of our associations expect an increase in troubled loans in the coming year. In addition,

we note financial difficulties in farm-related businesses and coops,

particularly input suppliers and marketing firms. We encourage

the committee to closely examine this area.

U.S. agricultural credit markets have changed dramatically in

the past decade. In addition to expanding the authorities of commercial banks, Congress awarded them nearly unfettered access to

funding from GSEs. Commercial banks have in effect become GSEs

with virtually unlimited operating authority. Meanwhile Farm

Credit’s authorities remain basically unchanged.

Farm Credit’s charter needs updating. It has not changed materially since 1971. A few areas that might be considered are valueadded agribusiness lending, increased community size and rural cooperatives, equity capital for rural businesses, and elimination of

unduly burdensome and costly regulations.

In summary vigorous competition between Farm Credit, commercial banks, and other lenders is benefiting U.S. agriculture. Producers have choices, and that is critical. In short, pricing is competitive, service is better because Farm Credit ensures competition in

agricultural and rural credit markets. The more intense the competition, the greater the benefit for American agriculture.

Thank you, Mr. Chairman, for allowing us to give you our views

on serving agriculture.

The CHAIRMAN. Thank you very much.

Mr. Edelman.

[The prepared statement of Mr. Penick can be found in the appendix on page 64.]

STATEMENT OF HENRY D. EDELMAN, CHIEF EXECUTIVE

OFFICER, FARMER MAC, WASHINGTON, DC

Mr. EDELMAN. Thank you, Mr. Chairman.

Mr. Chairman, distinguished members of the committee, my

name is Henry Edelman. I am President and Chief Executive Officer of Farmer Mac.

It is an honor to appear before this committee to offer testimony

on an important and timely subject—the state of the delivery system for financial credit to farmers and ranchers in the United

States and Farmer Mac’s role in that process.

17

I appear before you today on behalf of a company rapidly advancing in its congressional mission of operating an efficient secondary

market for agricultural mortgages. Our recent successes and strong

current condition derive from the foresight of this committee and

the consequent passage of the Farm Credit System Reform Act of

1996.

Today, thousands of farmers and ranchers have more than $3.1

billion of agricultural mortgages that back securities guaranteed by

Farmer Mac. We actively support mortgage lenders, large and

small, in all sectors of the agricultural credit industry, with effective programs and products.

Since 1996, Farmer Mac has contributed to lender liquidity, capital adequacy, and increasingly competitive rates and loan products

for farmers and ranchers seeking mortgage funds.

Over the same period, Farmer Mac increased its capital from about $12 million at the end of 1995 to over $100 million at the

end of 2000, and satisfied every condition set forth by Congress in

the 1996 legislation to ensure its continuing safe and sound operation.

Over the last five years, we have not only put together programs

that have appealed increasingly to both agricultural lenders and

the farmer borrowers they serve, but also broadened the acceptance

of Farmer Mac to all sectors of the agricultural credit industry.

We believe that we have made a great deal of progress, yet we

know there is much more to be done before the industry reaches

the level of efficiency and financial sophistication that exists today

in the residential home market.

The year 2000 was the third consecutive year that prices for core

agricultural commodities were at levels that promoted Congress to

provide additional income support to farmers to avert serious economic stress. Conditions likely to place continued stress on the U.S.

agricultural economy persist in 2001.

Despite the low prices for agricultural commodities, the value of

good farm land was stable or slightly higher in most regions of the

Nation during 2000. Each commercial lending sector maintained or

increased its share of the agricultural mortgage market during

2000, and agricultural lenders reported profitable performance,

good loan quality—with some recent increases in delinquency and

nonaccrual loans—and liquidity adequate to support lending activities during 2000.

As I noted in my opening comment, the 1996 reform legislation

dealt very effectively with the statutory limitations that had constrained our development up to that time and provided the authorities Farmer Mac needed to move forward aggressively in the development of an efficient secondary market for agricultural mortgages.

The 1996 legislation enabled Farmer Mac to develop and offer to

agricultural lenders mortgage credit enhancement programs that

have contributed materially to lender competitiveness and mortgage availability. The relationships that we have established with

those lenders, including the Farm Credit System, commercial

banks, and insurance company lenders, should continue the expanding use of the Farmer Mac secondary market. That process

should ultimately move lenders away from dependence on mortgage portfolio management strategies and toward greater reliance

18

on mortgage securitization, which permits borrowers greater choice

and allows lenders to reduce credit concentrations.

As has been proven in the residential sector, this process will

benefit both lenders and borrowers in the agricultural sector.

Farmer Mac is proud to be an intermediary in this beneficial evolution.

On a related matter, I would also like to comment on the USDA

guaranteed loan programs, which were extensively revised by Congress in the 1996 Farm bill. As you know, we purchased FSA guaranteed loans in our Framer Mac II program. In most respects, we

believe that the changes made in 1996 have contributed to a more

streamlined and financially sound FSA guaranteed loan program.

Many of the lenders we work with report that the processing of

guaranteed loans has improved and that changes in loan limits and

the allocation of funds have added flexibility to the programs. Nevertheless we believe that the programs could be reformed further

to provide eligible borrowers with greater access to long-term fixedrate loans at more competitive rates of interest.

The primary policy goal for agricultural credit over the next decade should be for the entire industry to achieve a level of parity

with the residential mortgage market with regard to financing

techniques and structures supporting highly competitive mortgage

products for farmers and ranchers.

Credit legislation could be framed to support the continuing evolution of the agricultural credit industry toward these goals. This

might be accomplished by reference to the Farmer Mac secondary

market rates and the sale and securitization of loans that are already in the USDA. As applied to those loans, an approach of that

kind would open opportunities for borrowers to have greater access

to long-term fixed-rate loans and for variable interest loans to be

standardized and tied to published indices.

At the same time, adequate lender profits must be preserved to

ensure effective competition among lenders and provide borrowers

with ready access to multiple lending sources.

Adjustments to Farmer Mac’s statute with a view toward reducing or eliminating certain limitations devised some 12 years ago

would also be useful. We think that this could include, for example,

expanding the definition of loans eligible for the Farmer Mac secondary market to include rural development loans or rural small

business loans in rural areas so far as there is no efficient secondary market for them today.

These are preliminary ideas, but we are submitting them for examination by the members and staffs of the committee. We welcome the opportunity to discuss our ideas further with you, Mr.

Chairman, and thank you for having us here today.

The CHAIRMAN. Thank you very much, Mr. Edelman.

[The prepared statement of Mr. Edelman can be found in the appendix on page 72.]

The CHAIRMAN. Mr. Evans, I pointed out, but there was a din of

transition between the panels, that you are from Burley, Idaho,

and you are coming in on behalf of Independent Community Bankers of America in addition to your own experience at the Evans

Bank.

Please proceed.

19

STATEMENT OF JOHN EVANS, JR., CHIEF EXECUTIVE

OFFICER, D.L. EVANS BANK, BURLEY, IDAHO, ON BEHALF

OF INDEPENDENT COMMUNITY BANKERS OF AMERICA

Mr. EVANS. Thank you very much, Mr. Chairman, for letting me

testify this morning.

My name is John Evans, Jr. I am CEO of D.L. Evans Bank in

Burley, Idaho, a small community of less than 10,000 people in the

heart of potato, sugar beet, small grain, and livestock country. Our

family owned bank has served our community for nearly 100 years

and has survived agricultural disasters, the Great Depression, and

the recent downturn in the farm economy.

I am vice-chairman of ICBA’s Agricultural-Rural America Committee.

Last year, ICBA sent President Bush and the new Congress a

special report entitled, ‘‘Community Banking Issues and Answers

Brief: A Community Bank Agenda,’’ which included some of the

farm policy-related recommendations I will mention today.

Next week, ICBA’s Agricultural-Rural America Committee will

be meeting here in Washington to discuss the farm policy and related issues. A specially appointed Farm and Rural Credit Policy

Task Force will also be reviewing these issues to present additional

recommendations.

Mr. Chairman, unfortunately, farmers today face a triple-whammy of despairingly low prices, sharply rising energy and input

costs, and an unlevel playing field in the international trade arena.

Our recommendations are as follows.

First, we support the adoption of another farm aid package. Congress may need to adopt a package similar in size to last year’s

package. We urge ample funding flexibility be provided for the next

two years so that farm aid payments can be front-loaded if necessary, especially if the new Farm bill is not adopted in a timely

fashion next year.

Our second key recommendation is to pass a new farm bill that

includes countercyclical income mechanisms that automatically

provide farmers more assistance in years when prices fall to unacceptable levels. From a lender standpoint, we value predictability

and profit in the farmers’ income and cash-flow statements. We

hope a new farm bill will allow farmers and lenders to plan at least

3 to 5 years in the future.

In regard to income mechanisms, we are not currently wedded to

one particular approach, but the structure of the next Farm bill

could include not only fixed payment mechanisms, such as AMTA

payments if they are continued, but also countercyclical mechanisms. The latter would provide supplemental income payments

when farm prices fall. Also, tax-deferred individual savings accounts could work with and supplement the other income mechanisms, for example, by creating a ‘‘Farmer 401(k)’’ or quasi-retirement program for at least part of the individual savings account.

Some goals for this type of savings account program are, No. 1,

maximize farmer participation by allowing some portion of Government payments to be funnelled into accounts, and allow farmers to

match a portion of the Government payments from his other income; second, include a tax deferral component that can work over

long periods of time to generate significant savings; third, limit

20

withdrawals to hardship or other specific criteria; fourth, target

participation to insured financial institutions; and fifth, improve

producers’ finances by allowing long-term accumulation of assets to

eventually free farmers from dependence on Government payments.

Our third key set of recommendations are to fully fund the

USDA loan guarantee programs. A few ideas include: provide a

permanent source of contingency funds to prevent disruptions in

the financing of guaranteed loans; permanently eliminate the 15-

year limit on eligibility; provide some flexibility to raise the loan

size limit.

Our fourth recommendation is to adopt policies that help diversify rural America. Mr. Chairman, one important aspect of

strengthening the farm safety net involves helping rural communities diversify their economic base. More farm families appear to

be relying on off-farm income to support farming enterprises.

USDA indicates that 90 percent of farm household income came

from off-farm sources and averaged $60,000 last year. Yet trends

indicate that counties relying largely on agriculture as a main industry lost significant population in the last decade. The recent

2000 Census revealed that while the general population grew 13

percent in the 1990’s, 676 primarily rural counties lost population.

Diversifying our rural economy will help people in rural America

and will help farm families have additional sources of income,

thereby reducing the need to rely solely on farm programs for survival. Rural economic diversity will also keep small businesses

thriving on Main Street and help sustain the rural community

banks that finance them.

We offer these suggestions. First, increase deposit insurance, and

index it to inflation. Deposit insurance was last increased in 1980,

and its value has been eroded by one-half. A much higher level is

needed to adequately ensure the retirement needs of the aging

rural population and to attract new deposits, to provide more security for large financial transactions conducted by larger farms and

rural businesses, and to keep money in our rural communities so

that it can be recycled into new investments and new opportunities

for the communities’ rural residents.

Second, increase funding for USDA’s Business and Industry Program. Last year, Congress increased the B and I guarantee program by 50 percent, but that was not enough. About 400 banks

now use the program. There was still excess demand of $1 billion

that was not funded. More funds for B and I would be a very costefficient way to strengthen the rural safety net and the farm economy.

Finally, we need policies to spur greater investment in telecommunication technologies in rural America to help us bridge the

digital divide between our rural and urban areas.

Thank you, and I will be happy to answer any questions.

The CHAIRMAN. Thank you very much, Mr. Evans.

[The prepared statement of Mr. Evans can be found in the appendix on page 108.]

The CHAIRMAN. At this point, since the chair is the only surviving Member present on the Senate side, and a roll call vote is unVerDate 11-MAY-2000 10:00 Nov 25, 2002 Jkt 081040 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 81040.TXT SAG1 PsN: SAG1
21

derway, as you can tell by the white light, I will call a short recess,

vote and do my duty, and then return.

I am sorry for the interruption, but we look forward to hearing

from you, Mr. Canada. You will have an opportunity to catch your

breath and prepare for your testimony.

We will adjourn for just a moment.

[Recess.]

The CHAIRMAN. The hearing will resume.

Mr. Canada, you were introduced as from the Bank of England.

A number of our members asked me about that, and I explained

that you are from England, Arkansas.

Mr. CANADA. Yes, sir. I have had that problem more than once.

The CHAIRMAN. I suspect so. It is good to have you here, and

please proceed.

STATEMENT OF GARY R. CANADA, PRESIDENT, BANK OF

ENGLAND, ENGLAND, ARKANSAS, ON BEHALF OF THE

AMERICAN BANKERS ASSOCIATION

Mr. CANADA. Mr. Chairman and members of the committee, I am

pleased to be here on behalf of the American Bankers Association

to participate in this important hearing to examine the state of

credit in agriculture.

I am Gary Canada, President of the Bank of England in England, Arkansas, and I am chairman of the ABA’s Agricultural and

Rural Bankers Committee.

The Bank of England was chartered in 1898 and has provided

credit to farmers, businesses, and others in and around England

since that time. Over half of our loans are to producers. For most

of my banking career, I actively farmed in the England area.

We wish to thank you, Mr. Chairman, and this committee for

your prompt and effective response to the critical needs of farmers

and ranchers. You helped to avert a serious and extended period

of economic disruption.

At the end of 2000, banks had nearly $75 billion in loans outstanding to farmers and ranchers. For every dollar of agricultural

credit outstanding, 41 cents is loaned by banks. Loan quality remains strong and losses on all farm loans have been low. However,

continued low commodity prices and the uncertain nature of future

Federal assistance to agriculture has heightened our concern about

the continued viability of our farm and ranch customers.

From early January to early May of this year, staff of the ABA

Center for Agricultural and Rural Banking conducted 19 listening

sessions in 14 States. Nearly 1,000 bankers and other stakeholders

participated in these sessions. In the sessions, we talked about a

wide range of topics, from Federal support for agriculture to trade

to FSA programs to recommendations for the 2002 Farm bill.

Of the many policy options that we discussed during our listening sessions, there was consensus about the need to create a farm

policy that is consistent and allows for some level of certainty for

both producers and the bankers that finance them.

The guaranteed farm loan programs offered by FSA are some of

the most cost-effective tools that Congress can provide to farmers

and ranchers during difficult economic times. Because these proVerDate 11-MAY-2000 10:00 Nov 25, 2002 Jkt 081040 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 81040.TXT SAG1 PsN: SAG1
22

grams are such an important part of access to credit, we urge you

to make funding for these loan programs a priority.

We also strongly recommend that Congress permanently repeal

the 15-year term limit on guaranteed loan eligibility.

In 1992, Congress approved a low-documentation loan program

for FSA guarantees. At that time, the loan limit was set at

$50,000. We recommend increasing the ceiling to $150,000 on these

applications.

Many USDA services still require direct farmer contact by the

FSA, but guaranteed lending is not one of them. Because many

program delivery problems stem from the highly localized structure

that USDA maintains, FSA should consolidate guaranteed loanmaking and loan servicing in specialized offices to ensure consistency of program delivery.

For the past three years, Congress has approved emergency assistance to farmers. USDA determined that the additional payments could not be assigned with an existing assignment form even

if a producer had assigned to the bank payments from all programs. FSA should create a blanket assignment form for USDA

benefits that would attach to all program benefits now and in the

future.

Bankers are very aware of the work that this committee and others have done to improve the Federal Crop Insurance Program in

recent years. We urge you to seek additional ways to make crop insurance a more effective tool for producers to manage production

and price risk.

Bankers are enthusiastic about FFARRM accounts. FFARRM accounts would encourage producers to save cash when they have a

surplus and would allow them to balance their cash-flow when

their earnings are down. Additionally, FFARRM accounts would

provide a new source of deposits to banks which would then lend

these funds back to businesses and individuals in their communities.

One of the best sources of low-cost funds for beginning farmers

is loans that are originated by banks using State industrial revenue bonds. ‘‘Aggie bonds’’ allow banks to use the bonding authority

of the participating States to fund qualified beginning farmer

loans. More credit could be made available by banks to more beginning farmers if aggie bonds were exempted from Federal revenue

bond volume caps.

Bankers support efforts to stimulate economic development in

rural America by lending to the businesses that support in some

way or add value to the crops and livestock produced by farmers

and ranchers.

One of the most widely used non-farm credit programs is the

Business and Industry Guaranteed Loan Program. B and I guarantees allow us to make loans to retain existing businesses in our

communities and to help attract new businesses.

There have been some problems with the program in the past.

Prudent steps have been taken to control loan losses and address

other program problems. Unfortunately, the damage has been

done, and all future borrowers are being asked to pay the price

through increased loan fees. We oppose increasing loan fees on B

and I guarantees.

23

The banking industry has a substantial commitment to agricultural and to rural America. Bankers will continue to work with

their customers to restructure debt, to provide credit to operate, to

find ways for beginning farmers to get started, and to provide the

financial services and stability that rural communities need.

The ABA looks forward to working with you as you address the

challenges facing our Nation’s farmers, ranchers, and rural communities.

I am happy to answer your questions.

Thank you, Senator.

[The prepared statement of Mr. Canada can be found in the appendix on page 119.]

The CHAIRMAN. Thank you very much, Mr. Canada.

Let me ask this question of you to begin with. Staff has pointed

out to me that columnist Tom Mertons of Agriculture On Line

Magazine recently noted that there are fewer and fewer experienced agricultural bankers who understand the business of farming

in the commercial banks of this country, and his fear was that commercial banks lacking those persons or that expertise would move

away from lending.

What is your observation—not necessarily from the Bank England’s standpoint, but in your overall role this morning, looking at

it from the standpoint of American Bankers? Is this the case, that

there are fewer and fewer persons who understand agriculture?

Mr. CANADA. Yes, sir, but that does not mean they cannot learn

to understand agriculture. We do have fewer and fewer agricultural

lenders just like we have fewer and fewer farmers.

The CHAIRMAN. The banks are not moving away from making

loans.

Mr. CANADA. In my observations, I have noticed that as far as

several of the larger banks, as they buy up smaller banks in our

area, agriculture is not one of their primary goals.

The CHAIRMAN. This has, of course, been a long-time quest of the

committee to try to make certain that there are opportunities available, preferably competitive opportunities, so that borrowers have

some options. It is a mild concern, and I simply raise it because

I suspect you would be as knowledgeable as any in this overall purview.

Mr. Evans, let me pick up a point that you made, I think as your

fourth recommendation, or at least an important one, about the diversifying of rural America. This is an observation that a number

of witnesses have made today, that as off-farm income has increased for America’s farming families, except for the eight percent

that I cited earlier that the Sparks people identified, the 150,000

and so forth, a majority of income in each of the other groups

comes from off the farm. In fact, they identify 100 percent for about

1.3 million, with farming coming and going in the process, but the

income that keeps the bread and butter on the table really comes

from off the farm. This implies some other job opportunities.

When we come to that part of the Farm bill that somehow gets

into this business of rural development—which is always a very

broad subject and sometimes so broad that we lose track of any

comprehensive plan—what suggestions do you have for us? Who, at

least in your shop or among the bankers in your dealing, has done

24

some fundamental research? Have you worked with think tanks or

universities or others to take a look at America comprehensively at

what this should be ideally?

Mr. EVANS. My feeling is that farmers cannot make it just farming anymore, the margins are so tight or nonexistent. We are seeing wives going out to find full-time jobs where they had previously

been helping out on the farm. The men who have worked primarily

on the farm have gone out and gotten part-time jobs to supplement

that income.

I cannot stress enough how tight those margins are. The input

costs are increasing. In Idaho, we have a drought situation where

the power company is actually paying farmers not to turn on their

pumps. This is going to have a drastic impact on southern Idaho,

where we bank, and it is probably going to happen all through the

West and might even go further East.

The CHAIRMAN. I grant that premise, so my question is how can

we go about getting a more comprehensive view of diversification

to supplement these incomes.

Mr. EVANS. I do not really have an answer to that question right

now, but I would be happy to——

The CHAIRMAN. If you could go back to your organization, because this is a very serious problem. You have certainly given the

background very accurately, and the off-farm income situation is an

acute need if people are continuing in the large majority of farms

in America. This gets scattershot treatment as to what is to be

done. Certain communities try to solve it on an ad hoc basis with

chambers of commerce or business councils or others coming together to provide some relief. The committee is trying to take a

look at all of America and the moneys that are provided for socalled agricultural development and what should be our priorities,

or who ought to help us with the blueprint. We are incapable of

really doing that. We can provide the legal framework or some of

the moneys. If you would help us in that respect—and that would

be true of any of the panel members today—if you could share that

kind of expertise, it would be very helpful.

Mr. EVANS. I would be happy to.

The CHAIRMAN. Mr. Edelman, I am curious—is your secondary

loan business stronger in some States than in others? How would

you describe, if you were to take a look at a map of America, where

you are doing business, or reasons why you are not doing business

in some sectors if that is not happening?

Mr. EDELMAN. Certainly. The most competition and the most sophistication about the use of secondary markets is on the West

Coast. The combination of those two has led to a large proportion

of our business coming from the States basically west of the Mississippi and in fact west of the Rockies. When you look at it, those

are the places where the use of Fannie Mae and Freddie Mac is

most common among the smaller lending institutions, which tends

to be a factor.

Another thing is the relative sophistication of the lenders and the

borrowers. What you were referring to earlier today about return

on investment is exactly in point here. What we see is more of a

focus on return on equity among lenders and a focus on return on

investment among the borrowers. The borrowers are more inclined

25

to leverage their operations, which improves the return on investment you referred to earlier today. The use of a secondary market

program tends to increase return on equity at the lending institution.

The level of competition in the Western States has fostered this

partly, and also the nature of farming. Less dependence on support

payments is certainly a factor in that whole process, because those

are the States that are less dependent on the very sorts of payments that you have had some consternation over. That has also

been a factor.

Another consideration, of course, is that the Farmer Mac concept

is still relatively new in certain places, and people tend to follow

the early adopters, and we have seen more progress in certain

areas of the Nation than others. Perhaps the slowest process has

been in the Southeastern United States, but we see that part of

that also has to do with the crops and commodities grown. When

you are talking about commodities and crops that are dependent,

for example, on integrators and growers and the structure there,

where you really are shifting the emphasis on credit upstream to

an integrator, it is more difficult to securitize those loans and see

them as stand-alone loans.

The CHAIRMAN. You make several interesting points. Let me follow-up in this way. In California, for example, we have had testimony from a number of farmers who are not involved, as you have

suggested, in corn and wheat or cotton or rice; rather, they are in

vegetables, for example. People in vegetables sometimes do well,

sometimes do badly—but they have suggested, at least anecdotally,

that some of these people are doing better than the four percent

on invested capital, and this then leads to an interesting colloquy

that we have had with some of these people as suggestions have

been made that we might incorporate them in support payments of

some sort, either a loan deficiency payment or a loan rate of some

type or a safety net. Some of them have reacted very adversely to

this, and have said ‘‘Leave us alone,’’ that in essence, because they

don’t have all the apparatus that attends wheat and corn; as a

matter of fact, they have a market that is more vital, and those

who are in it do better. People are not over-encouraged to get into

it, nor are they kept in it, whether they are doing well or not. As

a result, in essence, they are suggesting that we ought to keep

arm’s-length out of this business.

Now, you are suggesting that in addition to whatever returns

might be better than this proverbial four percent, by these loan

mechanisms, they can further leverage their return, which some

have testified that they do. Then, farming becomes a very different

proposition than what we are talking about when we take a look

at the whole situation.

That is why I am intrigued that you would have much greater

success in this particular sector, but I know that you are not surprised given the explanation you have given.

Mr. EDELMAN. That although it is not a perfect market, it is a

more efficient market and a truer economic model when you see

free enterprise operating in that way, and the participants do appreciate that.

26

The CHAIRMAN. Mr. Penick, mention has been made of the crisis

of the 1980’s in the Farm Credit System generally, and all of us

who were on the committee then remember those days, and I am

sure you do, too, vividly, because it was a disaster. It was predicted

to be much worse than it turned out, and that was because some

of the legislative suggestions that came through were sound, and

the Farm Credit people really worked, and they were a smaller

group than the savings and loans, for example, which were simultaneously going along a track of disaster throughout that period of

time.

At the same time, it was a very frightening period for producers

who were borrowers, quite apart from those who were making the

loans, and the changes that occurred in Farm Credit were profound.

I wonder, because I have not heard anything in the testimony

today—it is much more optimistic—that would give any hint that

somehow we are missing something going on out there in the Farm

Credit System. I would ask you if there is there something—or is

the system essentially sound, and the elements, not only in the

Northwest that you have talked about but generally in your experience, in the overall system, something on which there is no particular cause for alarm, but as you have suggested, some incremental

changes, and these largely in arrangements with farmers rather

than structurally with the institutions.

Mr. PENICK. When I went through the 1980’s with the Farm

Credit System—I did that in Ohio, Indiana, Kentucky, and Tennessee—the land values dropped out from under the foundation of

the system. Tied to that were, as you know, radical changes in interest rates, which really started the process.

As we take a look at what is going on in the 1990’s, we have

some of the same issues with low prices and challenges from that.

We do have a very favorable interest rate market, and for agricultural producers that are leveraged and those that have grown, the

interest rate environment becomes a very significant part of their

repayment issues.

I also believe that Congress and in total, the programs for agriculture now, are targeted more to filling in the gaps with the additional supplemental payments, and I think that that has been a

benefit. In my testimony, I made the comment that there is a significant difference between the balance sheets of commodity producers who receive payments and those who do not.

Actually, what you get and what has occurred is that you really

have kind of a subsistence level going on, where the Government

is involved with payments in the commodities of corn, wheat, and

those; where, when you take the other commodities, they really

fluctuate rapidly with the market, and those producers are prepared for that—much different than they were back in the 1980’s.

The system has also done a tremendous number of things internally from the standpoint of capital regulations, from the standpoint of contractual agreements and CIPA scores, things that you

are aware of, that really have provided the basis for early detection

of any entities within the system that are starting to show stress.

Those things have really been the difference between what is going

on now and what was going on them.

27

If the Government programs were not in place, we would have

a significantly different discussion on this panel today than we are

having.

The CHAIRMAN. That is apparent, but that is an interesting way

of looking at it, that the payments by and large fill in gaps, and

there is a sharp difference, as you note, between, at least as a

group, the commodity people who are receiving the payments and

those who are not, in terms of market fluctuations and perhaps returns, as we were talking about with Mr. Edelman—they are sometimes very high and leveraged and sometimes much lower, depending on shifts in the market. As you said, this may be better preparation for the fact that it will not go on like a brook; you really

have to be alert to the changes in the market signals.

Mr. PENICK. They react much more quickly to the market pressures than do the other group.

The CHAIRMAN. You were saying that during the earlier period

of your career, or during this crisis, you were out in the Indiana,

Ohio, and Tennessee markets and so on. I remember in this committee in the late 1970’s, agricultural land prices was rising rapidly. I could see that with regard to my own farm. I tracked it

throughout all that period of time. Then, of course, we hit the wall

of the prime rate going to 20 percent and all the long-term rates

in double digits, and Paul Volcker drawing a halt to the inflation

at the time, and the wheels came off. Then, the 1980’s were a terrible reverse in which land values in many parts of the country, as

testimony here will indicate, fell by 50 percent and in some cases

by more, stripping the gears altogether, which changed the credit

picture markedly for anybody making loans to see all that collateral washed out.

As we are talking about here today, we have had an incremental

increase in land values in the last 3 or 4 years, even in the face

of all the rest of the crises that we are discussing, which is almost

counterintuitive to the rollercoaster that we saw in the late seventies and the downslide in the eighties, and the beginning of tracking in parts of the country as the nineties came, with increases,

and these have been more substantial as we came through the end

of the decade and remain, as you say now.

This is instructive, and hopefully, we will not have to make all

the same mistakes again. This is why some institutional memory

is useful, and I appreciate your supplementing it.

Well, thank you all very much for coming. We appreciate your

testimony and look forward now to still a third panel.

The CHAIRMAN. The chair would like to call Mr. David Carter,

President of Rocky Mountain Farmers Union, representing the National Farmers Union, from Washington, DC; Mr. Frank Brost, a

rancher and Chairman of Tax and Credit Committee of the National Cattlemen’s Beef Association, from Rapid City, South Dakota; and Mr. Ferd Hoefner, Washington representative of the Sustainable Agriculture Coalition, from Washington, DC

Gentlemen, we thank you for your patience and endurance, and

even more importantly, your presence today. As I mentioned to the

previous panels, for your testimony will be published in the record

in full, and I would ask that you attempt to summarize your comments in five minutes, and we will then proceed to questioning.

28

Mr. Carter.

STATEMENT OF DAVID CARTER, PRESIDENT, ROCKY

MOUNTAIN FARMERS UNION, ON BEHALF OF THE

NATIONAL FARMERS UNION, WASHINGTON, DC

Mr. CARTER. Mr. Chairman, members of the committee, good

morning, and thank you very much.

I am Dave Carter. I am President of the Rocky Mountain Farmers Union, a general agricultural organization representing independent producers in Colorado, Wyoming, and New Mexico. I am

testifying this morning on behalf of the 300,000 family farmer and

rancher members of the National Farmers Union.

On paper, as we have heard several folks say this morning, the

appearance of the farm credit portfolios and the availability of farm

credit does not look too bad. We in the Farmers Union are very

concerned, though, that this is a house of cards. There is a real patent disconnect, we feel, between the performance of the portfolios

and the realities of production agriculture today.

There are two factors. One has been discussed a lot this morning—underwriting the health of the ag-based financial institutions

has been $69 billion worth of farm program benefits and emergency

and disaster payments since 1996, and we thank you very much.

It has been very helpful in stabilizing the land values.

In many areas, there is the additional impact of growth, sprawl,

and nonagricultural pressures on land values which have essentially given farmers a line of credit that they will never be able to

repay by growing wheat, corn, or cattle.

There has been a lot of discussion comparing now and the 1980’s.

In the 1980’s, land values plummeted at the time commodity prices

fell, and that triggered the waves of foreclosures and liquidations.

Now, even though we have low commodity prices, the land values

have remained stable. Farmers are not going into foreclosure bankruptcy; they are simply selling out and walking away.

We feel there are two issues at work—No. 1, the sources of credit, and No. 2, the distribution of that credit. Let me go through

some of these very briefly.

First, the Farm Credit System that provides 20 percent of all

farm operating debt in the United States. We are very concerned

that now, more than one-third of that operating capital has gone

to operations with more than $500,000 in annual sales—it is going

to the larger producers.

The Farm Credit Administration proposal for a national charter

purports to increase market competition, and in the short term,

this could be very beneficial in that it would increase competition

and lower interest rates. As we have seen happen in the airline industry and the energy industry, that is not always the long-term

benefit of deregulation. What it could actually contribute to is the

ongoing consolidation in agricultural financing. That is very troubling.

There was a producer in our area, for example, who related to

me that he was told by his farm credit institution that unless his

operating loan this year was $100,000 or more, he could not expect

to talk personally with a loan officer. This is a very troubling trend.

29

In the commercial banking sector, we have seen a 25 percent decline in the number of commercial agricultural banks, since 1992.

The mergers and consolidations are very disturbing. In our area,

we have had First National become United become Norwest and

now become Wells Fargo. As was discussed earlier, as they move

into these larger banks, the expertise and the background and even

the interest in providing ag credit diminishes.

We have seen that there is a real concern that as the consolidations go on, there is more interest in providing a small number of

loans to very large operators than a large number of loans to smaller operators.

The philosophy is being played out as the larger consolidated

banks simply try to clean out their ag portfolios in many instances.

We are very troubled in our region that we have heard many examples from Wells Fargo and other banks that they are simply trying

to reduce the number of ag borrowers.

As this has happened, there has been an interesting and disturbing trend toward more credit being provided by suppliers and input

providers. Machinery dealers, seed companies, input suppliers are

willing to fill that vacuum and provide credit at a cost, with interest rates up to 17 percent in some instances by those input suppliers.

We are very concerned that in the American countryside, we are

creating a modern version of the company store.

We in Farmers Union urge Congress to authorize a study and

seek recommendations from a qualified outside third party on the

impact and effect of concentration in the farm credit and commercial lending sectors on No. 1, the availability of farm credit and No.

2, the growing scale bias of those resources.

Then, let me talk just very briefly about USDA and FSA, and

there is more detail in my written testimony. We need adequate

funding for all loan programs—direct, guaranteed, emergency and

disaster, non-emergency loans for socially disadvantaged and beginning farmers. The Secretary of Agriculture needs broader flexibility in transferring funds from program and program and State

to State.

The Secretary also needs greater emergency short-term borrowing authority from the CCC to address temporary shortfalls.

We would also like to see USDA loan guarantee programs expanded to encourage farmers to invest in value-added enterprises,

particularly in producer-owned cooperatives and I would be glad to

discuss later on in the questions and answers some thoughts on diversifying agriculture.

Finally, in the area of Chapter 12, we are pleased that Congress

passed legislation extending Chapter 12 effective through the end

of this month, but we feel that this needs to be made a permanent

part of the Bankruptcy Code. We ask that this continue to be extended until that happens.

Finally, in conclusion, let me just say that credit will never serve

as a substitute for real farm income. One of the problems that we

have seen, for example, with the shared appreciation program, is

that the basis on which that was built in 1987 was that if commodity prices are down, land values would be down, and if commodity

prices came up, the equity would go up. The problem is that with

30

the decoupling of the farm program payments, we have had the

payments go out while commodity prices have stayed down. The

land values have been capitalized by program payments and we

have had that disconnect. We need to make sure that our commodity prices are more relative to the land values.

Thank you very much, Mr. Chairman.

The CHAIRMAN. Thank you very much, Mr. Carter, for your testimony.

Mr. Brost.

[The prepared statement of Mr. Carter can be found in the appendix on page 130.]

STATEMENT OF FRANK BROST, RAPID CITY, SOUTH DAKOTA,

CHAIRMAN, TAX AND CREDIT COMMITTEE, NATIONAL

CATTLEMEN’S BEEF ASSOCIATION

Mr. BROST. Thank you, Mr. Chairman.

My name is Frank Brost. I am a second-generation South Dakota

cattle rancher. I am also on the board of directors and a member

of the Loan Committee of a very aggressive, $80 million bank in

central South Dakota that does a lot of ag lending.

I am here today on behalf of the National Cattlemen’s Beef Association. I thank you for the opportunity to testify.

I am chairman of the NCBA’s Tax and Credit Committee, and I

hope that my testimony will be able to express and represent the

views of the nearly 250,000 members of our organization. I look forward to providing some insight into the importance of sound and

reasonable policies regarding 1) the availability and 2) the use of

credit in the United States beef industry.

Cow-calf stocker and feeder operations generate $150 billion in

economic activity. The chart included in my written testimony reflects the great, wide swings in returns on the average cattle operation from a profit perspective—around $80 per head loss during

the bad times to a similar amount of profit during the good times.

Like many others in agriculture, we have been successful in finetuning our production. In 1996, NCBA refocused itself on the marketing and the demand side. We are seeing successes and growing

consumer demand. We feel the focus on demand is largely responsible for the recent profitability that we have enjoyed.

As margins, however, become smaller and capital needs grow, a

solid financial partner becomes even more important. Sound financial partners that operate with the spirit of a partnership agreement are critical to our success and sustainability. The very segments of our industry must be capable of dealing with constant

fluctuations and variations in both prices and profitability.

We have three major concerns, the first being our new producers.

The average age of beef producers is nearly 60 years of age. I am

among them. As a result, we must focus on young producers just

starting out in the business or inheriting the family operation and

continuing it. The availability of capital to make it through the

high and low cycles is critical.

The industry has evolved from a labor-intensive way of life into

a capital-intensive business. Management and capital have become

critical ingredients. Our banks and our financial institutions need

the tools and the flexibility to be that partner in helping develop

31

young producers into profitable and sustainable operators. We have

to be prepared to help that producer and that lender make the

change from a producer of a commodity into a partner in the production of a product. We agree with the aggie bond concept that

one of the prior speakers talked about.

The second area of concern is our existing producers. Cattle feeding has become high-tech. With lower margins and increased capital needs, there is little margin for error.

Significant environmental capital cost improvements are required. Current operating credit lines do not provide room for these

new regulatory capital costs. We must find ways to finance the

costs of these new regulations.

The environmental standards will also begin to apply to broad

bases of cattlemen, cow-calf operators like myself, and feeder operations, many of whom lack the equity to make these kinds of longterm capital investments.

The third major area we would like to address is the area of the

value-adding concept which has also been discussed previously. As

stated earlier, industry-wide, we are evolving from producers of a

commodity into producers and partners in the production of a product. This has brought about the banding together of producers in

new business structures, in turn, cooperatives, as you have discussed.

The cattle business out of necessity needs to prepare for its place

in tomorrow’s marketplace. This requires more focus on marketing,

more focus on operators’ strategic plans and strategic objectives. To

quote a Yogi-ism, ‘‘You cannot get to where you are going unless

you know where you are going.’’ All of this requires a strong, wellfinanced partnership between the producer and the financial partner.

In summary, I have outlined three major concerns—how we finance the next generation, how we finance existing producers into

an evolving business, and how we finance value-adding components

of an ever-changing business.

NCBA recommendations are, first, that beginning farmer and

rancher programs should be continued and expanded to allow for

higher ceilings and reductions in filing requirements for guaranteed loans. New and stronger incentives should be developed that

make it easier for young and beginning farmers to get a solid footing.

This committee and those with related oversight must ensure

that new and existing regulations are not hampering growth and

development. Technical assistance, when needed, should be part of

any and all new regulations.

The United States must remain free of foot and mouth. There

has been discussion of this, and we request and urge increased

funding of R and D facilities.

The emphasis on value-adding will require even more vigilance

on the part of regulators. We need to ensure that technical assistance is helpful and not a hindrance. The repeal of the death tax

and the creation of farm accounts will permit producers to better

manage their limited resources.

32

Finally, the Congress in its efforts to provide a safety net should

not allow one segment of the industry to benefit at the expense of

others.

I appreciate the opportunity to testify, Mr. Chairman, and I will

be happy to answer any questions. On a personal note, my friend,

Senator Abdnor, offers his greetings to you from South Dakota.

The CHAIRMAN. Thank you for bringing the greetings of Jim

Abdnor. We appreciate it.

Mr. Hoefner.

[The prepared statement of Mr. Brost can be found in the appendix on page 139.]

STATEMENT OF FERD HOEFNER, WASHINGTON

REPRESENTATIVE, SUSTAINABLE AGRICULTURE

COALITION, WASHINGTON, DC

Mr. HOEFNER. Thank you and good morning, and thanks for this

opportunity to testify.

I am Ferd Hoefner, Washington representative of the Sustainable Agriculture Coalition. The focus of my remarks today is on the

beginning farmer provisions of the credit title.

I am currently starting a second term on the USDA Advisory

Committee on Beginning Farmers and Ranchers and have submitted for the record some of the correspondence between that group

and the Secretary that might be of some interest.

Credit programs are the only area in which Congress has addressed beginning farmer issues directly in any substantial way,

and thus, existing programs deserve careful review.

First, I would call attention to targeted Federal credit assistance

for beginning farmers. Congress embarked on a reorientation of

credit programs to prioritize beginning farmers in 1992 and continued this effort in the 1996 Farm bill. My written statement contains details about these targeting provisions, but the bottom line

message is that the targeting provisions are working.

Targeting has resulted in a profound shift in the focus and resource allocation within FSA credit, although more so with regard

to direct lending than guaranteed lending, and more so in some regions of the country than others.

One clear example of the success of targeting is the combined

total of over 11,000 beginning farmer farm ownership loans of all

types that have been made since these provisions went into effect

in 1994.

Our recommendation for the Farm bill credit title is to retain the

existing targeting features without change. The possible exception

might be some modification to the guaranteed operating loan target, which is the only program which has not come close to reaching its goal.

The Beginning Farmer and Rancher Down Payment Program has

been very successful and should be continued. The Down Payment

Program was authorized in 1992, started in 1994, and was bolstered in the 1996 Farm bill. Under this first-time purchase program, the borrower supplies 10 percent of the purchase price, FSA

30 percent of the purchase price, or on a 10-year loan at 4 percent,

and commercial lenders or the seller provides the other 60 percent.

This program been very heavily used across the Midwest and more

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lately in other regions of the country. It has helped to create over

2,100 new farming opportunities in its seven years.

The Down Payment Program has an excellent track record. The

delinquency rate at the end of 2000 was just 2.3 percent, which

compares very favorably with the 12.4 percent for regular ownership loans. I would also stress that with the Down Payment Loan

Program, you get three to four times the number of borrowers

served when compared with regular 100 percent financed loans,

which is obviously very important in times of limited funding availability.

To make the Down Payment Program more flexible and to increase its applications to other regions of the country where it is

currently underutilized, we recommend that the new Farm bill establish a broader range of both the size of the down payment required from the borrower and of the length of time for the FSA

loan.

At the same time, we would recommend the establishment of

performance goals for each State with significant farm ownership

lending.

These recommendations are consistent with the recommendations of the USDA Advisory Committee and I believe would extend

the programs to all regions of the country while maximizing the

number of beginning farmer loans per dollar appropriated.

Let me briefly touch on funding levels. As recent year program

levels have hopefully made clear, farm bill authorization levels for

direct operating and especially for direct farm ownership loans

need to be increased significantly. In the current year, where appropriated dollars are significantly higher than the authorized levels, the direct farm ownership program was out of money before

spring started. It currently has $25 million only because of a recent

transfer from unused guaranteed operating loans.

Both the general and the beginning farmer specific transfer authorities need to be continued—they have been very important—

but we should also look to increasing direct loan fund availability

directly.

We believe that no single change in law would do as much to

spur down payment loans and the Federal-State partnership on beginning farmers as would a change in the Tax Code and a parallel

change in the credit title to allow guarantees in conjunction with

aggie bond loans at the State level.

FSA provides loan guarantees for private sector loans, but under

the IRS Code cannot provide guarantees for aggie bond loans facilitated by State beginning farmer programs. We strongly urge a tax

change and a parallel credit title change to allow guarantees on

aggie bond loans. Together, these provisions would expand the pool

of participating lenders and reduce interest rates for beginning

farmers.

We also note our support for Senator Grassley’s bill to exempt

aggie bonds from the volume cap on industrial revenue bonds.

We recommend a substantial reworking of the Interest Assist

Program so that the full interest rate break is targeted to moderate-scale loans for beginning, minority, and limited-resource

farmers.

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Finally, we would encourage the enactment of two new programs.

We believe the credit title could establish a pilot project that would

test the benefits of switching funds from debt financing to equity

assistance. A revenue-neutral program for qualified beginning

farmers and ranchers could provide seed money to help them build

equity while encouraging lower-cost approaches to farming, reducing risk, and creating incentives for saving and investment.

We would also propose the establishment of a direct participation

loan program with a limited-duration Federal loan to assist beginning farmers and ranchers getting a stake in value-added agricultural coops.

I would close by saying that we have many other ideas for beginning farmers that do not relate to the credit title; sometimes, in the

past too much of the beginning farmer focus has just been on credit. There are other ideas that pertain to research, rural development conservation and other titles that we would love to pursue

further with the committee at a later date.

Thank you for the opportunity to testify, and I will be happy to

answer questions.

[The prepared statement of Mr. Hoefner can be found in the appendix on page 145.]

The CHAIRMAN. Thank you very much, Mr. Hoefner, and I appreciate your final paragraph where you mentioned that there are

other things beyond credit that are involved, and I invite each of

you and your organizations to help us in each of those areas. Farmers Union has testified with regularity at our conservation hearings, and likewise our hearings on export and various other titles

that we have been taking up seriatim. Your organization, Mr.

Hoefner, is likewise a very valuable resource.

Mr. Brost, let me start, because you have stressed the problems

for beginning farmers and therefore credit for them—more fundamentally, although this changes anecdotally from time to time as

I visit Purdue University or other university agriculture departments, there are a fair number of people enrolled, and in some

years even increases, but only a very small percentage of these,

sometimes fewer than one in ten, are considering going into production agriculture, that is, out on the farm. The other nine-tenths

plus are in agribusiness or in some background dealing with rural

America. There is a lot of interest in rural America but not necessarily in being farmers.

One of the reasons, I suppose, as you know, why cattlemen have

a 60-year-plus age average, and for most other sectors, it is at least

high 50’s, and maybe in some sectors, more than that, is because,

as a matter of fact, these are the folks who are still around. The

number of people coming in at entry level still remains very few.

Leaving that aside for a moment, those who do, at least that I

have observe in my home State, are very aggressive and sometimes

have the benefit of inheriting land, or they have other relatives

who have been involved in agriculture; but bit by bit, they put together, at least in a typical Indiana situation, 2,000 or 3,000 acres.

They are bits and pieces of acreage from the States or from elderly

farmers who no longer want to farm or whatever. That often, these

people will have 25 or 30 properties, and it is a very complex business moving the equipment around, but it gives them the opporVerDate 11-MAY-2000 10:00 Nov 25, 2002 Jkt 081040 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 81040.TXT SAG1 PsN: SAG1
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tunity to amortize the purchase of sophisticated equipment as well

as their expertise over a lot more territory, and they have a lot of

energy. They are young people who want to expand their operations; they are highly leveraged as a rule; I am sure they are imbibers in, if not the credit programs we are discussing today, somebody’s credit program. There are not many of them. They are conspicuous because they are relatively successful, and they are young,

as opposed to those who are old and who are most involved in the

situation.

Is this likely to change? In other words, as you take a look at

the prospects for either enhancingthe system—and you have made

some excellent suggestions for ways in which we can do more than

tweak the system; there are some substantial changes that can be

made but the problem exists that I discussed earlier this morning

of the relatively low return in this area, which means, translated

for a young farmer, a middle-class income enough to put his children through college or other things that people do in our society— is this a competitive outlook for a young person? Looking at this

with some realism, how many people are going to be involved, and

are the programs that we have not only sufficient for them but attractive enough so that many more might be invited?

Does anybody have a ‘‘blue sky’’ prospect that you would like to

share with us?

Mr. BROST. I would comment on that. As one of my other experiences in life, I practiced law for 25 years out in Jim Abdnor’s country, where I was his attorney. What you talk about is also true in

South Dakota, Senator. Young, aggressive people have to have a

fire in their belly, and they have to have some financial backing

of some kind, whether it is a partner, an equity partner, or whether it is an inherited partner, to get into this business—not unlike

wanting to run a bank or anything else. You have to have capital

because it is a capital-intensive business.

I do not see it changing, and I do not think Government can

make it change. You need to be there to support financially those

young people who really want to do that, with technical assistance,

with good bankers providing good credit advice. The ones I saw get

in trouble over my years in the law practice and my years on the

bank board—my neighbors and friends and relatives in this business got in trouble because they made some bad decisions in terms

of where to put that equity and how to manage their marketing

and other aspects of this business.

Good advice and good sound banking counseling in a partnership

mode we talked about are terribly important, but I do not see it

changing.

The CHAIRMAN. Mr. Hoefner, do you have a comment?

Mr. HOEFNER. Yes, I would just add one comment. Regardless of

the four percent figure, the beginning farmer conferences that have

been happening around the country and the beginning farmer programs that are beginning to spring up at the State level through

extension and through private organizations are getting record

numbers of people to come into the programs—for whatever reasons. It behooves us to make sure that the programs that we do

have and the resources that we do have are serving their needs as

flexibly and as efficiently as possible. That some of the recVerDate 11-MAY-2000 10:00 Nov 25, 2002 Jkt 081040 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 81040.TXT SAG1 PsN: SAG1
36

ommendations that we are making in terms of the Beginning

Farmer Down Payment Program can certainly help; having a new

Federal program that is focused on beginning farmer development

programs could also help—there is a lot going on at the State and

local level that I believe could be supported through the next Farm

bill.

The CHAIRMAN. Mr. Carter, do you have any thoughts about this

subject?

Mr. CARTER. Yes, very much so. We have to take a look and ask

is the status quo inevitable. I was concerned when I came back

from the USDA Agricultural Outlook Conference a couple of

months ago that a number of folks got up, and if you did not know

better, you would think that the word ‘‘low cost efficient’’ was one

word, because they tend to use that interface.

We think that if we take a look at where we are headed right

now, with fewer producers and high-volume/low-margin production—in Colorado, for example, we have 18 operations that produce

51 percent of the value of agricultural commodities in our State; it

is very heavily concentrated—what does that mean for the other

28,000 operations in the State?

When we look at the marketplace, though, we see that there is

the misconception that the consumer just wants to go in and buy

the cheapest thing and does not care where it is produced. In reality, more than half of the consumers are bringing other values to

the grocery store with them, particularly concerns about health,

wellness, food safety, as has been discussed considerably this morning. If we provide more opportunities for farmers to move forward

and to put the value-added attributes on their products to market

to those consumers, we can get more income back to agriculture.

That is where, when we take a look at the credit that could provide new opportunities not only in diversifying the rural economy,

not to bring in businesses to replace agriculture, but let us talk

about some businesses to enhance the stability of agriculture.

When, out of the $1 trillion, the food and fiber sector, less than 6

percent goes to the producers of the commodities, and 60 percent

is going to the processing, manufacturing and retail side, it seems

to me that part of the answer here is let us provide producers with

the ability to capture some of that added value, and let us do it

through the loan guarantee programs, the B and I, as you said, enhancing the aggie bond programs, to help producers make their equity investment into these new value-added cooperatives.

We administer a cooperative development center through our

foundation—USDA has been very helpful in providing support—

and we see that it is very important not only to have new businesses that producers sell their commodities to, but to have producers be owners of those businesses so they can share in the rewards

and the profitability of that business.

The CHAIRMAN. Is this one of a kind? In other words, is this

something that can be replicated, this extension of producers into

value-added production and so forth?

Mr. CARTER. It can be—I do not want to say replicated, because

each success is not something that you can take a cookie-cutter and

replace it, because each one is unique—but there are lessons to be

learned there, and we would see that there is a combination of reVerDate 11-MAY-2000 10:00 Nov 25, 2002 Jkt 081040 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 81040.TXT SAG1 PsN: SAG1
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sources—loans and loan guarantees, but also grant programs

through USDA to help farmers do the up-front work, the feasibility

studies, and the technical assistance that can be brought to bear

to help us move into these new value-added markets.

I happen to also serve on the National Organic Standards Board,

and when we take a look at the phenomenal growth in organic agriculture and organic market, there are some real opportunities

there, but we have got to make sure that the producers get the rewards from it.

The CHAIRMAN. Yes, Mr. Brost.

Mr. BROST. Mr. Chairman, during my life, I served on the National Institute of Corrections—I was on a State corrections

board—which is a marvelous governmental organization that is set

up to provide technical assistance to prisons, to jails, and to community corrections. It does not have a lot of full-time employees,

but it has a body of technical assistance experts that you can call

upon to come in and help.

I really believe that in many of these instances as we progress

into value-adding agriculture, if we had an organization with a

body of those kinds of people available, where young fireball people

in groups could call in to help them get their business plans to help

them get their business plans and how to fund and how to market,

that it might be something that would be quite beneficial.

That is a good organization that you might look at to do something from the governmental perspective.

The CHAIRMAN. Well, the idea of farmers being involved in the

other aspects, as you have all pointed out the problem that six percent or so goes to producers and 60-some percent to processors,

manufacturers, and what-have you, on the surface is a great idea.

The question is will farmers be willing to organize themselves

and their efforts, or a portion of their time in these ways. Maybe

the answer is yes of necessity, but this is going to require a lot of

leadership on the part of farm organizations, people like yourselves, who try to offer some business plan or a way of doing this,

and it will require support from the Federal Government to help

in the financing of it. We all pray that within our lifetime, this will

occur, or better still, within the next decade or so, because this

kind of rescue mission, it seems to me, is necessary; otherwise, we

will have a continuing dialog about the aging of the population of

American agriculture, and people will stick to being corn farmers

and not manufacturers or marketers or what-have-you, which will

not be good enough, I am afraid, given what I see to be continuing

low returns from that type of thing per se. Now, if you enhance in

other ways, you get into a different story.

Well, I appreciate your heightening our imagination through

your testimony. Likewise, the basic papers that you have presented

are very helpful. We look forward to working with you on other aspects of the Farm bill, and any additional thoughts that you have

on credit today.

Having said that, the hearing is adjourned.

[Whereupon, at 12:30 p.m., the committee was adjourned.]

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