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A REVIEW OF CREDIT AVAILABILITY IN 

RURAL AMERICA 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

LIVESTOCK, RURAL DEVELOPMENT, AND CREDIT 

OF THE

COMMITTEE ON AGRICULTURE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

JUNE 25, 2014 

Serial No. 113–15 

( 

Printed for the use of the Committee on Agriculture 

agriculture.house.gov 

COMMITTEE ON AGRICULTURE 

FRANK D. LUCAS, Oklahoma, Chairman 

BOB GOODLATTE, Virginia, 

Vice Chairman 

STEVE KING, Iowa 

RANDY NEUGEBAUER, Texas 

MIKE ROGERS, Alabama 

K. MICHAEL CONAWAY, Texas 

GLENN THOMPSON, Pennsylvania 

BOB GIBBS, Ohio 

AUSTIN SCOTT, Georgia 

SCOTT R. TIPTON, Colorado 

ERIC A. ‘‘RICK’’ CRAWFORD, Arkansas 

SCOTT DESJARLAIS, Tennessee 

CHRISTOPHER P. GIBSON, New York 

VICKY HARTZLER, Missouri 

REID J. RIBBLE, Wisconsin 

KRISTI L. NOEM, South Dakota 

DAN BENISHEK, Michigan 

JEFF DENHAM, California 

STEPHEN LEE FINCHER, Tennessee 

DOUG LAMALFA, California 

RICHARD HUDSON, North Carolina 

RODNEY DAVIS, Illinois 

CHRIS COLLINS, New York 

TED S. YOHO, Florida 

VANCE M. MCALLISTER, Louisiana 

COLLIN C. PETERSON, Minnesota, Ranking 

Minority Member 

MIKE MCINTYRE, North Carolina 

DAVID SCOTT, Georgia 

JIM COSTA, California 

TIMOTHY J. WALZ, Minnesota 

KURT SCHRADER, Oregon 

MARCIA L. FUDGE, Ohio 

JAMES P. MCGOVERN, Massachusetts 

SUZAN K. DELBENE, Washington 

GLORIA NEGRETE MCLEOD, California 

FILEMON VELA, Texas 

MICHELLE LUJAN GRISHAM, New Mexico 

ANN M. KUSTER, New Hampshire 

RICHARD M. NOLAN, Minnesota 

PETE P. GALLEGO, Texas 

WILLIAM L. ENYART, Illinois 

JUAN VARGAS, California 

CHERI BUSTOS, Illinois 

SEAN PATRICK MALONEY, New York 

JOE COURTNEY, Connecticut 

JOHN GARAMENDI, California 

NICOLE SCOTT, Staff Director 

KEVIN J. KRAMP, Chief Counsel 

TAMARA HINTON, Communications Director 

ROBERT L. LAREW, Minority Staff Director 

SUBCOMMITTEE ON LIVESTOCK, RURAL DEVELOPMENT, AND CREDIT

ERIC A. ‘‘RICK’’ CRAWFORD, Arkansas, Chairman 

BOB GOODLATTE, Virginia 

STEVE KING, Iowa 

RANDY NEUGEBAUER, Texas 

MIKE ROGERS, Alabama 

K. MICHAEL CONAWAY, Texas 

GLENN THOMPSON, Pennsylvania 

SCOTT DESJARLAIS, Tennessee 

CHRISTOPHER P. GIBSON, New York 

REID J. RIBBLE, Wisconsin 

JEFF DENHAM, California 

RICHARD HUDSON, North Carolina 

TED S. YOHO, Florida 

JIM COSTA, California, Ranking Minority 

Member 

MIKE MCINTYRE, North Carolina 

DAVID SCOTT, Georgia 

FILEMON VELA, Texas 

MICHELLE LUJAN GRISHAM, New Mexico 

PETE P. GALLEGO, Texas 

WILLIAM L. ENYART, Illinois 

CHERI BUSTOS, Illinois 

KURT SCHRADER, Oregon 

RICHARD M. NOLAN, Minnesota 

JOE COURTNEY, Connecticut 

(II) 

(III) 

C O N T E N T S 

Page 

Costa, Hon. Jim, a Representative in Congress from California, opening statement ...................................................................................................................... 3 

Crawford, Hon. Eric A. ‘‘Rick’’, a Representative in Congress from Arkansas, 

opening statement ................................................................................................ 1 

Prepared statement .......................................................................................... 2 

WITNESSES

Long Thompson, Ph.D., Hon. Jill, Board Chair and Chief Executive Officer, 

Farm Credit Administration, McLean, VA ........................................................ 4 

Prepared statement .......................................................................................... 6 

Submitted material .......................................................................................... 91 

Submitted questions ......................................................................................... 105 

Beyerhelm, Chris, Deputy Administrator for Farm Loan Programs, Farm 

Service Agency, U.S. Department of Agriculture, Washington, D.C. .............. 13 

Prepared statement .......................................................................................... 15 

Submitted question .......................................................................................... 108 

Kauffman, Nathan S., Assistant Vice President, Federal Reserve Bank of 

Kansas City, Omaha Branch, Omaha, NE ........................................................ 20 

Prepared statement .......................................................................................... 21 

Frazee, Bob, President and Chief Executive Officer, MidAtlantic Farm Credit, 

ACA, Westminster, MD; on behalf of Farm Credit System .............................. 45 

Prepared statement .......................................................................................... 47 

Buzby, Timothy L., President and Chief Executive Officer, Federal Agricultural Mortgage Corporation (Farmer Mac), Washington, D.C. ........................ 52 

Prepared statement .......................................................................................... 53 

Wolfe, Leonard, President and Chief Executive Officer, United Bank & Trust, 

Marysville, KS; on behalf of American Bankers Association ........................... 60 

Prepared statement .......................................................................................... 61 

Williams, Sean H., President and Chief Executive Officer, The First National 

Bank of Wynne, Wynne, AR; on behalf of Independent Community Bankers 

of America ............................................................................................................. 66 

Prepared statement .......................................................................................... 68 

Melone, Brett, Loan Officer, California FarmLink, Santa Cruz, CA; on behalf 

of National Sustainable Agriculture Coalition .................................................. 75 

Prepared statement .......................................................................................... 77 

SUBMITTED MATERIAL

Auer, Kenneth E., President and Chief Executive Officer, The Farm Credit 

Council, submitted letter ..................................................................................... 95 

Emerson, Jo Ann, Chief Executive Officer, National Rural Electric Cooperative Association, submitted letter ....................................................................... 100 

Petersen, Sheldon C., Chief Executive Officer, National Rural Utilities Cooperative Finance Corporation (CFC), submitted letter ....................................... 101 

Thaler, Brad, Vice President of Legislative Affairs, National Association of 

Federal Credit Unions, submitted letter ............................................................ 102 

National Association of REALTORS®, submitted statement ............................... 103 

(1) 

A REVIEW OF CREDIT AVAILABILITY IN 

RURAL AMERICA 

WEDNESDAY, JUNE 25, 2014 

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON LIVESTOCK, RURAL DEVELOPMENT, AND

CREDIT, COMMITTEE ON AGRICULTURE, Washington, D.C. 

The Subcommittee met, pursuant to call, at 10:01 a.m., in Room 

1300 of the Longworth House Office Building, Hon. Eric A. ‘‘Rick’’ 

Crawford [Chairman of the Subcommittee] presiding. 

Members present: Representatives Crawford, Goodlatte, King, 

Rogers, Conaway, DesJarlais, Yoho, Costa, Scott, Vela, Lujan Grisham, Bustos, Schrader, and Nolan. 

Staff present: Caleb Crosswhite, Debbie Smith, Josh Maxwell, 

Kevin Kramp, Mary Nowak, Pete Thomson, Skylar Sowder, Anne 

Simmons, Lisa Shelton, Liz Friedlander, and Riley Pagett. 

OPENING STATEMENT OF HON. ERIC A. ‘‘RICK’’ CRAWFORD, A 

REPRESENTATIVE IN CONGRESS FROM ARKANSAS 

The CHAIRMAN. This hearing of the Subcommittee on Livestock, 

Rural Development, and Credit to review credit availability in 

rural America, will come to order. Good morning and thank you all 

for attending today’s hearing to review credit availability in rural 

America. 

Before I go any further, I do want to take a point of privilege, 

if you would allow, and that is to recognize Debbie Smith who is 

clerking her last hearing in the Agriculture Committee after 35 

years of service. She began her career here on the Hill at 19 years 

of age, and she served seven chairmen during the span of eight 

farm bills. I probably said too much on the math. But let me just 

say, she has always made the trains run on time here in the Committee. She is a treasure that we will certainly miss dearly, especially when it comes to getting our way in conference in the Senate. 

So, Debbie, thank you so much. And we appreciate you. 

All right. I know she would want me to go on with the show. Providing credit to America’s farmers and ranchers is a necessary and 

serious challenge for many lenders in the United States. The Farm 

Credit System, commercial banks and USDA’s Farm Service Agency have continued to do an outstanding job working to meet the 

credit needs of rural America. I believe it is important to hold hearings like the one we are holding today to make sure the credit 

needs of producers are being met and will continue to be met in 

the future. 

2 

As we know, the ag economy is highly cyclical. History teaches 

us that interest rates will eventually go up, and record high prices 

will eventually come down. In fact, after a recent period of historic 

highs, crop prices have declined due to record plantings and strong 

production, and farmland values are slightly decreasing. While 

livestock producers are rebounding on the balance sheet with lower 

feed costs, our western producers are still struggling with consecutive years of drought. 

Thankfully, due to recent years of high farm incomes and responsible underwriting, the state of our ag lending institutions and the 

farm economy remain strong. Even though the current ag economy 

and higher farm prices have resulted in overall good credit conditions, we must be cautious moving forward. While farmers should 

see a small drop in production costs, USDA is forecasting a 27 percent decline in farm income from last year. In order to sustain an 

abundant supply of food and fiber well into the future, we must ensure that responsible farm and ag credit policies are in place now. 

The Agricultural Act of 2014 was instrumental in doing just that. 

The bill included several provisions to provide opportunities for 

young and beginning farmers, including making permanent a 

microloan program to meet their needs for smaller projects and creating a cooperative lending pilot program. Additionally, the elimination of term limits on guaranteed operating loans will give borrowers and lenders the certainty they need to work together to 

graduate participants to commercial credit. 

Today, I am pleased to welcome a distinguished group of witnesses and I look forward to learning more from them about their 

perspectives of current credit conditions and their forecast for the 

future economy of rural America. 

[The prepared statement of Mr. Crawford follows:] 

PREPARED STATEMENT OF HON. ERIC A. ‘‘RICK’’ CRAWFORD, A REPRESENTATIVE IN

CONGRESS FROM ARKANSAS

Good morning. Thank you all for attending today’s hearing to review credit availability in rural America. 

Providing credit to America’s farmers and ranchers is a necessary and serious 

challenge for many lenders in the United States. The Farm Credit System, commercial banks, and USDA’s Farm Service Agency have continued to do an outstanding 

job working to meet the credit needs of rural America. 

I believe it is important to hold hearings like the one today to make sure the credit needs of producers are being met and will continue to be met in the future. As 

we know, the agricultural economy is highly cyclical. History teaches us that interest rates will eventually go up and record high-prices will eventually come down. 

In fact, after a recent period of historic highs, crop prices have declined due to 

record plantings and strong production, and farmland values are slightly decreasing. 

While livestock producers are rebounding on the balance sheet with lower feed costs, 

our western producers are struggling with consecutive years of drought. Thankfully, 

due to recent years of high farm incomes and responsible underwriting, the state 

of our agricultural lending institutions and the farm economy remains strong. 

Even though the current agricultural economy and higher farm prices have resulted in overall good credit conditions, we must be cautious moving forward. While 

farmers should see a small drop in production costs, USDA is forecasting a 27% decline in farm income from last year. 

In order to sustain an abundant supply of food and fiber well into the future, we 

must ensure that responsible farm and agricultural credit policies are in place now. 

The Agriculture Act of 2014 was instrumental in doing just that. The bill included 

several provisions to provide opportunities for young and beginning farmers, including making permanent a microloan program to meet their needs for smaller projects 

and creating a cooperative lending pilot program. Additionally, the elimination of 

3 

term limits on guaranteed operating loans will give borrowers and lenders the certainty they need to work together to graduate participants to commercial credit. 

Today I am pleased to welcome a distinguished group of witnesses and I look forward to learning more from them about their perspectives of current credit conditions and their forecast for the future economy of rural America. 

The CHAIRMAN. I would like to recognize our distinguished Ranking Member, my friend from California, Mr. Costa. 

OPENING STATEMENT OF HON. JIM COSTA, A 

REPRESENTATIVE IN CONGRESS FROM CALIFORNIA 

Mr. COSTA. Thank you very much, Chairman Crawford, ladies 

and gentlemen, and our good witnesses on the two panels that we 

will be hearing from shortly. We appreciate you being here and 

having the opportunity to hear from the witnesses on what we can 

do to ensure that farmers, ranchers and dairy producers across this 

great nation of ours have the necessary financial resources to continue to produce what I believe—what this entire Subcommittee believes—is the most nutritious, the finest food products grown anywhere in the world at cost levels to American consumers that cannot be matched anywhere in the world. And, certainly, it is the agricultural producers of this nation that make it happen every day. 

But we are here because the certainty provided by availability of 

credit for our producers is a critical link for their continued prosperity and of our ability to make this happen. Despite the strength 

of the farm economy, we all know that there is significant volatility 

that occurs on a cyclical nature throughout every region of America. America’s farmers, ranchers and dairy producers face so many 

different variables as they grow the food that we put on our dinner 

table each day that sadly, in my view, it is too often taken for 

granted by the consumers who get that wonderful food at their 

table. They don’t understand, in many instances, the hard work 

and the risk-taking that is involved. Every day these variables take 

different shapes and forms. We are all aware of the natural disasters like droughts and floods. And despite those challenges, our 

producers are resilient. But they also deal with other levels of volatility in the marketplace. And, obviously, we are proud of their efforts to preserve and sustain themselves through these difficult 

challenges. 

In my home State of California, as across much of the western 

United States, farmers, ranchers and dairy producers, as the 

Chairman noted a moment ago, are dealing with a devastating 

drought after 3 consecutive below average rainfall years. And couple that with water systems that today cannot meet the demands 

we face. In California, for example, we are looking at a 6 million 

acres of very highly productive agricultural land in which possibly 

over 600,000 acres of that 6 million acres could become fallow this 

year. What are the totals of those impacts and costs? 

Therefore, we have to ensure that credit is available to our producers, both large and small and in between. And to ensure that 

credit is available, we must have the mechanisms in place, the 

tools, to provide producers that financial assistance. For example, 

the dairy producers in California and across the country saw a 

sharp decline in prices back in 2009 and 2010 when we were looking at $9 per hundredweight in milk prices. We had significant 

bankruptcies as a result of that. Farm Credit’s loan portfolio was 

4 

impacted as were other private institutions that were financing 

dairies. 

But with the passage of the new farm bill, and bipartisan credit 

is due to this Subcommittee and to the full Committee with both 

Chairman Lucas and Ranking Member Peterson, we were able to 

produce a 2014 Farm Bill that I think reflects a lot of the current 

needs that American agriculture is facing. Dairy producers, as an 

example, and lenders alike, will have confidence to apply for and 

provide loans respectively because of the new dairy title and the 

safety net that exists with the insurance program. 

There were also other reforms that were made in the Agricultural Act of 2014 that we believe collectively bolster rural America. 

The microloans that were mentioned, the efforts to provide assistance to young farmers, the EQIP Program and Market Access Program, as examples, we take for granted. But American agricultural 

exports are at an all-time high, proving that not only can we 

produce the food on the American consumer’s dinner table better 

than anywhere, but we can compete in foreign markets if we have 

a level playing field. 

So, Mr. Chairman, I look forward to hearing what our witnesses 

have to say about their confidence in our agriculture economy and 

the attempt to ensure that we have a stable source of lending activity that is available for agriculture in every region of America, as 

we implement the reforms in the 2014 Farm Bill. 

So thank you, and I yield back the balance of my time. 

The CHAIRMAN. I thank the Ranking Member and would request 

that any Members that want to submit an opening statement 

would do so in writing for the record, so witnesses may begin their 

testimony and ensure that there is ample time for questions. 

I would like to welcome our first panel of witnesses. Our first 

three witnesses, the Honorable Jill Long Thompson, Board Chair 

and CEO, Farm Credit Administration; Mr. Chris Beyerhelm, Deputy Administrator for Farm Loan Programs, Farm Service Agency, 

USDA; and Mr. Nathan S. Kauffman, Assistant Vice President, 

Federal Reserve Bank of Kansas City, Omaha Branch, Omaha, Nebraska. We appreciate the witnesses being here today. 

We will recognize each of you in turn for 5 minutes. I would direct your attention to the timer and the box that you see in front 

of you. If the light is green, it means you are good to go. If it turns 

yellow, it is just like when you are in your car, you might want to 

step on the gas because it is fixing to turn red. So we appreciate 

that. 

And with that, I would like to introduce our first witness, the 

Honorable Jill Long Thompson. You are recognized for 5 minutes. 

STATEMENT OF HON. JILL LONG THOMPSON, PH.D., BOARD 

CHAIR AND CHIEF EXECUTIVE OFFICER, FARM CREDIT 

ADMINISTRATION, MCLEAN, VA 

Dr. LONG THOMPSON. Thank you, Mr. Chairman, Members of the 

Subcommittee. I am Jill Long Thompson, Board Chair—— 

The CHAIRMAN. Can you turn on the microphone. Thank you, 

ma’am. 

Dr. LONG THOMPSON. Thank you. That is better. Mr. Chairman 

and Members of the Subcommittee, I am Jill Long Thompson, 

5 

Board Chair and Chief Executive Officer of the Farm Credit Administration. On behalf of my colleagues on the FCA Board, Kenneth Spearman and Leland Strom, and the dedicated women and 

men at FCA, I am pleased to participate in this hearing today. 

As required by the Farm Credit Act of 1971, as amended, FCA 

serves as the independent arm’s-length agency responsible for examining and regulating the banks, associations and related entities 

of the Farm Credit System. We take our responsibilities very seriously, and we strive to interpret the Farm Credit Act faithfully. 

Congress established the Farm Credit System in 1916 to provide 

American agriculture with a dependable source of credit. The System consists of a nationwide network of cooperatively organized 

banks and associations that are owned and controlled by their borrowers. It serves all 50 states and the Commonwealth of Puerto 

Rico. At year-end 2012, the System held more than 46 percent of 

the nation’s farm real estate debt. And I am pleased to report that 

the System’s overall condition and performance remains sound, and 

it continues to fulfill its Congressionally mandated mission. The System’s net income was $4.64 billion in 2013, up 12.7 percent from 2012. Since 2010 when the financial crisis and recession 

were in full swing, credit quality has continued to improve. As of 

December 31, 2013, non-performing loans amounted to $2 billion, 

or 1.01 percent of gross loans, down from $2.6 billion or 1.36 percent at year-end 2012. 

Because the System raises the money it lends to borrowers by 

selling securities in the debt markets, having reliable access to debt 

capital is critical for the System. And I am happy to report that 

it continues to experience reliable access. And investor demand for 

all System debt security products is strong. 

In addition to monitoring the Farm Credit System, my agency 

closely monitors the farm economy for emerging risks that would 

affect farmers and their lenders. Currently, U.S. agriculture, as a 

whole, remains strong. In the Farm Credit Act, Congress requires 

System institutions to provide programs specifically to serve young, 

beginning and small, or as we call them YBS farmers and ranchers. In our examinations of System institutions, we review their 

YBS programs to ensure that they are meeting the needs of these 

borrowers. And we also require annual reports from institutions on 

their YBS lending activities. 

In the wake of the global financial crisis, we have undertaken 

two major rulemaking actions to strengthen the safety and soundness of System institutions. Last June, we issued a revised liquidity regulation requiring each bank to maintain higher quality liquidity, as well as a supplemental liquidity buffer. The rule helps 

ensure that System banks keep liquidity to continue operating if 

their access to the capital markets is temporarily interrupted. 

In addition, the FCA staff worked throughout 2013 and into 2014 

on extensive revisions to the agency’s capital regulations. The proposed rule, which the Board adopted last month, would modernize 

our capital requirements while ensuring that System institutions 

continue to hold regulatory capital to fulfill their mission. 

Another part of our mission is to regulate and oversee the Federal Agricultural Mortgage Corporation, or as it is known Farmer 

Mac. Congress established Farmer Mac in 1988 to provide a secVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00009 Fmt 6633 Sfmt 6601 I:\DOCS\113-15\88547.TXT BRIAN
6 

ondary market for agricultural mortgage and rural home loans to 

improve the availability of cost effective, long-term credit and liquidity to America’s farmers, ranchers and rural communities. 

Farmer Mac is in good financial condition and continues to grow 

its operations and risk bearing capacity to advance its statutory 

mission. 

In the past couple of years, as our nation has considered the 

ways corporate misconduct may have contributed to the recent financial crisis, my agency has increased its emphasis on ethics and 

standards of conduct, both among our own employees and in the institutions we regulate. American agriculture is critical to meeting 

the food demands of this nation and the world, and the Farm Credit System is a critical source of financing for America’s farmers and 

ranchers. As the regulator of the System, FCA is committed to 

helping maintain the source for generations to come. 

And, Mr. Chairman, this concludes my statement. But, of course, 

I will be happy to answer any questions you may have. 

[The prepared statement of Dr. Long Thompson follows:] 

PREPARED STATEMENT OF HON. JILL LONG THOMPSON, PH.D., BOARD CHAIR AND

CHIEF EXECUTIVE OFFICER, FARM CREDIT ADMINISTRATION, MCLEAN, VA 

Introduction 

Chairman Crawford, Ranking Member Costa, Members of the Subcommittee, I am 

Jill Long Thompson, Board Chair and Chief Executive Officer of the Farm Credit 

Administration (FCA or Agency). On behalf of my colleagues on the FCA Board, 

Kenneth A. Spearman of Florida, Leland A. Strom of Illinois, and all the dedicated 

men and women of the Agency, I am pleased to participate in this hearing today. 

FCA is an independent agency responsible for examining and regulating the 

banks, associations, and related entities in the Farm Credit System (FCS or System), including the Federal Agricultural Mortgage Corporation (Farmer Mac). The 

banks and associations of the FCS form a nationwide network of borrower-owned 

financial institutions that provide credit to farmers, ranchers, residents of rural 

communities, agricultural and rural utility cooperatives, and other eligible borrowers. 

FCA Mission 

As directed by Congress, FCA’s mission is to ensure a safe, sound, and dependable 

source of credit and related services for agriculture and rural America. We accomplish this mission in two important ways. 

First, we protect the safety and soundness of the FCS by examining and supervising all FCS institutions, including Farmer Mac, and we ensure that they comply 

with applicable laws and regulations. Our examinations and oversight strategies 

focus on an institution’s financial condition and any material existing or potential 

risk, as well as on the ability of its board and management to direct its operations. 

We also evaluate each institution’s compliance with laws and regulations to ensure 

that it serves all eligible borrowers, including young, beginning, and small farmers 

and ranchers. If a System institution violates a law or regulation or operates in an 

unsafe or unsound manner, we use our supervisory and enforcement authorities to 

take appropriate corrective action. 

Second, we develop policies and regulations that govern how System institutions 

conduct their business and interact with customers. Our policies and regulations 

protect System safety and soundness; implement the Farm Credit Act; provide minimum requirements for lending, related services, investments, capital, and mission; 

and ensure adequate financial disclosure and governance. We approve the corporate 

charter changes of System institutions, System debt issuance, and other financial 

and operational matters. 

Through the oversight and leadership of the House and Senate Agriculture Committees, many important reforms were made to the Farm Credit Administration and 

the FCS as a result of the agricultural credit crisis of the 1980s. This included restructuring FCA as an independent arm’s-length regulator with formal enforcement 

powers, providing borrower rights to System borrowers with distressed loans, and 

7 

establishing the Farm Credit Insurance Fund (Insurance Fund) to protect System 

investors. 

Since then, the Farm Credit System has restored its financial health and the public trust. Using our authority as an arm’s-length regulator, we have contributed to 

the System’s success by ensuring that System institutions adhered to safety and 

soundness standards. The Insurance Fund also helped by restoring investor confidence. 

Both the System and FCA learned much during the crisis of the 1980s, and those 

lessons helped build a much stronger Farm Credit System, as well as a stronger 

regulator. We will continue to focus on ensuring that the System remains safe and 

sound by promulgating regulations, providing appropriate guidance, and maintaining strong and proactive examination and supervisory programs. With the dynamics 

and risks in the agricultural and financial sectors today, we recognize that FCS institutions must have the appropriate culture, governance, policies, procedures, and 

management controls to effectively identify and manage risks. Today the System is 

a dependable provider of credit to agriculture and rural America as intended by 

Congress. 

Farm Credit System Mission 

The FCS is a government-sponsored enterprise (GSE) created by Congress in 1916 

to provide American agriculture with a dependable source of credit. The System’s 

banks and associations form a nationwide network of cooperatively organized banks 

and associations that are owned and controlled by their borrowers, serving all 50 

states and the Commonwealth of Puerto Rico. 

The System provides credit and other services to agricultural producers and farmer-owned agricultural and aquatic cooperatives. It also makes loans for agricultural 

processing and marketing activities, rural housing, farm-related businesses, rural 

utilities, and foreign and domestic companies involved in international agricultural 

trade. In addition, the System provides funding and discounting services to certain 

‘‘other financing institutions’’ and forms partnerships with commercial banks to provide credit to agriculture and rural America through participations and syndications. 

As required by law, System borrowers own stock or participation certificates in 

System institutions. The FCS had nearly 1.1 million loans and approximately 

500,000 stockholders in 2013. Approximately 85 percent of the stockholders were 

farmers or cooperatives with voting stock. The remaining 15 percent were nonvoting 

stockholders, including rural homeowners and other financing institutions that borrow from the System. The U.S. Department of Agriculture’s latest data show that 

the System’s market share of farm debt was 41 percent, which slightly exceeds the 

40 percent share held by commercial banks. 

One of FCA’s oversight roles is to ensure that the System, with its mission devoted to agriculture and rural America, maintains its presence in the agricultural 

marketplace to provide competitive and dependable credit for all eligible and creditworthy farmers, ranchers, and agricultural cooperatives. In fact, the System has 

maintained its mission service during the difficult markets of the past 6 years to 

help producers and rural America. When commodity prices soared in early 2008, 

System institutions stepped forward to meet the critical financing needs of the grain 

elevator industry. They met increased demands for financing machinery and higher 

input costs for producers. The FCS also helped Midwest borrowers affected by floods 

and worked with livestock producers, especially dairy and hog producers, as they 

made difficult decisions during stressful market conditions. Overall the System continued to have access to funds and was able to increase its lending to agriculture 

and rural America during a financial crisis and severe recession. 

Condition of the FCS 

The FCS remains fundamentally safe and sound and is well positioned to withstand the challenges facing agriculture. Although the near-term outlook for agriculture is generally favorable, uncertainty surrounding both the general and farm 

economies will present continuing challenges for the System. 

The U.S. Department of Agriculture is projecting that net cash income will drop 

sharply in 2014. Crop prices declined significantly in 2013 in response to strong 

global crop production. Near-record U.S. corn and soybean plantings and a return 

to normal yields in 2014 could lead to further declines in grain and oilseed prices. 

As a consequence of lower prices, margins for crop producers will be sharply 

lower, but the dairy and livestock sectors should see a significant improvement in 

profitability. Lower grain prices are also having a cooling effect on the farmland 

market, especially in the Midwest. Severe drought conditions in the West, especially 

in California, may also negatively affect System borrowers. While the current credit 

8 

stress level in the System’s loan portfolio is well within its risk-bearing capacity, 

the above-mentioned factors may adversely affect asset quality in 2014. 

The System continues to grow at a moderate pace. As of March 31, 2014, gross loans totaled $204.6 billion, up $12.8 billion or 6.7 percent from March 31, 2013. 

Real estate mortgage lending was up $5.5 billion or 6.2 percent as demand for cropland continued in 2013, especially in the Midwest. Overall, real estate mortgage 

loans represent 46.1 percent of the System’s loan portfolio. Agribusiness and production lending increased by $3.3 billion from the year before, and intermediate-term 

lending increased by $2.4 billion. 

The System also continues to enhance its capital base. As of March 31, 2014, Sys- tem capital equaled $43.7 billion, up from $39.6 billion the year before. The System’s total capital-to-assets ratio was 16.6 percent as compared with 16.0 percent 

a year earlier. Moreover, more than 81 percent of total capital is in the form of 

earned surplus. 

The increase in total capital is due in large part to the System’s strong earnings performance. For the first quarter of 2014, the System reported net income of $1.1 

billion. For the 2013 calendar year, the System reported net income of $4.6 billion. 

With the decline of 18 basis points in the interest rate on earning assets, net interest margin declined in the first quarter to 2.63 percent compared with 2.83 percent 

the year before. Higher average earning asset balances, up $15.1 billion year over 

year, helped offset the decline in net interest margin. While the System has been 

able to take advantage of the low interest rate environment, its ability to continue 

to lower its cost of debt relative to asset pricing is limited. Some compression of net 

interest spread is expected as interest rates change and assets prepay or reprice. 

Credit quality in the System’s loan portfolio continues to be strong. As of March 

31, 2014, non-performing loans totaled $2.1 billion, or 1.01 percent of gross loans, 

as compared with $2.7 billion, or 1.41 percent, for the same quarter a year ago. In 

comparison to total capital, non-performing loans represented 4.7 percent at quarter-end. High feed costs, which challenged livestock, poultry, and dairy producers 

through much of 2013, have moderated as a result of the substantial drop in crop 

prices. Combined with strong product pricing, profit margins for these sectors are 

substantially higher. Other sectors such as the forestry and nursery industries have 

also seen a drop in nonaccrual rates as the U.S. housing market continues to 

strengthen. 

The System continues to have reliable access to the debt capital markets. Investor 

demand for all System debt products has been positive, allowing the System to continue to issue debt on a wide maturity spectrum at very competitive rates. Even as 

the Federal Reserve started to slowly taper its quantitative easing policy at the end 

of 2013, risk spreads and pricing on System debt securities remained favorable relative to corresponding U.S. Treasuries. Further strengthening the System’s financial 

condition is the Insurance Fund, which holds more than $3.6 billion. Administered 

by the Farm Credit System Insurance Corporation, this fund protects investors in 

System-wide consolidated debt obligations. 

System banks also maintain liquidity reserves to ensure they can withstand market disruptions. As of March 31, 2014, the System’s liquidity position equaled 183 

days, significantly above the 90 day regulatory minimum. 

A Changing Risk Profile in Agriculture 

The high grain prices of the past few years led to strong earnings for grain and 

soybean farmers. High grain prices had the inverse effect on the earnings of livestock and dairy producers, constricting their profit margins by driving up their feed 

costs. 

The tables have now turned, however. The large U.S. corn and soybean crops in 

2013 and the potentially large crops in 2014 have caused prices for these crops to 

decline considerably. As a result, the profit margins for livestock and dairy producers have expanded as the profit margins of grain and soybean farmers have constricted. Crop insurance played an important role in supporting grain and soybean 

farmers’ income in 2013, but the level of support it will provide in the future is unclear. 

The reduced profit margins in the crop sector are not expected to lead to significant credit problems in the near future because many grain farmers have experienced several years of good earnings and should have the resources necessary to get 

them through some lean times. Nevertheless, grain farmers who rent most of the 

land they farm may face greater financial stress than those who have no land rental 

costs. 

Farmland values in the Midwest rose rapidly during the past several years because of high grain prices and historically low interest rates. Most observers agreed 

that these elevated farmland values were not sustainable because grain prices and 

9 

interest rates would likely revert to more sustainable levels, leading to an adjustment in farmland prices. Surveys conducted by several Federal Reserve Banks and 

Iowa State University indicate that farmland values are adjusting. 

Fortunately, farm real estate mortgage underwriting has been conservative 

among Farm Credit System institutions as well as commercial banks, according to 

colleagues from other financial regulators with whom we discuss common issues regularly. Consequently, we believe that most FCS institutions will not face significant 

losses because of adjustments in farmland prices. 

FCA staff monitors developments in the farmland market closely, and our examiners have implemented a program for examining the collateral risk management 

at each Farm Credit institution. In addition, we monitor System real estate mortgage loan-to-value ratios on a quarterly basis. The FCA Board receives semiannual 

staff reports on the farmland market and loan-to-value ratios at Farm Credit institutions. 

Examination Programs for FCS Banks and Associations 

FCA is responsible for regulating and supervising the banks, associations, and related entities that compose the Farm Credit System. Our examination and oversight 

programs provide strategic, proactive risk supervision of the System. In conducting 

our institution-specific, risk-based oversight and examination activities, we assign 

highest priority to institutions that present the greatest risk. 

We also perform nationally focused examinations that target specific issues and 

operational areas to monitor the condition and operations of the System as a whole. 

We actively monitor risks that may affect groups of System institutions or the entire 

System, including risks from the agricultural, financial, and economic environment. 

Through our oversight, we require System institutions to have the programs, policies, procedures, and controls to effectively identify and manage risks. Our oversight 

program also requires compliance with laws and regulations. When institutions are 

either unable or unwilling to address unsafe and unsound practices or to comply 

with laws and regulations, we take appropriate supervisory or enforcement action. 

We use a comprehensive regulatory and supervisory framework to ensure the System’s safety and soundness. FCS institutions, on their own and in response to our 

efforts, continue to improve their risk management systems. 

FCA uses the Financial Institution Rating System (FIRS) to assess the safety and 

soundness threats to each System institution. Similar to the systems used by other 

Federal financial regulators, the FIRS is a CAMELS-based system, with component 

ratings for capital, assets, management, earnings, liquidity, and sensitivity, all factoring into an overall composite rating. System institutions are assigned component 

and composite ratings based on FCA’s evaluation of quantitative and qualitative factors. FIRS ratings range from 1 for a sound institution to 5 for an institution that 

is likely to fail. 

Although the System’s financial condition remains sound, a small number of individual institutions display some weaknesses. These weaknesses stem from several 

factors that have adversely affected some System borrowers: 

• The slow pace of economic recovery 

• Volatile commodity prices 

• Drought in the western United States 

• Damaging diseases in the citrus and pork sectors 

As the System’s regulator, we have increased supervisory oversight and dedicated 

additional resources to institutions experiencing stress. As of December 31, 2013, 

eight System institutions had a composite FIRS rating of 3. While these institutions 

represent about two percent of System assets and do not meaningfully affect the 

System’s consolidated performance, they require significantly more resources to 

oversee. 

The chart below includes the System banks and their affiliated associations. The 

figures in the bars reflect the number of institutions by FIRS rating. 

10 

Farm Credit System FIRS Composite Ratings 

Source: FCA’s FIRS Ratings Database. 

Regulatory Activities 

Congress has given the FCA Board statutory authority to establish policy, prescribe regulations, and issue other guidance to ensure that System institutions comply with the law and operate in a safe and sound manner. We are committed to 

developing balanced, flexible, and legally sound regulations. 

Over the past couple of years, we have revised our regulations to accomplish the 

following objectives: 

• To require each System institution’s business plan to include strategies and actions to serve all creditworthy and eligible persons in the institution’s territory. 

In addition, the regulation encourages institutions to serve nontraditional customers, such as women and minorities, who often operate within local food systems by producing organic or specialty crops on small farms. The regulation 

also seeks to achieve diversity and inclusion in the workforce of System institutions. 

• To enhance System disclosures of senior officer compensation and supplemental 

benefit programs. 

• To ensure that System institutions maintain effective policies to measure and 

manage exposure to single counterparties, industries, and market segments, 

and to large complex loans. 

• To ensure that System funding and liquidity requirements are appropriate and 

to ensure that the discounts applied to investments reflect their marketability. 

• To allow System institutions to purchase eligible agricultural loans from the 

Federal Deposit Insurance Corporation. 

• To ensure that prudent practices are in place for the safe and sound management of System investment portfolios. 

• To remove all requirements related to nonbinding, advisory votes at System institutions on senior officer compensation. 

• To establish a regulatory framework for the reporting of System accounts and 

exposures to FCA. The revisions reaffirm our authority to collect data on System institution accounts and exposures, including data on shared assets. 

• To establish standards for Farmer Mac’s capital planning process. The revised 

process emphasizes the quality and level of capital and annual stress testing. 

• To increase the level and quality of assets held in Farmer Mac’s liquidity reserve. 

Currently, we are working on regulatory projects to accomplish these additional 

objectives: 

• To enhance our risk-based capital adequacy framework to more closely align it 

with that of other Federal banking agencies and the Basel Accord. We published 


11315001.eps
11 

a notice of proposed rulemaking to solicit comments on amending our regulations to replace the current core and total surplus capital standards with a ‘‘Tier 

1/Tier 2’’ capital framework. 

• To implement the requirements of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act by imposing margin requirements on noncleared derivatives transactions and removing references to credit ratings. 

• To clarify and strengthen the standards-of-conduct requirements for System directors, employees, and agents. 

• To seek public input on FCA regulations that may duplicate other requirements, are not effective in achieving the stated objectives, are not based on law, 

or impose burdens that are greater than the benefits received. 

• To clarify and enhance stockholder voting procedures. 

• To revise regulatory requirements for mergers or consolidations of banks or associations. 

• To strengthen the safety and soundness of the investment activities of System 

banks by more accurately reflecting the risk in particular investments, and to 

comply with a provision of the Dodd-Frank Act by replacing credit rating requirements with other standards of creditworthiness. 

• To ensure appropriate and effective risk governance and board oversight at 

Farmer Mac, and to clarify standards-of-conduct and conflict-of-interest requirements. 

• To remove reliance on credit ratings from investment eligibility regulations pertaining to Farmer Mac and to maintain the quality and availability of Farmer 

Mac’s liquid investments. 

Corporate Activities 

The number of FCS institutions has declined over the years as a result of bank 

and association mergers. Generally, System institution mergers result in larger, 

more cost-efficient and better-capitalized institutions with broad, diversified asset 

bases, both by geography and commodity. 

However, these mergers also increase the complexity of the continuing institutions. The increased complexity places greater demands on both FCA staff resources, 

as well as the level of expertise required of staff, particularly in areas of regulation, 

policy, examination, and legal interpretation. As of January 1, 2014, the System 

consisted of the following: 

• Seventy-eight direct-lender associations 

• Three Farm Credit Banks and one Agricultural Credit Bank 

• Five service corporations that provide support, technology, leasing, human capital, and other services 

• A funding entity that markets the securities—chiefly bonds and discount 

notes—that the banks sell in the capital markets to raise loan funds 

• A GSE with the mission of providing a secondary market for agricultural real 

estate and rural housing mortgage loans 

Federal Agricultural Mortgage Corporation 

Congress established Farmer Mac in 1988 to provide a secondary market for agricultural mortgage and rural home loans to improve the availability of cost-effective 

long-term credit and liquidity to America’s farmers, ranchers, and rural communities. Farmer Mac creates and guarantees securities and other secondary market 

products that are backed by mortgages on farms and rural homes, including certain 

USDA guaranteed loans. Loan originators that participate in Farmer Mac’s secondary market programs include community banks, Farm Credit System institutions, mortgage companies, commercial banks, insurance companies and credit 

unions. The 2008 Farm Bill expanded Farmer Mac’s program authorities by allowing it to purchase and guarantee securities backed by eligible rural utility loans 

made by cooperative lenders. 

Through a separate office required by statute (the Office of Secondary Market 

Oversight), FCA examines, regulates, and oversees Farmer Mac’s operations and its 

safety and soundness. As the secondary market GSE devoted to agriculture and 

rural America, Farmer Mac has the statutory authority to, in extraordinary circumstances, issue obligations to the U.S. Treasury Department, not to exceed $1.5 

billion, to fulfill the guarantee obligations of its guaranteed securities. The Insurance Fund does not back Farmer Mac’s securities, and the System is not liable for 

any Farmer Mac obligations. 

12 

After sustaining losses on liquidity investments during the 2008 financial crisis, 

Farmer Mac continues to replenish capital and strengthen its operations and riskbearing capacity to advance its statutory mission. Over the past several quarters, 

Farmer Mac’s capital position has steadily improved, with healthy core earnings 

growth and recent issuances of high-quality preferred stock. As of March 31, 2014, 

Farmer Mac’s core capital totaled $664.0 million, which exceeded its statutory requirement of $462.5 million. As a result, capital surplus grew to $261.0 million, up 

from $155.6 million as of March 31, 2013. 

New business volume growth is steady. The total portfolio of loans, guarantees, 

and commitments grew by five percent from March 31, 2013, to $14.1 billion on 

March 31, 2014. Farmer Mac recently reported that small farm loans contributed 

44 percent of the volume related to its new Farm & Ranch program. Despite the 

decreasing number of small farms, Farmer Mac has seen an overall increase in the 

dollar volume and number of small farm loans in its programs. 

Credit quality indicators reflect the strength in the agricultural and rural utility 

sectors and Farmer Mac’s commitment to strong underwriting standards. As of 

March 31, 2014, Farmer Mac’s 90 day delinquencies were $29.4 million, or 0.56 percent of Farm & Ranch volume, compared with $39.7 million, or 0.83 percent, as of 

March 31, 2013. Real estate owned as of March 31, 2014, was $2.5 million, down 

from $4.4 million a year earlier. Farmer Mac reported no delinquencies in its pools 

of rural utility cooperative loans. On March 31, 2014, Farmer Mac’s allowance for 

losses totaled $14.0 million, compared with $14.3 million on March 31, 2013. 

Farmer Mac continues to enjoy reliable access to the debt capital markets to support its mission of providing financing and liquidity to agriculture and rural markets. To improve its financial flexibility in the event of a financial or market disruption, Farmer Mac has taken significant measures to increase the quality and liquidity of its $2.5 billion investment portfolio. 

Serving Young, Beginning, and Small Farmers and Ranchers 

System institutions are required to develop programs and make special efforts to 

serve young, beginning, and small (YBS) farmers and ranchers. In 2013, the System 

continued to show gains in loan dollars outstanding and loan numbers outstanding 

to YBS producers. In addition, from 2012 to 2013, the number of new loans made 

to young farmers went up by 2.3 percent, and the number of new loans made to 

beginning farmers went up by 5.0 percent. 

Despite these gains, YBS results as a percentage of the System’s total farm loans 

have either declined or remained flat over the past few years. These results likely 

reflect the shrinking pool of YBS farmers in the United States. Because of the high 

costs of starting a farm, fewer people are entering agriculture. Over the years, farms 

have gotten bigger, and the average age of farmers has gone up. 

FCA issued a bookletter in August 2007 to encourage institutions to seek ways 

to better serve YBS borrowers. The bookletter provides institutions with more flexibility to lend to YBS borrowers and encourages them to use credit enhancements 

to allow more YBS borrowers to qualify for credit. Credit enhancements for YBS 

borrowers may include: 

• lower rates or fees for YBS borrowers, 

• differential underwriting standards, and 

• USDA loan guarantees. 

In response to this guidance, more institutions are committing capital to assist 

in their YBS lending, and more are using advisory committees to update YBS policies and procedures. Many institutions have stepped up their YBS outreach efforts 

and their coordination with outside parties or organizations to serve YBS producers. 

In addition to providing credit to YBS borrowers, FCS institutions may offer other 

financial services to YBS borrowers, and many institutions provide special training 

and educational programs for them. 

Our efforts to encourage System institutions to emphasize diversity and inclusion 

and to serve producers of local and regional foods also benefit YBS producers. In 

2012, to ensure the System fulfills its Congressional mission to serve all eligible, 

creditworthy borrowers, we issued a regulation requiring institutions to develop 

human capital and marketing plans that promote diversity and inclusion. Because 

many small and beginning farmers belong to underrepresented groups, this regulation helps strengthen service to YBS borrowers. Likewise, a bookletter we issued in 

2012 to provide guidance regarding service to local and regional foods producers also 

benefits YBS borrowers because many of these producers would be classified as 

young, beginning, or small. 

13 

Working with Financially Stressed Borrowers 

Risk is an inherent part of agriculture, and the causes of risk are many: 

• Adverse weather 

• Changes in government programs 

• International trade issues 

• Fluctuations in commodity prices 

• Crop and livestock diseases 

These risks can sometimes make it difficult for borrowers to repay loans. The 

Farm Credit Act provides System borrowers certain rights when they apply for 

loans and when they have trouble repaying loans. For example, the act requires 

FCS institutions to notify borrowers of the right to seek restructuring of loans before the institutions begin foreclosure. It also provides borrowers an opportunity to 

seek review of certain credit and restructuring decisions. When a System institution 

acquires agricultural property through liquidation, the Farm Credit Act also provides borrowers the opportunity to buy or lease back their former properties. 

FCA enforces the borrower rights provisions of the Farm Credit Act and examines 

institutions to make sure that they are complying with these provisions. We also 

receive and review complaints from borrowers who believe their rights have been 

denied. Through these efforts, we ensure compliance with the law and help FCS institutions continue to provide sound and constructive credit and related services to 

eligible farmers and ranchers. 

Conclusion 

We at FCA remain vigilant in our efforts to ensure that the Farm Credit System 

and Farmer Mac remain financially sound and focused on serving agriculture and 

rural America. While we are proud of our record and accomplishments, we remain 

committed to excellence, effectiveness, and cost efficiency, and we will remain focused on our mission of ensuring a safe, sound, and dependable source of credit for 

agriculture and rural America. This concludes my statement. On behalf of my colleagues on the FCA Board and at the agency, I thank you for the opportunity to 

share this information. 

The CHAIRMAN. Thank you. I appreciate that. And we will move 

on to our next witness, Mr. Chris Beyerhelm, Deputy Administrator for Farm Loan Programs, FSA. 

STATEMENT OF CHRIS BEYERHELM, DEPUTY 

ADMINISTRATOR FOR FARM LOAN PROGRAMS, FARM 

SERVICE AGENCY, U.S. DEPARTMENT OF AGRICULTURE, 

WASHINGTON, D.C. 

Mr. BEYERHELM. Mr. Chairman, Members of the Subcommittee, 

thank you for this opportunity to appear before you to provide an 

update on credit conditions in rural America and a status update 

on how FSA loan programs are working with our commercial lending partners to provide credit to our farmers and ranchers. 

The farm economy has been strong in recent years with high 

farm income and farmland values at or near record levels. However, these highs are not expected to continue, and not all agriculture sectors have benefited from these conditions. An increase in 

feedgrain production is expected to drive farm income down, and a 

slowdown in real estate values has already been observed. Our livestock producers and dairy operations are still recovering from extended periods of high feed costs and drought. And input costs for 

all are expected to remain at near or record high levels of recent 

years. 

Finally, considering all of these events, combined with interest 

rates creeping up, lenders and their regulators are closely scrutinizing agriculture credit standards, making some producers unable 

to get credit. For those family farmers who could not qualify for 

14 

commercial credit due to lender standards, but otherwise creditworthy, they can turn to the FSA administered guaranteed loan 

programs. These loan programs are discretionary and are funded 

through annual appropriations. Federal budget resources have 

been increasingly leveraged over the last 4 years through loan programs. For example, in 2010, $148 million of budget authority was 

needed to provide $5 billion of lending authority. While in 2014, a 

significantly reduced budget authority of $98 million provided for 

$5.5 billion of lending authority. This is an excellent example of 

how government programs that are prudently managed the taxpayer with a greater return. 

Since early 2009, FSA has experienced record demand levels of 

loan requests. In each of the last 4 years, FSA has had a significant backlog of approved, but unfunded, loans. To manage this increase, the President’s 2015 budget has requested lending authority to go to $6.4 billion. And should these funds be provided, FSA 

expects for the first time in many, many years to be able to meet 

all of the demand in our loan programs. This will allow our customers to be better prepared and execute their business plans, and 

meet on an even playing field for land and preseason discounts. As of May 2014, the FSA portfolio was $20 billion, 71,000 direct 

customers, 34,000 guaranteed customers. Performance of the portfolio has been stellar, with loss rates for the direct and guaranteed 

programs at 1.6 and .3 percent respectively. Delinquencies for direct and guaranteed are 5.4 percent and 1 percent respectively. 

The portfolio continues to be fluid with customers moving in and 

out of the portfolio as it was designed. In fact, of all of the customers in our portfolio in the year 2000, for the operating program, 

only 14 percent of those remained in 2013. These statistics indicate 

the program is providing new and beginning farmers an opportunity. But once their financial condition improves, they are able 

to seek and obtain commercial credit. 

The FSA continues to put an emphasis on beginning farmers. 

The continued increase in average age of farmers and rural population decline says that there is a pressing need that we get new 

farmers into the industry. We try to take existing loan programs 

and tweak and revise those to provide benefits to beginning farmers. Most notably, the microloan program you have mentioned earlier has been a tremendous asset to beginning farmers. Since its inception in January of 2013, over 7,200 of these loans have been 

made. And I am pleased to tell you that over 70 percent of those 

have been to beginning farmers. 

Congress also recognized the importance of beginning farmers in 

the last farm bill. And soon after enactment, FSA implemented all 

of the discretionary—or the non-discretionary provisions of the 

farm bill. And many of those had immediate impact on beginning 

farmers, though many of the farm bill provisions will be implemented in October of 2014, with the rest in early 2015. 

In conclusion, Mr. Chairman, FSA, working together with our 

commercial lending partners, is delivering a successful lending program with high levels of participation and fiscal responsibility. Our 

boots on the ground delivery system puts us in a unique position 

to deliver a quality loan product to the next generations of America’s farmers and ranchers. However, we continue to face chalVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00018 Fmt 6633 Sfmt 6601 I:\DOCS\113-15\88547.TXT BRIAN
15 

lenges: government resources are declining, and agriculture is 

changing. 

We look forward to working with this Committee and others to 

continue to refine and adjust our programs and processes to maximize the opportunities for our small, beginning and socially disadvantaged farmers, and find the appropriate level of resources in 

order for us to meet this—or accomplish this mission. 

Thank you for allowing me to share the FSA farm loan perspectives as you seek to address this important issue. I look forward 

to any questions now or in the future. Thank you. 

[The prepared statement of Mr. Beyerhelm follows:] 

PREPARED STATEMENT OF CHRIS BEYERHELM, DEPUTY ADMINISTRATOR FOR FARM

LOAN PROGRAMS, FARM SERVICE AGENCY, U.S. DEPARTMENT OF AGRICULTURE, 

WASHINGTON, D.C. 

Mr. Chairman, and Members of the Subcommittee, thank you for the opportunity 

to appear before you to provide an update on the credit conditions rural America 

now faces, and the current status and operations of the farm loan programs at the 

Farm Service Agency (FSA). 

Credit Conditions 

The farm economy has been strong the last couple of years with net farm income 

at an all-time high in 2013, and farmland values currently at, or near, record levels. 

However, record farm income is not sustainable. A bumper feed grain crop is being 

forecast for 2014 that could lead to a 27 percent decline in farm income from last 

year, but farm income is still forecast to be the seventh highest to date. A slowdown 

in farmland value growth already has been observed. Furthermore, the high commodity prices in prior years did not benefit all producers equally as higher feed 

costs squeezed livestock and dairy producer margins leaving them with weak balance sheets in need of rebuilding. Compared to 2012, gross crop receipts are forecast 

to decrease by more than 15.2 percent in 2014, with a $20.2 billion decline in corn 

receipts and a $6.2 billion decline in soybean receipts expected. 

On a historical basis, production expenses are anticipated to fall from 2013 levels, 

but will remain near their all-time highs, having grown to a forecasted $348.2 billion for 2014, which is a 21.1 percent increase over 2010. Therefore, large amounts 

of capital will continue to be required to finance agricultural production, increasing 

the demand for operating credit, financial leverage, and liquidity. 

Finally with interest rates bottoming out and farmland values high, credit standards established by lenders and their regulators have been high since 2010 and will 

likely continue to be high for some time. Recent Federal Reserve Surveys indicate 

commercial lenders in most regions are maintaining stringent credit standards. This 

continued high level of loan scrutiny by lenders means some farmers still cannot 

qualify for commercial credit. 

FSA Farm Loan Programs. Family farmers who do not qualify for commercial 

credit due to lender standards, but are otherwise creditworthy, can turn to the farm 

loan programs administered by FSA. The Agency assists farmers through direct and 

guaranteed farm loans. Direct loans are made and serviced by FSA; agency employees provide supervision and technical assistance to direct loan borrowers. Direct 

loans are not intended to be a permanent source of credit, and borrowers agree to 

obtain commercial credit and refinance their FSA debts when they are able to do 

so. In fact, of those borrowers having outstanding operating loans in 2000, only 14 

percent remain in the FSA portfolio in 2014. 

Guaranteed loans are made, funded and serviced by a commercial lender. FSA 

typically guarantees up to 90 percent of the loan principal and interest. FSA employees must evaluate and make a credit decision on all guaranteed loans. Guaranteed lenders must retain at least the non-guaranteed portion of the loan in their 

portfolio and are accountable for loan servicing under the FSA guarantee. 

Funding. FSA farm loan programs are discretionary programs funded through annual appropriations. In accordance with the Federal Credit Reform Act of 1990 (as 

amended), appropriations for FSA farm loans are based on the projected total cost 

of loans when they are made. Federal budget resources are able to be significantly 

leveraged through the loan programs. In Fiscal Year (FY) 2014, $97.7 million in appropriations supported $5.53 billion in direct and guaranteed FSA loans which, 

when provided to American farmers and ranchers, resulted in a significant investVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 I:\DOCS\113-15\88547.TXT BRIAN
16 

ment in the rural parts of our country. Prudent management and program administration, as evidenced by low levels of delinquencies and losses, has allowed FSA to 

increase leverage of limited budgetary resources over the past several years. For example, in FY 2010, $148.5 million in budget authority was required to support a 

total program level of $5.08 billion, while in FY 2014, a slightly larger program level 

requires 34 percent less budget authority. 

Loan Demand. Activity in FSA’s farm loan programs indicates that a significant 

number of farmers and ranchers continue to be unable to obtain commercial credit 

under current conditions. Farm loan program demand is usually a reflection of financial conditions in the farm economy: when the overall farm economy is strong, 

farm loan activity declines; during times of financial stress in the farm economy, 

demand for FSA loans rises. This makes sense, given that a basic requirement to 

qualify for the loan programs is to be unable to meet the criteria for commercial 

credit. 

In early FY 2009, loan demand surged to levels that had not been seen since the 

early 1980s. Demand for farm loan program assistance in FY 2009, and in 2013, 

reached its highest levels since FY 1985. Demand has continued at, and in some 

programs increased above, those near-record FY 2009 levels. In each of the last 4 

years FSA has closed out the fiscal year with a significant backlog in approved, but 

unfunded loans. Application activity in FY 2014 reflects demand levels similar to 

the higher levels of the previous 5 years. To manage the increased demand, the 

President’s budget request for FY 2015 recommended that loan levels to be increased to $6.4 billion. If these funds are provided, FSA expects, for the first time 

in many years, to have sufficient funds to meet the demand. This will allow our customers to better prepare and execute their business plans, and compete on an even 

playing field for land and pre-season discounts on inputs. 

Over the past 2 years, an unusually high number of direct operating loan applications have been received from new customers. Normally, about 20 percent of direct 

operating loan applications in any given year are from farmers who do not have 

FSA loans. In FY 2013, 37 percent of the direct operating loans made were to customers who did not have existing FSA operating loans. 

Performance and Portfolio Conditions 

Farm loan programs continue to emphasize the importance of processing applications in a timely manner. Between FY 2008 and FY 2013, the length of time to process direct loans has averaged 28 days. During this period, FY 2010 (the largest loan 

volume year since the mid-1980s) had the highest average, at just less than 31 days, 

while the lowest of 25 days was achieved in FY 2013. Similarly, loan processing 

timeliness in the guaranteed loan program has remained very strong with an average of 9 days over the past 6 years. These results for both the direct and guaranteed 

programs represent historic lows. This strong performance is continuing in FY 2014. 

As of May 31, 2014, the average processing time for the direct loan program was 

24 days, and 9 days for guaranteed loans. These long-term results are remarkable 

given that loan demand has surged and staffing levels have declined. The fact that 

there has not been a noticeable deterioration in application processing time is a testament to the dedication of FSA field staff, implementation of efficiency measures 

in loan processing, and the effectiveness of the Information Technology (IT) solutions farm loan programs has deployed. 

As of May 31, 2014, the FSA direct loan portfolio consisted of $8.2 billion owed 

by 70,445 borrowers, while the guaranteed portfolio consisted of $11.5 billion owed 

by 33,847 borrowers. The quality of our portfolio has continued to improve, with 

foreclosure and loss rates falling while borrower graduation to commercial loans has 

increased. 

Loss Rates. In FY 2013, losses in the direct loan program were just 1.6 percent 

(see Chart 1). Losses for FY 20l3 in the guaranteed loan program were 0.3 percent, 

(see Chart 1). 

Delinquency Rates. As with losses, the direct loan delinquency rates have been at 

historic lows for the past 2 decades at 5.4 percent for FY 2013 (see Chart 2). This 

is the result of steady and dramatic decreases, from a 23.8 percent delinquency rate 

in FY 1995. The decrease was facilitated by expanded authority, since 1996, to offset 

delinquent borrowers’ loan obligations with their Federal payments, salaries and income tax refunds. In the guaranteed program, the FY 2013 delinquency rate was 

1.07 percent; the lowest on record (see Chart 2). 

Graduation rates: FSA does not provide permanent financing; direct loan borrowers are required to move to commercial credit or graduate when they are able 

to do so. Statistics indicate that the vast majority of borrowers leave the FSA portfolio in a relatively short (given a potential 40+ year farming career) period of time. 

Eighty six percent of the operating loan borrowers in the FSA portfolio in 2000 no 

17 

longer owed an operating loan by 2013. In the farm ownership program, over 70 percent of the borrowers in the FSA portfolio in 2000 had left by 2013. These statistics 

indicate the program is providing new and beginning farmers an opportunity to obtain credit, but after establishing themselves financially, are able to seek and obtain 

commercial credit. 

Equitable Treatment and Participation 

I, along with all members of the FSA management team, remain fully committed 

to providing equal access and opportunity to all those FSA serves. In FY 2013, while 

FSA received more than 50,000 loan applications, more than 2,700 loan servicing 

requests, and tens of thousands of applications for various farm commodity, income 

support, and disaster assistance programs, the Assistant Secretary for Civil Rights 

received only 19 civil rights complaints related to FSA programs. While this is the 

lowest number of FSA civil rights complaints received since records have been kept, 

it is our goal to further reduce this number. 

I will closely monitor the operations of farm loan programs to assure that our producers, program applicants, and employees receive fair and equitable treatment. I 

want to update you on a few key activities dealing with these important issues. 

Program participation. An examination of the composition of FSA’s loan portfolio 

indicates that FSA finances socially disadvantaged farmers at a much higher rate 

than that groups’ proportion of the farm population. FSA has significantly increased 

the amount of loan funds provided to socially disadvantaged applicants. Between 

2008 and 2013, the FSA direct loan caseload for socially disadvantaged borrowers 

increased from 14,068 to 15,514. 

New and Beginning Farmers. The continuing increase in the average age of farmers and decline in rural population both point to a pressing need for more beginning 

farmers. As a result, assisting and fostering beginning farmers and ranchers remain 

a primary concern and focus for FSA farm loan programs. While the general 

strength of the agriculture economy is certainly a positive factor for rural America, 

the resulting increases in land values and other capital costs have made it ever 

more difficult for beginning farmers to get started and become established. More 

than ever, beginning farmers need a hand up to start their journey toward success. 

FSA is committed to effective use of farm loan programs and authorities to assist 

beginning farmers. Beyond implementation of the 2014 Farm Bill provisions benefitting beginning farmers, FSA has implemented or modified programs under existing 

authorities to better fit the needs of beginning farmers. Most notably, the microloan 

program, a subset of the direct operating loan program, has been tremendously successful in assisting beginning farmers. This program, launched in January 2013, reduces paperwork by half and is designed to fit the business plans of non-commodity 

operations such as local food, community-supported agriculture, urban agriculture 

and niche market farm businesses which are attracting many beginning farmers. So 

far this year, 72 percent of the microloans made have gone to beginning farmers. 

Although the program is still new, performance, so far, is very good, with over 7,200 

loans made. 

In addition to the microloan program, FSA implemented a ‘‘streamlined loan’’ application process for repeat operating loan customers with good repayment history 

on FSA loans. This allows FSA to provide more timely service to many beginning 

farmer borrowers and frees staff time so they may spend more time with those borrowers who need additional help or technical assistance. 

2014 Farm Bill Implementation. Congress also recognized the criticality of the situation for beginning farmers and re-affirmed the focus on them for FSA programs 

in the 2014 Farm Bill. FSA continues to strive to reach more beginning farmers and 

ranchers and has increased the amount of loan funds provided to beginning farmers 

and ranchers. The FSA direct loan caseload for beginning farmers increased from 

18,785 in 2008 to 31,659 borrowers in 2013. 

FSA was able to implement several nondiscretionary provisions of the farm bill 

shortly after enactment, including provisions to increase the guarantee percentage 

on guaranteed conservation loans, reduce the interest rate on joint financing loans, 

increase the loan limit on down payment loans, eliminate guaranteed loan term limits, change the land ownership limitation for beginning farmer applicants, eliminate 

the restriction on youth loans to rural areas, and reduce credit limitations for delinquent and defaulted youth loan borrowers. Several of these had an immediate impact on beginning farmers. In particular, the change in interest rates on joint financing farm ownership loans benefitted hundreds of applicants with applications 

pending, but not yet funded, at the time of implementation. 

Several additional farm bill provisions will be implemented through an interim 

rule scheduled for publication in October 2014, including changes to eligibility rules 

for entities, experience requirements for direct ownership loans, and increasing the 

18 

microloan limit to $50,000. These provisions will add flexibility or enhance programs 

for beginning farmers as well. The Agency plans to publish a request for suggestions 

for pilot projects authorized in Section. 5302, and hopes to receive suggestions for 

projects that demonstrate new approaches to assist beginning farmers and others 

through farm loan programs. In addition, we are prepared to implement the Individual Development Accounts authorized by the farm bill if funding is provided. 

IT Modernization. Farm loan programs has also implemented modern, web-based 

systems to manage the loan application, approval and funding process. This system 

provides real-time management data on application activity and allows the Agency 

to better cope with funding problems and act quickly when necessary. For example, 

when the Agency received supplemental funding in the American Revitalization and 

Recovery Act, over 2,000 farmers were waiting for desperately needed direct operating loans to pay 2009 planting and other farming expenses. When funds were 

made available to FSA, the Agency was able to process obligations overnight, and 

funds began flowing into farmers’ bank accounts only 3 days later. I am proud to 

say that FSA was one of the first agencies in the government to get recovery dollars 

flowing to those who urgently needed it. The modern, web-based IT systems in place 

for farm loan programs, such as the Direct Loan System and the Program Funds 

Control System, were, and are, a key factor in our ability to provide such timely 

service. 

The continued efforts to move all automated systems to the Web will allow for 

the elimination of duplicate data collection and for farm loan services to be delivered 

even more efficiently. This will further our mission to conduct USDA business from 

any location where there is broadband or WiFi Internet access and allow us to conduct business with producers at locations and times convenient to them. Additionally, loan information is stored on a centralized server allowing employees to quickly 

access portfolio information and provide real time management reports. 

Conclusion 

Through modernization efforts, maintaining focus on program objectives, and the 

hard work and dedication of FSA employees, FSA farm loan program staff has made 

great strides in improving program performance. Loan failures and losses have declined which is a strong indication that the program mission of helping farmers become successful is being accomplished. At the same time, increased assistance to 

small, beginning, and socially disadvantaged farmers, reflects remarkable success as 

well. 

However, we continue to face challenges. Government resources are increasingly 

limited and the agriculture production landscape is changing. It will require every 

bit of innovation, management expertise, and determination that we can muster to 

maintain the efficiency and efficacy of farm loan programs over the next several 

years. 

We are experiencing a unique set of conditions in the credit and banking sectors, 

and to a large extent, in agriculture. These changes pose significant barriers and 

challenges to the groups that FSA farm loan programs are intended to assist. These 

issues create major challenges for the agency as well, since the success of the program depends on those whom the programs are intended to serve. To keep pace 

with these changes, we look forward to working with you to continue efforts to modernize our delivery systems, and to refine and adjust program requirements and operations to maximize the opportunities for our nation’s small, beginning, and socially disadvantaged farmers and ranchers and to seek a level of resources appropriate for this important mission. 

Because of our rural delivery system and experienced loan officers, FSA’s farm 

loan programs staff is well positioned to continue providing high quality delivery of 

existing programs and new initiatives to assist small, beginning, and socially disadvantaged family farmers. 

Thank you for allowing me to share our Department of Agriculture perspective 

as you seek to address this important issue. I am available to answer your questions 

now or at any time in the future. 

19 

CHARTS

Chart 1 

Farm Loan Programs Loss Rates 

10 Year Trend 

Chart 2 

Farm Loan Programs Dollar Delinquency Rates 

10 Year Trend 


11315002.eps 11315003.eps
20 

The CHAIRMAN. Thank you, sir. Now, I am pleased to recognize 

the Vice President, Federal Reserve Bank of Kansas City, Mr. Nathan Kauffman. You are recognized for 5 minutes. 

STATEMENT OF NATHAN S. KAUFFMAN, ASSISTANT VICE 

PRESIDENT, FEDERAL RESERVE BANK OF KANSAS CITY, 

OMAHA BRANCH, OMAHA, NE 

Mr. KAUFFMAN. Thank you, Mr. Chairman, and Members of the 

Subcommittee. Thanks for the opportunity to speak to you this 

morning. My name is Nathan Kauffman, and I am Assistant Vice 

President and Economist at the Federal Reserve Bank of Kansas 

City, our regional reserve bank that has long devoted significant 

attention to U.S. agriculture. In my role, I lead several efforts to 

track the agricultural and rural economy, including a regional agricultural credit survey and the Federal Reserve System’s Agricultural Finance Databook, which is a national survey of agricultural 

lending activity at commercial banks. 

I am pleased to share with you this morning information on the 

current state of agricultural credit markets. Before I begin, let me 

emphasize that my statement represents my view only, and is not 

necessarily that of the Federal Reserve System or any of its representatives. 

The U.S. agricultural economy has been very strong since 2009. 

According to the USDA, average farm income from 2010 through 

2013 annually was about 46 percent higher than the average of the 

previous 10 years. Crop prices surged and cropland values increased dramatically during that time. In key crop producing 

states, cropland values rose by more than 20 percent annually for 

several consecutive years, which strengthened overall farm sector 

balance sheets. The crop sector was a primary driver of these near 

record farm incomes, while the livestock sector experienced multiple years of poor profits or losses due to elevated feed costs. 

Several key measures of agriculture credit conditions monitored 

by the Kansas City Fed also improved from 2009 to 2013. According to Federal Reserve surveys of agricultural banks, repayment 

rates for agricultural production loans in the Kansas City, Chicago 

and Minneapolis districts all improved considerably alongside rising farm income. Profitability and agricultural banks also strengthened significantly. 

During this time, however, bankers commented that agricultural 

loan demand had fallen despite declining interest rates, as farmers 

used more cash to pay for farm related expenses. Although the 

overall financial position of the farm sector had improved, some agricultural producers were more at risk for financial stress than others. Our banker contacts consistently voiced concerns about the viability of some livestock operations facing steep losses, as well as 

young and beginning farmers with significantly less equity in their 

operations. 

Since last fall’s crop harvest, sharp changes in agriculture commodity prices have led to corresponding changes in the outlook for 

the farm sector and agricultural finance. Current corn prices are 

about 40 percent less than last year. Conversely, average fed cattle 

prices are approximately 25 percent higher than a year ago. And 

21 

overall livestock prices and lower feed costs have contributed to a 

rebound in livestock sector profitability. 

Lower crop prices and persistently high input costs have reduced 

profit margins for U.S. crop producers and have affected recent 

trends in agricultural lending. Toward the end of 2013, declining 

profit margins reduced farm cash flow. As a result, demand for 

some agricultural loans began to rise, and lending activity jumped 

considerably in the first quarter of 2014. The Federal Reserve’s Agricultural Finance Databook, included with my written testimony, 

shows that the volume of new short-term farm loan originations increased by 28 percent from the previous year in the first quarter. 

Total farm debt at commercial banks increased by 9.1 percent from 

the year earlier. And non-real estate farm debt rose by 9.9 percent, 

which was the biggest year over year increase since 2001. Delinquency rates on agricultural loans, however, have remained historically low. And bankers have continued to report that ample funds 

are available for agricultural borrowers, amid a relatively competitive environment for high quality agricultural loans. 

Looking ahead, the level of working capital and overall liquidity 

in the farm sector will be crucial components of the financial health 

and credit conditions surrounding U.S. farm operations. If profit 

margins remain under pressure in the crop sector, and debt continues to rise, the ability of crop producers to withstand an increase in financial stress may be a concern, even as the outlook for 

the livestock sector has improved. Farmers with lower levels of equity, including young and beginning farmers, may be most vulnerable to financial stress, particularly if cropland values fall and farm 

income declines from its historically high levels. 

Despite these concerns, commercial banks have continued to recognize the long-term potential for U.S. agriculture and have financed the sector accordingly, albeit more cautiously in some 

areas. 

Thank you, Mr. Chairman, for inviting me today. This concludes 

my remarks. I would be happy to answer any questions there may 

be. 

[The prepared statement of Mr. Kauffman follows:] 

PREPARED STATEMENT OF NATHAN S. KAUFFMAN, ASSISTANT VICE PRESIDENT, 

FEDERAL RESERVE BANK OF KANSAS CITY, OMAHA BRANCH, OMAHA, NE 

Thank you Mr. Chairman and Members, of the Subcommittee. My name is Nathan Kauffman, and I am Assistant Vice President and Economist at the Federal 

Reserve Bank of Kansas City, a regional Reserve Bank that has long devoted significant attention to U.S. agriculture. In my role, I lead several efforts to track the agricultural and rural economy, including a regional agricultural credit survey and the 

Federal Reserve System’s Agricultural Finance Databook, a national survey of agricultural lending activity at commercial banks. I am pleased to share with you the 

following information on the current state of agricultural credit markets. Before I 

begin, let me emphasize that my statement represents my view only and is not necessarily that of the Federal Reserve System or any of its representatives. 

Agricultural Finance and Credit Conditions: 2010 to 2013 

The U.S. agricultural economy has been very strong since 2009. According to the 

U.S. Department of Agriculture (USDA), average real net farm income from 2010 

through 2013, annually, was about 46 percent higher than the average of the previous 10 years. Crop prices surged and cropland values increased dramatically during that time, rising by more than 20 percent annually in key crop-producing states 

for several consecutive years, which strengthened overall farm sector balance sheets. 

The crop sector was a primary driver of these near-record farm incomes, while the 

22 

livestock sector experienced multiple years of poor profits or losses due to elevated 

feed costs. 

Several key measures of agricultural credit conditions monitored by the Kansas 

City Fed also evolved positively from 2009 to 2013. According to Federal Reserve 

surveys of agricultural banks, repayment rates for agricultural production loans in 

the Kansas City, Chicago and Minneapolis districts all improved considerably alongside rising farm income, and profitability at agricultural banks strengthened significantly. During this time, however, bankers commented that agricultural loan demand had fallen, despite declining interest rates, as farmers used more cash to pay 

for farm-related expenses. 

Although the overall financial position of the farm sector had improved, some agricultural producers were more at risk for financial stress than others. Our banker 

contacts consistently voiced concerns about the viability of some livestock operations 

facing steep losses, as well as young and beginning farmers with significantly less 

equity in their operations. 

Current Agricultural Finance and Credit Conditions 

Since last fall’s crop harvest, sharp changes in agricultural commodity prices have 

led to corresponding changes in the outlook for the farm sector and agricultural finance. Current corn prices are about 40 percent less than last year. Conversely, average fed cattle prices are approximately 25 percent higher than a year ago and, 

overall, higher livestock prices and lower feed costs have contributed to a rebound 

in livestock sector profitability. 

Lower crop prices and persistently high input costs have reduced profit margins 

for U.S. crop producers and have affected recent trends in agricultural lending. Toward the end of 2013, declining profit margins reduced farm cash flow, and as a 

result, demand for operating and other agricultural loans began to rise and lending 

activity jumped considerably in the first quarter of 2014. The Federal Reserve’s Agricultural Finance Databook, included with my written testimony, shows that the 

volume of new, short-term farm loan originations increased by 28 percent from the 

previous year in the first quarter. Total farm debt at commercial banks increased 

by 9.1 percent from a year earlier, and non-real estate farm debt rose by 9.9 percent, the biggest year-over-year increase since 2001. Delinquency rates on agricultural loans, however, have remained historically low and bankers have continued to 

report that ample funds are available for agricultural borrowers amid a relatively 

competitive environment for high-quality agricultural loans. 

Looking ahead, the level of working capital and liquidity in the farm sector will 

be crucial components of the financial health and credit conditions surrounding U.S. 

farm operations. If profit margins remain under pressure in the crop sector and debt 

continues to rise, the ability of crop producers to withstand an increase in financial 

stress may be a concern, even as the outlook for the livestock sector has improved. 

Farmers with lower levels of equity, including young and beginning farmers, may 

be most vulnerable to financial stress, particularly if cropland values fall and farm 

income declines from its historically high levels, as projected by USDA and Federal 

Reserve surveys. Despite these concerns, commercial banks have continued to recognize the long-term potential for U.S. agriculture and have financed the sector accordingly, albeit more cautiously in some areas. 

This concludes my formal remarks and I would be happy to answer any questions 

you may have. Thank you. 

ATTACHMENT

Agricultural Finance Databook 

Operating Loans Drive Recent Increases in Farm Lending 

By Nathan Kauffman and Maria Akers 

April 2014 

Farm loan volumes at commercial banks rose dramatically in the first quarter of 

2014, driven by increased demand for short-term production loans. According to a 

national survey of commercial banks from the first full week of February, agricultural producers borrowed larger amounts compared with last year to cover current 

operating expenses. Lower crop prices reduced cash flow for farmers selling the remainder of last year’s crop and overall crop input costs remained high despite a 

moderate decline in fertilizer prices. Feeder livestock loan volumes also rose as low 

inventories pushed feeder cattle and hog prices higher. In contrast, farm capital 

spending slowed further, lessening the need for intermediate-term farm machinery 

and equipment financing. 

23 

Small and midsize banks added loans faster than their larger competitors under 

differing terms. Non-real estate farm loan volumes increased nearly 30 percent from 

last year at small and midsize banks compared with a 20 percent rise at large 

banks. Commercial banks competed for larger average loan amounts by extending 

loan maturities and lowering interest rates. The majority of loans at large banks 

featured a floating interest rate, while customers of small and midsize banks locked 

in more fixed-rate loans compared with last year. 

Loan quality at agricultural banks improved during 2013 and contributed to solid 

profits. Following steady improvement the past 3 years, the return on assets at agricultural banks in the fourth quarter held at a high level and annual net income distributions strengthened. Despite a drop in crop prices at harvest, producers still 

paid down debt, reducing delinquency rates and net charge-offs for both farm real 

estate and non-real estate loans. 

After several years of exceptionally strong price appreciation, farmland values 

rose at a much slower pace in the fourth quarter. With lower crop prices expected 

to persist in 2014, most bankers expected farmland values would stabilize while 

some expected modest declines. 

Section A 

First Quarter National Farm Loan Data 

Farm borrowing ramped up in the first quarter as farmers prepared for spring 

planting. Operating loan volumes reached a record high, exceeding year-ago levels 

by 28 percent (Chart 1). Crop prices at the beginning of 2014 had fallen 40 percent 

from the previous year, lowering cash receipts for producers still marketing fall 

crops. In addition, while prices fell for some crop inputs, such as fertilizer, others, 

such as seed and fuel, were expected to hold at high levels (Chart 2). Reduced cash 

flow coupled with elevated crop production costs contributed to the upswing in operating loan volumes. The volume of feeder livestock loans also rose as low cow inventories kept feeder cattle prices elevated and hog prices jumped as an ongoing swine 

virus continued to limit hog supplies. 

Larger operating loans contributed to loan portfolio growth, particularly at small 

and midsize banks. In the first quarter, non-real estate lending at small and midsize 

banks rose 28 percent, exceeding the 20 percent rise at large banks (Chart 3). In 

a competitive lending environment, average effective interest rates continued to 

edge down and average loan maturities lengthened regardless of bank size. However, at large banks twice as many loans were made with floating interest rates 

compared with small and midsize banks where fixed-interest rate loans were more 

prevalent. 

Despite an overall increase in loan volumes, the volume of farm machinery and 

equipment loans fell by almost a third compared with the previous year, marking 

the fifth straight quarter of decline. Capital spending may have declined because 

operators recently upgraded equipment in high income years when tax depreciation 

rules were more favorable. Additionally, the prospect of lower farm income in 2014 

may have shifted financing from intermediate-term equipment loans to short-term 

operating needs. 

24 

Chart 1: Non-Real Estate Farm Loan Volumes by Purpose 

Source: Agricultural Finance Databook, Table A.3. 

Chart 2: Principal Crop Input Costs 

Source: USDA Economic Research Service, Farm Income and Wealth Statistics. 

Note: Data for 2013 and 2014 are forecasts. 


11315004.eps 11315005.eps
25 

Chart 3: Non-Real Estate Loan Volumes by Bank Size (First Quarter) 

Source: Agricultural Finance Databook, Table A.3. 

Section B 

Fourth Quarter Call Report Data 

Commercial bank call report data showed that agricultural loan volumes in the 

fourth quarter exceeded year-ago levels. Total farm debt outstanding as of December 

31, 2013, rose seven percent year-over-year, outpacing the five percent gain at the 

end of 2012 (Chart 4). The volume of loans secured by farmland rose 7.3 percent, 

followed closely by a 6.6 percent increase in production loans. A drop in crop prices 

at harvest tightened margins and may have contributed to the rise in production 

loan volumes at year-end. 

Commercial banks reported improved loan performance in the fourth quarter. Delinquency rates on farm real estate loans continued to trend down at both large and 

small banks. In addition, delinquency rates on non-real estate farm loans dipped 

below two percent at the 100 largest commercial banks for the first time since 2008 

(Chart 5). Furthermore, the percentage of farm loans 30 to 90 days past due was 

smaller than last year, suggesting delinquency rates could fall further. The volume 

of loans charged off against reserves at agricultural banks fell by almost half compared with the fourth quarter of 2012. 

Profitability at agricultural banks remained strong at the close of the year. The 

return on assets at agricultural banks stabilized at the 10 year average and exceeded returns at other small banks by more than 1⁄3 (Chart 6). Net income distributions 

as a share of average equity improved and there were no agricultural bank failures 

in 2013. With more lending activity, average capital ratios dipped slightly at both 

agricultural and other small banks in the fourth quarter and average loan-to-deposit 

ratios were higher than a year ago. 


11315006.eps
26 

Chart 4: Farm Debt Outstanding at Commercial Banks 

Percent Change From Previous Year 

Source: Agricultural Finance Databook, Table B.1. 

Chart 5: Delinquency Rates on Non-Real Estate Farm Loans 

Percent of Outstanding Loans, Seasonally Adjusted 

Source: Federal Reserve Board of Governors. 


11315007.eps 11315008.eps
27 

Chart 6: Rate of Return on Assets (Fourth Quarter) 

Source: Agricultural Finance Databook, Table B.7. 

Section C 

Fourth Quarter Regional Agricultural Data 

Demand for farm operating loans rose sharply in many major grain producing 

areas in the fourth quarter while farm capital spending waned. The steep drop in 

crop prices at harvest lowered earlier expectations for 2013 farm income, particularly in the Kansas City Federal Reserve District where drought affected crop 

yields. Low crop prices also prompted some producers to store grain inventories 

rather than sell in case prices rebounded later. Reduced cash flow increased demand 

for operating loans, particularly across the Corn Belt and northern Plains in the 

Chicago, Kansas City and Minneapolis Districts. Crop receipts were also down in 

the Dallas District, but bankers indicated strong cattle prices and revenue from oil 

and gas leases supported overall farm income levels. Conversely, bankers in the St. 

Louis District reported farm income strengthened compared with the previous year 

and loan demand weakened. In a reversal of recent trends in which farm capital 

spending spiked at year-end, contacts in the Chicago, Kansas City, Minneapolis and 

St. Louis Districts noted a drop in capital investment in the fourth quarter of 2013. 

Farm income levels influenced farm credit conditions in the fourth quarter. Loan 

repayment rates in the Chicago, Kansas City and Minneapolis Districts eased from 

strong positions earlier in the year. Bankers in these Districts also reported a modest rise in the number of loan renewals and extensions in the fourth quarter and 

slightly tighter collateral requirements. However, the Dallas and St. Louis Districts 

reported stronger loan repayment rates and fewer loan renewals and extensions. Despite minor deterioration in credit conditions in some areas, interest rates on farm 

operating loans were steady to lower in all Districts except Kansas City where they 

edged higher. Interest rates on farm real estate loans fell further in the Dallas, Minneapolis, Richmond and St. Louis Districts, held steady in the Kansas City District 

and rose slightly in the Chicago District. 

Agricultural bankers indicated farmland value gains slowed dramatically in the 

fourth quarter despite less farmland for sale compared with last year. In particular, 

bankers in Corn Belt states reported year-over-year increases in nonirrigated cropland values moderated from previous highs (Map). There was even a slight pullback 

in cropland values in parts of Minnesota and Iowa. Energy activity continued to 

support farmland value gains in the Dakotas, but a majority of bankers felt that 

lower farm income expectations for 2014 would limit further farmland value gains 

in major crop producing areas. 


11315009.eps
28 

Map: Value of Non-Irrigated Cropland (Fourth Quarter, 2013) 

Percent Change From Previous Year 

* Mountain states include: Wyoming, Colorado, and northern New Mexico, 

which are grouped because of limited survey responses from each state. 

Sources: Federal Reserve District Agricultural Credit Surveys (Chicago, 

Minneapolis, Kansas City, and Dallas). 

Addendum 

Agricultural Finance Databook 

Previous Charts Updated Through First Quarter 2014 

Section B 

Chart 4: Farm Debt Outstanding at Commercial Banks 

Percent Change From Previous Year 

Source: Agricultural Finance Databook, Table B.1. 


11315010.eps 11315011.eps
29 

Chart 5: Delinquency Rates on Non-Real Estate Farm Loans 

Percent of Outstanding Loans, Seasonally Adjusted 

Source: Federal Reserve Board of Governors. 

Chart 6: Rate of Return on Assets (First Quarter) 

Source: Agricultural Finance Databook, Table B.7. 


11315012.eps 11315013.eps
30 

Map: Value of Non-Irrigated Cropland (First Quarter, 2014) 

Percent Change From Previous Year 

* Mountain states include: Wyoming, Colorado, and northern New Mexico, 

which are grouped because of limited survey responses from each state. 

Sources: Federal Reserve District Agricultural Credit Surveys (Chicago, 

Minneapolis, Kansas City, and Dallas). 


11315014.eps
31 

The CHAIRMAN. Thank you. And I want to thank all the panelists 

for being so accurate on your time. It was wonderful. It doesn’t 

happen all the time. Again, I thank you. And I thank the witnesses. 

The chair would remind the Members that they will be recognized for questioning in order of seniority for Members who were 

present at the start of the hearing. After that, Members will be recognized in order of their arrival. I appreciate your understanding. 

I will recognize myself to begin the questioning. I recognize myself for 5 minutes. I want to start with Dr. Long Thompson. You testified that non-performing loans totaled $2.1 billion, which is a decrease of nearly $600 million. Is the non-performing 

loan portfolio—is that a geographic prerogative? Is it dominated by 

any certain sector of the ag industry, or is there a region in the 

country that may contribute more so than others? 

Dr. LONG THOMPSON. Well, certainly, among those institutions 

that we regulate, if they happen to be located in a part of the country where there has been stress, you might see some additional— 

a higher level of non-performing loans. But we haven’t detected a 

specific pattern geographically. I would, however, be very happy to 

provide you—we have very good data. We do analyses of the overall 

farm economy, as well as of the health of the System regularly. 

And we have some very good data that I would be happy to share 

with you and your staff. 

[The information referred to is located on p. 91.] 

Dr. LONG THOMPSON. The non-performing loans tend to occur in 

those areas of agriculture that are under stress. And if there happens to be a small association that has a high percentage of loans 

in that area, you might find that within one association or another 

association. But, generally speaking, across the board, the System 

is safe and sound. 

The CHAIRMAN. Okay. Excellent. You also mentioned the Farm 

Credit Insurance Fund. Do any other GSAs have any similar type 

of insurance fund or reserves that you are aware of? 

Dr. LONG THOMPSON. Well, someone else could probably better 

answer that question. I think you know very well the history of the 

Farm Credit System Insurance Corporation, which was established 

in the late 1980s after the crisis in the farm economy. And that 

fund, of course, exists to insure the banks should there be a situation where they were not able to repay their loans. So I can’t really 

speak to other agencies and what they do. Of course, the FDIC has 

an insurance fund that is not unlike what the Farm Credit System 

insurance fund is. 

The CHAIRMAN. Okay. I want to move on to something that will 

more than likely come up in the next panel. I think you are obviously someone who should be given an opportunity to comment on 

it. And it relates to CoBank’s role in two transactions. One was the 

finance package with Verizon, the other being a financing package 

with Frontier Communications. I would like to get your perspective 

on that. First, does CoBank have the authority to participate in 

those transactions? And, second, did FCA have any role in approving those transactions? 

Dr. LONG THOMPSON. The answer to your first question is yes, 

they did have the authority. As you know, Congress gave the entiVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00035 Fmt 6633 Sfmt 6601 I:\DOCS\113-15\88547.TXT BRIAN
32 

ties that we regulate the authority to engage in similar-entity participation lending to be used as a risk mitigation tool. And we reviewed those transactions in complete detail and found that they 

met any reasonable reading of the statutory authority provided. 

Now, in the interest of full disclosure, I have to tell you that I 

was on the ag committee and the subcommittee that had jurisdiction over credit issues at the time that the language was adopted. 

And I recall supporting it. However, I also have to say that it is 

not a model of drafting clarity. And I am not sure anywhere else 

in Federal statute you would even find the terms functional similarity. Even so, there are statutory limits. And those statutory limits include, for example, a single credit held by a System institution 

may not exceed ten percent of total capital; a single System institution, and all System institutions combined, must hold less than 50 

percent of the credit; a System institution may not exceed 15 percent of its total assets in similar-entity participations. And at the 

present time, System-wide, somewhere around five percent of the 

System’s total assets are held in some form of similar-entity participation. But we do examine—we do ensure that they are in compliance. And they are. 

The CHAIRMAN. Thank you. I yield the balance of my time. I now 

recognize the Ranking Member for 5 minutes. 

Mr. COSTA. Thank you very much, Mr. Chairman. 

Mr. Beyerhelm, you mentioned increased demand for loans with 

FSA. And, as you know, we are the authorizers. But did the appropriators provide sufficient funding to meet what you believe is 

going to be the demand in Fiscal Year 2015? 

Mr. BEYERHELM. From what I understand, from the—at least the 

preliminary numbers—both Chambers have authorized the President’s request for the $6.4 billion. So in addition to that, previous 

appropriation bills have had language that provided for programs 

that are zero subsidy to get an additional 25 percent. Both of our 

guaranteed farm ownership and our direct farm ownership, for the 

first time ever, are going to be zero subsidy programs. So the answer to your question is yes, $6.4 billion, plus the 25 percent bump 

in both of those programs, will actually exceed $7 billion. And we 

expect that to be sufficient. 

Mr. COSTA. And, historically, in terms of the level of lending activity that is taking place, would you say that the trends—that the 

appropriations reflect the demand out there? 

Mr. BEYERHELM. Absolutely. As I mentioned in the previous 4 

years, the programs have been oversubscribed. So we have always 

had periods—— 

Mr. COSTA. One could argue that maybe we should provide additional support for that effort then? 

Mr. BEYERHELM. That would be up to this body to decide. 

Mr. COSTA. No, I understand that part. Can you update us on 

where things are with the changes that were made as I stated as 

a result of the 2014 Farm Bill in terms of the relending provision 

of the microloan program. When that will be up and running? 

Mr. BEYERHELM. Yes—— 

Mr. COSTA. Obviously, for young farmers and ranchers, that is a 

potential source of financing. 

33 

Mr. BEYERHELM. Yes. Thank you for that question. We are in the 

process of drafting proposed regulations on how to implement that 

among the other discretionary provisions of the farm bill. That is 

one of the things we expect to have some clarity on by October of 

this year. 

Mr. COSTA. So before the end of this year? 

Mr. BEYERHELM. Yes. 

Mr. COSTA. That is important. When would the ability for application take place? Let us figure there are folks that are looking to 

maybe lease land or maybe purchase a farming entity, and they are 

looking at next year and are making decisions in the Fall. So in 

the timelines for the applications for those who would be interested, would it be in a timely enough fashion so that they could 

possibly be able to participate in 2015 with the advantage of that 

microloan? 

Mr. BEYERHELM. We would hope so. Once the regulations have 

been drafted, we are going to have to work with—— 

Mr. COSTA. Yes, but there is a comment period, isn’t there? 

Mr. BEYERHELM. That is correct. 

Mr. COSTA. I am trying to figure the timeline. 

Mr. BEYERHELM. Yes, it will be close, to answer your question. 

We are going to make every effort, with any changes, to make them 

available to the 2015 lending season. But it will be close. 

Mr. COSTA. Well, it is important, because if you get a loan in the 

middle of the year, you are past planting season, you are past a 

lot of decisions, depending upon the nature of the agricultural enterprise, obviously. 

Mr. BEYERHELM. I think the good part about it is, is that our program is still going to be there for those that need that credit. So 

if there is somebody that needs financing—— 

Mr. COSTA. Have you done an an estimation of the potential demand out there for the microloans? 

Mr. BEYERHELM. Well, as I mentioned earlier, we have been—we 

are right at the 7,200 mark right now. We did 3,500 the first year. 

And we are on pace to do about 4,500 this year. We would expect 

that demand to continue, especially one of the things we are going 

to do is increase the loan limits from $35,000 to $50,000—or at 

least propose to increase to $50,000. 

Mr. COSTA. All right. 

Mr. BEYERHELM. So that will increase the pool. 

Mr. COSTA. Okay. Dr. Long Thompson, and thank you by the way 

for your previous service to our country as a Member of the House 

of Representatives. And it is good to see you here in your current 

role. In your opening statement, you talked about the nature of 

Farm Credit. But I would like you to give a better snapshot. For 

example, from the time when you served in Congress in the late 

1980s, until today; you want to give a comparative analysis in 30 

seconds or less? 

Dr. LONG THOMPSON. I can do that in 30 seconds or less. The 

Farm Credit System today—the institutions that we regulate—are 

much more professional, much more financially sound. It is an incredibly strong system of lending institutions. And part of that is 

the result of changes that were made by Congress in the late 

1980s. But in terms of underwriting standards and reaching out to 

34 

creditworthy eligible borrowers, I think the System has strengthened incredibly. And I am proud to be a regulator of the System. 

Mr. COSTA. Thank you very much. My time has expired, Mr. 

Chairman. 

The CHAIRMAN. Thank you. The gentleman’s time has expired. I 

now recognize the gentleman from Iowa, Mr. King, for 5 minutes. 

Mr. KING. Thank you, Mr. Chairman. I thank all the witnesses 

for your testimony. And I would turn first to Dr. Long Thompson. 

And I would like to just get some definitions down to understand 

the parameters that we are working with here. And could you define a little bit more clearly the mission statement of Farm Credit? 

Dr. LONG THOMPSON. May I ask, the mission statement of the 

Farm Credit System or the mission statement of the Farm Credit 

Administration? 

Mr. KING. I understand the mission statement of Farm Credit 

Administration. But the System and the—how to identify the borrowers. 

Dr. LONG THOMPSON. The mission of the Farm Credit System is 

to provide credit to creditworthy eligible borrowers across the country for the purpose of making credit available for agriculture, but 

also for strengthening rural America. 

Mr. KING. And does that include a definition for small, beginning, young farmers? 

Dr. LONG THOMPSON. Yes. 

Mr. KING. And so you just left that out. Does it also include for 

socially disadvantaged farmers? 

Dr. LONG THOMPSON. All farmers who are creditworthy and eligible. 

Mr. KING. Okay. 

Dr. LONG THOMPSON. And, in fact, since my coming to the Board, 

we have adopted a policy that requires our examiners take a look 

at how the System is doing in this regard, for borrowers of all 

types. And they are to have a diversity and inclusion provision, 

both in their marketing—in reaching out to borrowers—but also in 

their human resources. 

Mr. KING. All creditworthy, with a diversity and inclusion. Is this 

statement as written and approved by whom? Not Congress, I take 

it? How is this arrived at? 

Dr. LONG THOMPSON. The statement—the diversity and inclusion 

regulation—that is a regulation that we issued. 

Mr. KING. And who produces that document then? Who are the 

people that signoff on it? 

Dr. LONG THOMPSON. It would be the Board of the Farm Credit 

Administration. 

Mr. KING. Okay. And it is an authority that is at least presumed 

granted by Congress? 

Dr. LONG THOMPSON. I missed that. 

Mr. KING. It is an authority that is at least presumed granted 

by Congress to make that decision? 

Dr. LONG THOMPSON. Yes. Yes. 

Mr. KING. And you mentioned also that the share of the Farm 

Credit debt was 46 percent in your testimony? 

Dr. LONG THOMPSON. Farm Credit real estate debt. 

Mr. KING. Yes. 

35 

Dr. LONG THOMPSON. Overall, including production loans, it is 

about 41 percent. 

Mr. KING. Well, what is the 46? 

Dr. LONG THOMPSON. The 46 is real estate loans. 

Mr. KING. Just real estate? 

Dr. LONG THOMPSON. Yes. 

Mr. KING. Okay. Can you tell us about the trend of Farm Credit? 

The 46 percent today, what would that have been if you would go 

back say 10 years? What has been the trend? 

Dr. LONG THOMPSON. I will have to ask my staff. I don’t have 

that trend for the last 10 years. But if you will give me a second, 

I think I can give you the answer. 

Mr. KING. I would. 

Dr. LONG THOMPSON. Thank you. Regarding total debt, and that 

would be real estate and operating loans, it is gone from about 35 

percent to 41 percent in the last 10 years. 

Mr. KING. Okay. And on the real estate debt, we would just anticipate, without turning back, a similar trend. And who holds the 

balance of that, if it is 46 percent in real estate? And where is the 

other 54 percent? 

Dr. LONG THOMPSON. The majority of that comes from independent banks—— 

Mr. KING. Independent banks. 

Dr. LONG THOMPSON.—or from banks—many from independent 

community banks. 

Mr. KING. Okay. I would like to turn to Mr. Kauffman. Thank 

you very much. Mr. Kauffman, you testified that it is a relatively 

competitive environment—lending environment. That seemed like 

a qualifying word, and I would ask if you could define that to me. 

The word relatively seemed to be a qualifier. 

Mr. KAUFFMAN. We have heard from our bank contacts that it is 

a competitive lending environment in the sense that there are—agricultural lending activity has been strong and repayment rates 

have been strong. So competitive in that sense that they have 

been—we have heard from bank contacts that not only have they 

been competitive perhaps with other commercial banks, but also 

with Farm Credit institutions that are lending in those areas overall. 

Mr. KING. What about interest rates, do you know of any banks 

that are lending at a lower rate than Farm Credit? 

Mr. KAUFFMAN. I can’t speak to that specifically. I would say 

anecdotally, we have heard some bankers say that they may be reluctant in some cases to reduce interest rates beyond a certain 

point, taking a more cautious approach perhaps in some areas as 

it relates to particularly on the farm real estate side. 

Mr. KING. Sounds like a qualified answer. Do you know of any 

cases, or even any anecdote about banks that are lending at a 

lower rate than Farm Credit? 

Mr. KAUFFMAN. Again, I do not know of any specific cases. 

Mr. KING. You do not. I would turn to Dr. Long Thompson. Do 

you? 

Dr. LONG THOMPSON. I can tell you that I know of instances 

where that is the case. And I am wondering if you are expressing 

or leading to expressing concerns about interest rates that are 

36 

charged in the System? Because they are required to be competitive, but they are not to engage in predatory pricing. 

Mr. KING. Dr. Long Thompson, I just—as our clock has run out, 

I will just conclude this. I am concerned about the competition side 

of this and the mission of providing credit, although I am grateful 

for the service that you all provide. Thank you very much, and I 

yield back. 

Dr. LONG THOMPSON. May I answer? 

Mr. KING. That is fine. 

The CHAIRMAN. Go ahead. 

Dr. LONG THOMPSON. Thank you. Whenever there is a concern 

expressed from someone across the country regarding predatory 

pricing in the System, we take that very seriously. And we do examine it, take a look at it. And if it were to occur, we certainly 

would then take the appropriate corrective action to get that corrected. But competitive is not by definition predatory, as you very 

well know. 

Mr. KING. Agreed. Thank you. 

The CHAIRMAN. The gentleman’s time has expired. I recognize 

the gentleman from Oregon for 5 minutes. 

Mr. SCHRADER. Thank you, Mr. Chairman. Dr. Long Thompson, 

how did Farm Credit Service, particularly Farmer Mac, fare during 

the recent recession, particularly compared to other banks and 

commercial institutions? 

Dr. LONG THOMPSON. The Farm Credit System did very well, including Farmer Mac. Some of the challenges that they faced were 

access to capital in the markets, liquidity, but no issues regarding 

the safety and soundness of their particular operations. 

Mr. SCHRADER. Did you lose—— 

Dr. LONG THOMPSON. They did very well—— 

Mr. SCHRADER. Did you lose any institutions under your purview 

as a result of the recession? 

Dr. LONG THOMPSON. We did not lose any institutions as a result 

of the recession. There had been some mergers that have occurred 

since, but that was occurring beforehand. 

Mr. SCHRADER. Right. When Dodd-Frank was written, this group 

and the entire Agriculture Committee spent a lot of time trying to 

differentiate between institutions of systemic risk and to protect 

end-users from overregulation. Similarly, in Dodd-Frank itself, a 

lot of the small independent banks were never part of the problem, 

we tried to make sure they were not burdened with burdensome 

regulations. And yet the Prudential Regulators have been frankly 

very overzealous. And I hear reports again and again how the 

small, independent folks are seeing the same degree of regulatory 

overreach that was only intended for these big systemic risk institutions. How has Farm Credit services fared in that System? How 

are you keeping your regulations under control, if I may ask? 

Dr. LONG THOMPSON. Well, as you know, for the most part, the 

System was not included in Dodd-Frank reforms. And you know 

that very well. It is my sense that we are not over-regulating. But 

the one thing that we have to be very careful about in overseeing 

the Farm Credit System is that it doesn’t have the potential for diversifying its portfolio in the same way that banking institutions 

are able to do. And so we have to be very conscious of what that 

37 

means in terms of things like capital requirements and liquidity. 

One of the reasons the System is strong is that the ag economy has 

been quite strong overall over the last 20 years. There have been 

some pockets of issues. But we take the regulatory responsibilities 

very seriously, recognizing that over-regulation can in fact impede 

their ability to do their job and fulfill their mission. 

Mr. SCHRADER. Very good. Mr. Beyerhelm, to that point, I can 

confirm that the Pacific Northwest and our nursery industry was 

particularly hard hit in the recession. Our seed producers were particularly hard hit. Christmas trees producers are just trying to get 

their feet underneath them. How are they fairing in the Farm 

Credit System at this point in time? 

Mr. BEYERHELM. I don’t have specifics for that particular enterprise, but I can surely get those for you. Certainly, they are eligible 

enterprises for our loans, both our direct and guaranteed loans. 

Mr. SCHRADER. All right. I appreciate that. And then could you 

explain a little bit about what you alluded to in your testimony, 

how a farmer graduates, if you will, to commercial lending. What 

do you see as your main role to encourage people to graduate? That 

is the way it is supposed to work. Could you explain that more for 

us? 

Mr. BEYERHELM. Yes. Obviously, we don’t compete with the commercial lending industry. So most of the customers who come to us, 

their balance sheets are not strong enough to go to commercial 

lending. Perhaps their cash flows don’t have the—a debt repaying 

capacity. So what we do is try to work with them to improve their 

balance sheets, their cash flows and also their production skills. 

Our loan officers actually work very closely with them, provide 

technical assistance. And at any point during their tenure with us 

that we feel that those three indicators have risen to the level that 

commercial lenders will make them a loan, as you said, we politely 

ask them to go to a commercial lender, pay us off and move on to 

the next customer. 

Mr. SCHRADER. And that is to make sure that your capital can 

flow onto the next young farmer or rancher coming in? 

Mr. BEYERHELM. Absolutely. 

Mr. SCHRADER. Good. 

Mr. BEYERHELM. Yes. Yes. 

Mr. SCHRADER. Okay. Mr. Kauffman, one of the problems on the 

Small Business Committee, and one of the problems we have seen 

there is that there is a lot of demand for small business loans, a 

lot of demand for Farm Credit Service loans. In tough economies, 

as people figure out they want to start a business, start a farm, or 

get their dad’s ranch going again, one of the problems we have seen 

is that while creditworthiness of some of the loans have actually 

gotten a little better, there are far fewer loans made. The Small 

Business Administration is making bigger loans to fewer people. 

And the real small businesses sometimes have a tough time. They 

are still having a very tough time getting the credit they need. How 

would you compare that to what is going on with Farm Credit 

Services, the medium and slightly larger size ranch and farm operations? What does the portfolio look like for FSA? 

Mr. KAUFFMAN. I would say in general from the commercial lending institutions, what we have seen has been some producers, in 

38 

terms of the scale of agriculture, capital requirements are quite 

large. I think that we have seen even the USDA Census of Agriculture has revealed there has been a bit of a shift to large producers, but also a number of increasing small producers. I think 

that there have been some small producers that have been able to 

obtain the credit that they need, albeit in some cases maybe needing to provide more collateral if they have—if they are perceived 

as being a more risky borrower. 

Mr. SCHRADER. All right. Thank you. And I yield back, Mr. 

Chairman. 

The CHAIRMAN. The gentleman yields back his time. I now recognize the gentleman from Texas, Mr. Conaway, for 5 minutes. 

Mr. CONAWAY. Thank you, Mr. Chairman. Lady and gentlemen, 

thank you for being here. Dr. Long Thompson, the FCA is currently 

working on a regulatory scheme to impose margin requirements on 

derivative transactions. We have just passed the House yesterday, 

H.R. 4413, which amends the CEA that would provide that initial 

and variation margin requirements shall not apply to a swap in 

which one of the counterparties to the swap is not a financial institution and qualifies for the end-user clearing exemption. If enacted 

into law, how would that change the FCA’s efforts to impose margin requirements of end-users? 

Dr. LONG THOMPSON. If you will give me just a minute, I want 

to turn to our General Counsel. 

Mr. CONAWAY. Sure. 

Dr. LONG THOMPSON. This is actually a very simple answer. It 

is going to be consistent with the law. And we will make sure that 

we are working with the other regulators. But the stage that we 

are in the process, there is nothing definitive for me to provide in 

terms of specifics. 

Mr. CONAWAY. Okay. Well—— 

Dr. LONG THOMPSON. But we will make sure that it is consistent 

with the law. 

Mr. CONAWAY. Okay. That is like art. 

Dr. LONG THOMPSON. I am sorry. I missed that. 

Mr. CONAWAY. I mean, that statement is like trying to decide 

what is pretty and what is not pretty. I mean, I understand—— 

Dr. LONG THOMPSON. It will be pretty. I promise you. 

Mr. CONAWAY. Okay. Mr. Beyerhelm, you had a comment that 

you provide credit to creditor—borrowers. Can you give use the distinction between—or the difference between your words, not qualifying for commercial credit due to lender standards but otherwise 

creditworthy? What—can you help me understand that? 

Mr. BEYERHELM. Well, most commercial lenders require a—some 

sort of equity position, maybe let them qualify—at least 30 to 40 

percent equity position and a debt service capacity of probably 20, 

25 percent in excess of what their expenses will be. So when a customer comes in and doesn’t meet those qualifications, they can 

come to FSA. When I say they are creditworthy otherwise, that 

means they have a good credit history. They can show repayment, 

perhaps not at the 20 percent level but something less than that. 

And they don’t have the required equity position to go to the commercial lender. 

39 

Mr. CONAWAY. Okay. All right. Also, Dr. Long Thompson, you are 

redoing the capital requirements. You have regulations out right 

now. Can you give me some sense of what the response has been 

from the regulated industry with respect to your changes? 

Dr. LONG THOMPSON. At the stage of the process that we are in, 

I don’t have any summarizing data on what the responses are, because it is still in the comment period. 

Mr. CONAWAY. Okay. But—well, maybe some other panelists can 

get—thank you very much. I appreciate you being here. And I yield 

back. 

Dr. LONG THOMPSON. Thank you. 

The CHAIRMAN. The gentleman yields back his time. I now recognize the gentleman from Florida for 5 minutes, Mr. Yoho. 

Mr. YOHO. Thank you, Mr. Chairman. Thank you, panelists, for 

being here. Agriculture is dear to my heart, because I like to eat, 

mainly. But I have been involved in it since I was about 16 years 

old. The Farm Credit Service or System has done a remarkable job. 

But I kind of want to expand on what Mr. King was bringing up 

about mission creep, have we gone over where we need to go with 

the Farm Credit System. Has it overstepped its boundaries, knowing when it first started in some form in 1916 when we had about 

32 percent of the population of America involved in agriculture. 

Today, we have roughly maybe one percent right as agriculture as 

our source of income, with two percent of the Americans—America’s population involved, or living on a farm. And the role seems 

like, of the Farm Credit System, has grown. I get—I don’t want to 

say complaints. I get inquiries about the Farm Credit System competing with the small rural banks. And I want to build off what 

Mr. Schrader said, my fellow veterinarian here in Congress, on the 

rules and regulations of Dodd-Frank you brought up that you are 

pretty much excluded from those. All right. And the small community banks that they don’t have a large portfolio. They are bound 

by those, and they are restricted by those. And it really put them 

at a disadvantage. And some of the conversations we have is that 

the Farm Credit System can be more competitive because of the operating expenses. How do you view that? 

Dr. LONG THOMPSON. I think that is a very good question. And 

it has a certain complexity to it. My experience as a regulator of 

the System has informed me that there really hasn’t been significant, if any, mission creep in the Farm Credit System. But it is a 

balancing act, because—and it is a balancing act not just for the 

System, but for the regulatory agency as well. 

Mr. YOHO. Can I interrupt you? Let me ask you—— 

Dr. LONG THOMPSON. Sure. 

Mr. YOHO. In your portfolio, I think you said 41 percent of your 

assets are in farm—or not assets—your loans are in agricultural 

land, correct? 

Dr. LONG THOMPSON. No. What I said was—— 

Mr. YOHO. Then 46 percent was—— 

Dr. LONG THOMPSON. No. What I said was that of the farm loans 

across the country, 41 percent of those are made by the Farm Credit System. 

Mr. YOHO. Okay. Go ahead then on what you were talking about 

as far as your mission. 

40 

Dr. LONG THOMPSON. And so the challenge for any regulatory 

body is to find the balance. We work very hard with a very professional staff of examiners, regulatory policy folks, lawyers, to ensure 

that whatever businesses engaged in by the System is consistent 

with the law. I think that the agency has done a good job of that. 

Mr. YOHO. Mr.—— 

Dr. LONG THOMPSON. Yes, sir? 

Mr. YOHO. Go ahead. And I was going to ask Mr. Kauffman his 

opinion on that. 

Dr. LONG THOMPSON. Okay. But, in a market economy, as we 

have—in a capitalist economy, there is going to be competition. 

And I think that competition benefits—it benefits—— 

Mr. YOHO. Well, since you brought that up. In a market economy, in the free market, they are kind of—like a community bank, 

they are kind of dependent upon themselves. Whereas in the Farm 

Credit System, you have the backing of the United States Government. It seems that is not quite as fair or as equitable as it should 

be in the free market economy. 

Dr. LONG THOMPSON. Well, let me clarify. The System that we 

regulate is private sector. 

Mr. YOHO. Yes. 

Dr. LONG THOMPSON. And it gets its funding by selling securities 

in the marketplace. 

Mr. YOHO. But yet if you don’t have to abide by Dodd-Frank financial regulations, you are talking about being fair. And my time 

is—we have about a minute left. 

Dr. LONG THOMPSON. But we do have a book this thick of laws— 

of statutes that we have to ensure is followed by the Farm Credit 

System. 

Mr. YOHO. I have heard from the other banks, they have one 

about this thick. Mr. Kauffman, what is your opinion on—— 

Dr. LONG THOMPSON. Ours is getting thicker. 

Mr. KAUFFMAN. We do hear similar inquiries from community 

bankers asking similar questions. I would corroborate what Dr. 

Long Thompson had said in terms of the split between real estate 

and non-real estate at community banks. You do typically see a bit 

more lending activity in the non-real estate space. And that has 

been a trend that we have seen here recently. But we do hear similar inquiries from community bankers. 

Mr. COSTA. Would the gentleman yield? 

Mr. YOHO. Yes, sir. 

Mr. COSTA. If I understand your questioning correctly, you are 

attempting to try to get a snapshot on the balance of the lending 

activity between the Farm Credit and between the private sector 

institutions, correct? 

Mr. YOHO. Well, what I would like to do is kind of—do we need 

a Farm Credit System as big as we do now, compared to what we 

did when we had 32 percent of the population involved in farming—— 

Mr. COSTA. Right. 

Mr. YOHO. And, today, we have less than one percent actively involved in farming. 

Mr. COSTA. But with FSA, especially, there is a partnership. 

Mr. YOHO. Right. 

41 

Mr. COSTA. If I understand it correctly, with the community 

banks that are the private sector that are banks made up of people 

we know in our communities—— 

Mr. YOHO. Right. 

Mr. COSTA. You are providing in essence the secondary mortgages or the guarantees on these loans for the community banks, 

in many instances. Is that correct? 

Mr. BEYERHELM. Yes, that is correct, up to—we do have a restriction requirement that they be family size farms. So to some extent, 

for the smaller operators. But for the larger operators, there would 

not be a comparable—an opportunity to participate in FSA programs. 

Mr. COSTA. Mr. Chairman, can I ask something on family size 

farms? 

The CHAIRMAN. I thank the gentleman for yielding. 

Mr. YOHO. Yes, sir. 

Mr. COSTA. On the family size farms, what is the definition of 

that? Is that just one person with a tractor, or—— 

Mr. BEYERHELM. I think it is what is pretty and not pretty question. A general definition of family sized farm is that the applicant 

themselves, whether it is a corporation or individual, whatever, 

provide the majority of the labor required and all of the management required to run the operation. 

Mr. COSTA. Thank you. 

Mr. BEYERHELM. That is the general definition. 

The CHAIRMAN. The gentleman’s time has expired. Just for clarification, Dr. Long Thompson, can you leave ag space at any point 

in time? 

Dr. LONG THOMPSON. I missed that question. 

The CHAIRMAN. Can you leave ag space at any point in time? 

That is your core mission, correct? 

Dr. LONG THOMPSON. We are the regulator. The Farm Credit 

System—— 

The CHAIRMAN. Farm Credit System. I am—— 

Dr. LONG THOMPSON. Yes. They do have, as authorized by Congress, the ability to make rural housing loans. Beyond that—well, 

and then the title III lending authority is for rural electric co-ops, 

for telephone co-ops, for co-op business, various kinds of co-op business. 

The CHAIRMAN. So what we are really talking about is a—sort 

of a broad definition of what constitutes agriculture versus non-agriculture portfolio. And I don’t want to encroach on Mr. Roger’s 

time. So I will recognize the gentleman from Alabama for 5 minutes. 

Mr. ROGERS. Thank you, Mr. Chairman. That is what I was 

going to ask about. And I was late. And I am sorry. And I know 

that the Chairman visited this topic earlier. But one—the primary 

criticisms I get about the Farm Credit System is issuing loans in 

non-agriculture. And so do you know what percentage of the loan 

portfolio the Farm Credit System is issued to non-farm entities? 

Dr. LONG THOMPSON. I think it probably would be best for me 

to get a detailed breakdown for you. But it is primarily agriculture 

and ag related. It is agriculture—and let me also say that, even 

though the System did not fall for the most part under the jurisdicVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00045 Fmt 6633 Sfmt 6601 I:\DOCS\113-15\88547.TXT BRIAN
42 

tion of Dodd-Frank, there are other kinds of rules that statute requires—for example, the territories, the districts that are established. So there are a number of restrictions in the Farm Credit 

System that simply are not restrictions in the banking sector. And 

I also think that there is a very strong case to be made for a group 

of farmers going together and setting up a cooperative model of 

lending, particularly when there is not always access in traditional 

banking. 

[The information referred to is located on p. 91.] 

Mr. ROGERS. Now, I represent a very rural Congressional district. There is access to credit in our communities. I have been a 

supporter of the Farm Credit System. But, it is pretty hard for me 

to explain—I can’t explain why you are financing a merger deal 

with Verizon, or the Farm Credit System is. I recognize that from 

a making money standpoint you want to do that, but—and while 

it is not illegal to do it—— 

Dr. LONG THOMPSON. Yes. 

Mr. ROGERS. Why would you do it? 

Dr. LONG THOMPSON. Well—— 

Mr. ROGERS. When you and Mr. Kauffman talked about what 

you are really there for is to take the shaky young farmer and help 

to get him on stable footing so they can then go into the commercial lending, why would Farm Credit get outside the farm world for 

lending? 

Dr. LONG THOMPSON. Verizon does provide service to rural communities. And in the title III lending authority, loans are made for 

co-op-owned rural utility services that are member-owned. And this 

similar-entity provision that was included in the law back in the 

early 1990s was included for the purpose of mitigating risk in a 

lending institution’s portfolio. If you felt that it was important to 

remove that particular provision, Congress could certainly do that. 

Mr. ROGERS. Yes, I think that we may have to visit that, because 

this really is pretty indefensible in my world. So with that, I thank 

you, Mr. Chairman. 

The CHAIRMAN. The gentleman yields back his time. I see no further—we have one more Member, the gentlelady from New Mexico 

is recognized for 5 minutes. 

Ms. LUJAN GRISHAM. Thank you very much, Mr. Chairman. And 

I want to thank the panel for your testimony and presence here 

today. Mr. Beyerhelm, I want to talk about the loan application 

process and tie it to what I know many states are concerned about 

and you are concerned about as well, which is the graying or the 

aging of our farmers and ranchers. We have in New Mexico, which 

I am sure you are aware, the highest percentage of older farmers 

and ranchers who are age 65 and up, at 37 percent. That is seven 

points higher than the national average. Further, we expect that 

1⁄2 of those 65 and older farmers to retire over the next decade. So 

we are very interested in our state at making sure that there is 

a sense of urgency by USDA, a sense of urgency by everybody in 

the state to do what we can to grow, if you will pardon the pun, 

the younger farmers and ranchers an interest in the agricultural 

industry. And I know that you have ramped up your efforts to 

reach out to this demographic. But I continue to hear from young 

43 

farmers and ranchers that it is not enough, that the application 

process for loans and support is arduous at best. 

And I want to give you a couple of examples. And if you could 

give me some specifics about what we might do to make that simpler, more effective and to really encourage folks to get the resources that they need and the educational support and expertise 

that they need to actually enter into the industry. So, for example, 

in New Mexico, even if you go online—and I realize that you have 

now created an online sort of resource directory, you have to be 

able to go online. But even then, you are still going to have to 

make an application. But, you can’t do any of it online. You have 

to go in-person to an office. In New Mexico, there are only four offices. They are all in the southern part of the state. That means 

for some people, they are going to have to make a 6, 7, 8 hour 

drive, make an appointment at one of those four offices, and then, 

as I understand it, even if you look at the sort of guide on the online application, you are talking about making several trips to that 

loan office over periods of several months. And what happens is 

that people give up. And they don’t get access to the support, the 

expertise, the credit, the resources or anything else to engage in 

this industry. Can you give me a sense about what we might do 

in the rural states to make sure that we are doing more than just 

creating an online resource directory? And I don’t want to minimize 

that that is a step in the right direction. But it isn’t getting to this 

demographic or actually getting what they need so that they enter 

the agricultural business. 

Mr. BEYERHELM. Yes. Thank you so much for that. And you are 

entirely correct. I think the situation is exacerbated a little bit 

when you get out into the West and you have these huge geographical regions. And then when you combine that with a continued budget constrained environment in which we have lost 25 percent of our employees in the last 4 years and had to restrict our 

footprint a little bit in rural America. So to try to respond to your 

question, one of the things are we are working very hard to create 

an online application to reduce some of the repeated need that you 

have to go to the office. So it is our goal and our hope that in the 

very near future that somebody is going to be able to apply, going 

to be able to do a lot of the pre-stuff—at some point, we have to 

have that face-to-face. 

Ms. LUJAN GRISHAM. And I appreciate that. Can you give me a 

sense of the timeframe? I don’t mean to sound like I am pushing 

back. And I know that you have talked about the streamline process in your testimony, but that is only for repeat loan applicants. 

I can do a loan, and I can get prescreened at my bank. I could do 

it while I am sitting here in this Committee, and just pull up my 

personal account information and send a loan application to my 

bank of choice. And probably, before I finish my remaining 46 seconds, I would get an answer about how eligible I am and what else 

they need. We could be using colleges and universities, and we 

could be using extension services, and we could be using state government partners and local government partners, so that you have 

a much broader footprint in this regard. So talk to me, if you can— 

I know I am over time, Mr. Chairman—about how long before you 

get the entire application online, and please tell me your thinking 

44 

about broadening your partnerships to achieve the goals that we 

are interested in. 

Mr. BEYERHELM. Yes. As I said, I can’t give you an exact timeline 

on the online application. It would certainly be my hope that sometime in the next 12 months we would have that done. The other 

thing that we are doing, in the farm bill, we were given authority 

to do pilot projects. And one of the things we want to look at is exactly what you are talking about is partnering with CDFIs, local 

CBOs and have those folks help us in reaching out to individuals 

in remote areas, actually underwriting loans, bringing to those to 

actually leverage their expertise. So I am glad you mentioned that, 

because that is one of our objectives under the pilot project authority. 

Ms. LUJAN GRISHAM. Mr. Chairman, if I might, can I make one 

quick statement? 

Thank you, Mr. Chairman. And I really appreciate that. And, I 

am probably going to send you in this terrible circle. I am an old 

bureaucrat myself. And I know that we can just go in circles—finding the right size. So I applaud that effort. And I know that we 

want to make sure that the loans that we provide are creditworthy. 

But you have to also make this burden much smaller, because you 

could certainly make the argument that instead of having to figure 

out these partners and going out to nonprofits and funding them 

and supporting them to do the loan application, wouldn’t it be 

much smarter and swifter to make it less burdensome so that we 

don’t need so much stuff, without minimizing that you have to assess the risk? So I just want to push that balance is great, but urgency really is important here. And we stand ready to help you in 

any way that we can to make the difference. 

Mr. BEYERHELM. Yes. And thank you very much for that. And no, 

certainly, we will continue to look at ways to streamline the process. I do want to say though that because we make loans that are 

very highly leveraged—I mean, we can actually—if somebody 

wants to borrow $200,000 to buy a $200,000 piece of property, we 

can do the whole 100 percent financing. And their cash flow may 

have a three percent margin in it. So as a consequence we do have 

to spend some time, for the taxpayer’s benefit, but even more importantly for the customer’s benefit that we do not provide them financing that they cannot repay and then wreck their credit. So 

there is a fine line in there somewhere. But I appreciate your comments. And we will look into it. 

The CHAIRMAN. I thank the gentlelady. The gentlelady from New 

Mexico makes a good point—most of us on this Committee serve 

a rural constituency. I would think that she brings a unique perspective in that she serves a remote constituency, and we have 

seen such consolidation with respect to FSA office closures and so 

on. The irony in this whole thing is that rural broadband has not 

kept pace. So it is that much more challenging. And the point that 

she has made is very well noted. 

So with that, I will recognize the gentleman from Virginia for 5 

minutes, Mr.—no. Okay. Seeing no further requests for time, we 

will dismiss this panel. Thank you all very much. We appreciate 

your testimony. And we certainly appreciate you being here. And 

we will prepare for the next panel. 

45 

Dr. LONG THOMPSON. Thank you. 

The CHAIRMAN. In the interest of time, as we prepare the second 

panel, I would just go on ahead and take a minute to introduce 

those individuals. This is a bigger panel than the first one. We 

have a total of five. Mr. Bob Frazee, President and CEO of 

MidAtlantic Farm Credit, Westminster, Maryland; Mr. Timothy L. 

Buzby, President and CEO, Farmer Mac; Mr. Leonard Wolfe, President and CEO, United Bank & Trust of Marysville, Kansas, on behalf of the American Bankers Association; Mr. Sean H. Williams, 

President and CEO of The First National Bank of Wynne, Wynne, 

Arkansas, on behalf of the Independent Community Bankers of 

America; and, finally, Mr. Brett Melone, Loan Officer, California 

FarmLink, Santa Cruz, California, on behalf of the National Sustainable Agriculture Coalition. 

And it appears that we have all of our panel members seated. I 

would remind our panelists, just as I did the first panel, green is 

go. You are good to go. When you see yellow, step on the gas. And 

red indicates your time has expired. 

So with that said, we will start by introducing Mr. Bob Frazee, 

President and CEO, MidAtlantic Farm Credit, ACA, Westminster, 

Maryland, on behalf of the Farm Credit System. Mr. Frazee, you 

are recognized for 5 minutes. 

STATEMENT OF BOB FRAZEE, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, MIDATLANTIC FARM CREDIT, ACA, 

WESTMINSTER, MD; ON BEHALF OF FARM CREDIT SYSTEM 

Mr. FRAZEE. Thank you, Mr. Chairman, and Members of the 

Subcommittee. I appreciate the opportunity to testify today on behalf of the Farm Credit System. 

At MidAtlantic Farm Credit, we are part of the nationwide Farm 

Credit System that is privately owned by farmers, ranchers, agricultural cooperatives, rural utilities and others in rural America. 

MidAtlantic is owned by more than 10,000 farmers that borrow 

from us in Delaware, parts of Maryland, West Virginia, Virginia 

and Pennsylvania. I report to an 18 member board, 16 of whom are 

farmers elected by the borrower-owners of our cooperative. The 

Board sets the policies that guide our institution. 

Farm Credit funds its lending by marketing System-wide debt 

securities to the investing public. We do not have access to deposits 

guaranteed by the FDIC and backed by the U.S. Treasury as a 

source of funding. The Farm Credit System remains financially 

strong. Our earnings have been good. Loan volume has continued 

to grow. And our capital at the end of the first quarter this year 

was 16.6 percent of total assets. The investors that buy our bonds 

want to see the strength so that they will continue to make their 

capital available to farmers, ranchers and rural America through 

us. 

Being a cooperative, we share our profits directly through patronage dividends with the farmers who borrow from us. In 2013, 

MidAtlantic distributed nearly $19 million, and the System over $1 

billion in earnings as patronage dividends. This puts money back 

in the pockets of farmers, and that supports rural communities. 

System institutions are regulated by the Farm Credit Administration. And I am on the receiving end of their attention, so I will 

46 

let you know that they are doing their job thoroughly. The Farm 

Credit Act makes clear that our responsibility is to meet the needs 

of all types of agricultural producers that have a basis for credit. 

Our customer base reflects the fact that farming has changed dramatically since the System was established almost 100 years ago. 

Our territory contains a diversity of farming operation that is today’s agriculture. We serve Maryland and Delaware poultry producing operations that are sophisticated, complex business, as well 

as startup vegetable growers in Virginia who are producing food for 

farmer’s markets right here in Washington. 

If agriculture is going to be able to continue to feed a planet of 

nine billion people in the year 2050, it is important that all types, 

all sizes of farms have access to capital and the infrastructure to 

support them. We are focused on doing all that we can to help with 

that. One way we are helping is through the StartRight Program 

we created in 2008 to address the challenges faced by young, beginning and small agricultural producers. Last year, we developed a 

Farm Fresh Financing Program, created to help producers involved 

in local foods and sustainable agriculture. 

An example of Farm Fresh Financing is the Urban Tree Connection in Chester, Pennsylvania. They have been building gardens in 

vacant city lots for over 10 years, growing fresh produce for their 

neighborhoods. We help them purchase equipment and have provided a revolving line of credit so that they will continue to grow 

and serve more communities. 

As of the end of May, we had over $57 million in loans in the StartRight Program and over $83 million in Farm Fresh Financing. 

Every Farm Credit Association has programs that are specifically 

targeted to serve these young, beginning and small farmers. During 

2013, the System made $8.3 billion in new loans to young farmer, 

and almost $11 billion to beginning farmers and $11.4 billion to 

small farmers. System institutions also deployed capital in support 

of rural communities, making investments in our borrower’s communities that will help to make them places where their children 

and grandchildren want to live. For example, the Farm Credit System provided $140 million to fund a rural business investment 

company that will begin operations this summer to save and create 

new jobs in rural communities. 

We are also very proud of a $250,000 Farm Credit grant that has 

enabled the Farmer Veteran Coalition to take a labeling program 

that was started in Kentucky to a national level. This will allow 

consumers to choose products produced by farmers that are veterans when they make purchases. 

Now, agriculture has experienced some very good years recently. 

However, some sectors have experienced stress, as we have heard 

earlier today. We have seen the livestock sector that was hit hard 

by high feed costs, but we have seen improvements there recently. 

In the Midwest, there have been issues around land value inflation. 

Our institutions took aggressive steps to manage their lending programs to avoid taking on increased credit risk as land values have 

increased. We make our credit decisions based on repayment capacity, not inflating collateral values. 

Drought conditions are impacting many parts of the country. In 

California, the third consecutive year of drought and water restricVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00050 Fmt 6633 Sfmt 6601 I:\DOCS\113-15\88547.TXT BRIAN
47 

tions pose significant risk to producers. Institutions there tell us 

that borrower’s liquidity will be helpful this year. But another dry 

year in 2015 is likely to create financial adversity for them. We will 

work with those customers on a case by case basis to help them. 

In conclusion, the Farm Credit System continues to make credit 

available to all segments of agriculture. We cover the expense of 

being regulated by the government. We pay insurance premiums to 

protect investors. And we rely on continued access to the debt markets and a built in oversight mechanism for our member-owners. 

Mr. Chairman, thank you again for the opportunity to testify. 

And I will be pleased to respond to your questions. 

[The prepared statement of Mr. Frazee follows:] 

PREPARED STATEMENT OF BOB FRAZEE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 

MIDATLANTIC FARM CREDIT, ACA, WESTMINSTER, MD; ON BEHALF OF FARM

CREDIT SYSTEM

Mr. Chairman, and Members of the Subcommittee, thank you for the opportunity 

to testify today on behalf of the Farm Credit System. My name is Bob Frazee and 

I am President and CEO of MidAtlantic Farm Credit. 

MidAtlantic is part of the nationwide Farm Credit System. My remarks today will 

provide some background on the Farm Credit System, an overview of current credit 

conditions, and comments on how Farm Credit is meeting our mission, and serving 

the credit needs of agriculture and rural communities. 

Background on the Farm Credit System 

The Farm Credit System is a federally chartered network of borrower-owned lending institutions. Established in 1916, the Farm Credit System is comprised of 82 

privately owned institutions. This includes four wholesale banks and 78 direct lending local associations. Farmers, ranchers, agricultural cooperatives, rural utilities 

and others in rural America cooperatively own all of these institutions. The four 

wholesale banks include CoBank. In addition to lending to Farm Credit associations, 

CoBank lends to agricultural, rural electric and telephone cooperatives, as well as 

rural water and sewer systems, broadband providers, agribusiness and to support 

exports. Farm Credit’s mission is to provide sound and dependable credit and other 

related financial services to our owners and others consistent with the eligibility criteria set out in the Farm Credit Act. 

MidAtlantic is a direct lending association. We are owned by more than 10,000 

farmers that borrow from us in Delaware, and parts of Maryland, West Virginia, 

Virginia and Pennsylvania. As President and CEO, I report to an 18 member board 

of directors. Sixteen of these directors are farmers elected by the borrower-owners 

of our cooperative. In addition to elected borrower-owners, each System institution 

is required to have at least one appointed outside director on their board that has 

financial expertise. At MidAtlantic, we have chosen to have two appointed directors. 

In no case are employees allowed to serve as directors of our lending institutions. 

The board of directors is responsible for setting the policies that guide how we 

run our institution and serve our marketplace. They approve the cooperative’s capitalization plan consistent with Federal regulations and ensure that management 

makes available loan products and related financial services appropriate to the 

unique needs of agriculture in the territory the association serves. 

Each Farm Credit association obtains funds for its lending programs through one 

of the four Farm Credit banks. At MidAtlantic, we get our funding through AgFirst 

Farm Credit Bank, located in Columbia, South Carolina. AgFirst is owned by 

MidAtlantic and 18 other associations. 

The four Farm Credit System banks cooperatively own the Federal Farm Credit 

Banks Funding Corporation. The Funding Corporation, as agent for the banks, markets to the investing public the System-wide debt securities that are used to fund 

the lending operations of all Farm Credit System institutions. Unlike commercial 

banks, Farm Credit institutions do not have access to secured deposits guaranteed 

by the Federal Deposit Insurance Corporation and backed by the U.S. Treasury as 

a source of funding. 

Regulatory Oversight by the Farm Credit Administration 

All Farm Credit System institutions are regulated by the Farm Credit Administration (FCA). The FCA is an arm’s-length, independent safety and soundness reguVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00051 Fmt 6633 Sfmt 6621 I:\DOCS\113-15\88547.TXT BRIAN
48 

lator. The agency’s three Board members are nominated by the President and confirmed by the Senate. The FCA has the oversight and enforcement powers that 

other Federal financial regulators have in order to ensure that Farm Credit institutions operate in a safe and sound manner. FCA examiners are required to be engaged with every System institution at least once every eighteen months. As one 

who is on the receiving end of that attention, you should feel comfortable that they 

are doing their job thoroughly. 

The terms of two of the three FCA board members have now expired. I understand that this Committee is not directly involved in the nomination and confirmation process; however, we urge the Committee to encourage the White House to 

bring forward nominees to the Senate in a timely basis. 

The Farm Credit System’s mission, ownership structure and authorizing legislation are unique among financial institutions. It is critically important that Farm 

Credit’s safety and soundness regulator understands our mission and what it takes 

to be successful in accomplishing that mission. Sometimes they need to be reminded 

of that, so we appreciate very much the language included in the farm bill reminding the regulator that the System’s unique cooperative structure should be taken 

into consideration as they promulgate rules. 

The System’s safety and soundness also is overseen by the Farm Credit System 

Insurance Corporation (FCSIC). FCSIC administers the Farm Credit Insurance 

Fund. The Fund and the operations of the Insurance Corporation are supported by 

premiums paid by Farm Credit institutions every year. The Fund is there to protect 

investors in System debt against loss of their principle and interest to the extent 

there are funds available in the Fund. There is no direct taxpayer backstop for the 

Fund. The Farm Credit Act sets the funding goal for the Fund at 2% of the aggregate outstanding insured obligations of the System. FCSIC also has the authority 

to examine System institutions and would act as the conservator or receiver of a 

System institution should one fail. 

Fulfilling Farm Credit’s Mission of Service to U.S. Agriculture and Rural 

America 

All Farm Credit institutions are focused on accomplishing the mission established 

for us by Congress: to serve agriculture and rural America. Our cooperative structure and governance is designed specifically to ensure that our lending and related 

financial service activities are driven by the needs of our borrower-owners and to 

ensure that there is a reliable and competitive credit source available to agriculture 

that America’s farmers and ranchers own and control. Our practice is to engage our 

customers in a consultative lending relationship, using our accumulated expertise 

and knowledge of agriculture and finance to craft long-term relationships. Our services are delivered in the manner that best suits our customers’ needs—whether that 

means talking to them and completing loan documents at a poultry farmer’s kitchen 

table, online while a vegetable producer is working in the field, or in the conference 

room of a regional agribusiness. 

The diversity found in our customer base is indicative of the fact that farming has 

changed dramatically since the Farm Credit System was established almost 100 

years ago. We are constantly evaluating our programs to ensure that we are able 

to serve the full breadth of agriculture. Much has been said and written about how 

agriculture needs to be prepared to feed a planet of nine billion people by the year 

2050. Very little focus has been given to the amount of capital that will be needed 

to make sure our agriculture and infrastructure that supports it will be up to the 

task. Many have different visions regarding what agriculture should look like to accomplish this. Our job is to be positioned to meet the needs of each—whether small 

and local, large and national, traditional or organic. As the Farm Credit Act makes 

clear, our responsibility is to meet the needs of all types of agricultural producers 

that have a basis for credit. 

In our territory at MidAtlantic, we see the diversity that is today’s agriculture 

first hand. We serve some of the premier poultry producing operations in the nation. 

These are sophisticated, complex businesses with tight margins and substantial 

credit needs. Our staff understands the needs of this industry and works closely 

with them on a whole host of issues. On the other end of the spectrum, we serve 

the needs of the Amish farming community in Pennsylvania, financing business improvements like solar panels that provide energy to their farms. In between those 

extremes are customers and businesses with similarly varied needs, from entrepreneurs working to develop a wine industry in Maryland, to dairy farmers in Delaware, to fruit and vegetable growers in Virginia producing food for local farmers’ 

markets right here in Washington, D.C. 

Our experience with this large swath of agriculture also gives us the knowledge, 

insight and expertise to develop special programs targeted at farmers who may need 

49 

special help. We created the StartRight program in 2008, which is a suite of loan 

products specifically designed to address the challenges faced by young, beginning 

and small agricultural producers. Just last year, we developed a Farm Fresh Financing program, created to help producers committed to local foods and sustainable 

agriculture. As of the end of May, we had over $57 million in loans in the 

StartRight program, and over $83 million in loans in Farm Fresh Financing. I’d like 

to give you two examples of the types of businesses and organizations that these 

loans help: 

The Urban Tree Connection in Chester, Pennsylvania has been building gardens 

in vacant city lots for over 10 years, growing both fresh produce for the neighborhoods, as well as growing a sense of community among neighbors. Farm Credit provided funding to help them purchase equipment. We also provided a revolving line 

of credit so that they could continue to grow and serve more communities. Since its 

inception, Urban Tree Farm has partnered with several additional companies to 

help them meet their community goals, and Farm Credit is currently talking to 

them about financing options. 

Groundworks Farm in Pittsville, Maryland is another example. Owners Margaret 

Evans and Kevin Brown didn’t grow up on farms, but they knew farming is what 

they wanted to do with their lives. Farm Credit helped them buy a small farm on 

the Eastern Shore of Maryland to grow produce and offer shares in their CSA, a 

Community Supported Agriculture farm. Last year, they offered almost 150 shares 

in their farm to local residents. 

It should be of no surprise to the Committee that when you look across Farm 

Credit’s loan portfolio you will see represented in it the broad array of operations 

that are U.S. agriculture. The Farm Credit Act was designed to ensure that we can 

continue to meet the needs of agriculture, cooperatives and rural infrastructure as 

they have developed. Parts of the law have not been updated for over forty years, 

and it can be challenging at times for us to continue to fulfill that mission when 

old law has to be applied in a very changed world. 

Sometimes when changes in law are made, they take time to get implemented. 

Back in the 2002 Farm Bill Congress authorized the formation of Rural Business 

Investment Companies (RBIC) and made clear that Farm Credit institutions could 

create and invest in these entities to further the goal of making available equity 

capital for rural entrepreneurs. It took additional changes in the law and final regulations that were not completed until 2013 for our institutions to be able to put this 

authority to work for rural America. This summer a Farm Credit System funded 

RBIC will begin operations thanks to a commitment of about $140 million from 

Farm Credit to capitalize the new effort. This will mean jobs saved and jobs created 

in rural communities. 

We also are very proud of our partnership with the Farmer Veteran Coalition to 

serve veterans involved in agriculture. As the result of a $250,000 grant from the 

Farm Credit System, farmers who are veterans now have access to a national labeling program that will allow consumers to choose products they know are produced 

by farmers that are veterans when they make purchases. These funds facilitated 

moving this program from one operated only in the state of Kentucky to a national 

program. 

Our cooperative structure ensures that our focus remains on the success of our 

owners rather than on achieving quarterly returns to impress stockholders. When 

our customer-owners achieve success, our business will succeed as well. Farm Credit’s lending relationship with our member-borrowers is based on constructive credit 

over the long haul—we make loans, retain loans and service loans. Farm Credit 

does not enter and exit agricultural lending as farm profitability waxes and wanes. 

Distributing Profits to Farmers Through Patronage 

Our commitment to our borrower-owners’ business success is demonstrated further by the fact that we share our profits directly through patronage dividends with 

the farmers who borrow from us. Each year, MidAtlantic’s board of directors makes 

a determination based on our profitability and financial strength as to what portion 

of our net earnings will be returned to our members who borrow from us. 

In 2013, MidAtlantic distributed more than $18.9 million in earnings as patronage 

dividends to the member-borrowers of our cooperative. In total, the Farm Credit 

System in 2013 distributed over $1 billion in patronage. This patronage distribution 

puts money back in the pockets of farmers. It is a rural stimulus that allows our 

customer-owners to re-invest in their own operations and to support rural communities through local spending. 

50 

Farm Credit’s Financial Strength 

The Farm Credit System remains very strong financially. The System’s combined 

net income was $4.64 billion for 2013, and we are pleased to report that in the first 

quarter of 2014, the System’s net income was nearly $1.1 billion. Nationwide, Farm 

Credit ended 2013 with a loan portfolio of about $201 billion, and we added another 

$3.5 billion in loans during the first quarter of this year. Our capital position exceeds that of most every other financial institution. At the end of the first quarter 

of this year, the System had just over $43 billion of capital, or 16.6 percent of total 

assets. This level of capital substantially exceeds that required by our regulator. 

This means that the investors that continue to make their capital available to farmers, ranchers and rural America through us should feel secure that they will be repaid. 

Overall Farm Credit Loan Portfolio 

As I noted before, at the end of the first quarter of this year we had outstanding 

about $204.5 billion in loans. To give you some perspective on the breadth of that 

portfolio of loans, that total was comprised of about $93 billion in real estate mortgage loans, $42 billion in production loans, $32 billion in agribusiness loans, $15.6 

billion in energy and water and sewer, $6.5 billion in rural home loans and about 

$4.3 billion in communications loans. In addition we supported exports with $4.7 billion in financing. 

Consistent with our authority under the Farm Credit Act, we are engaged in the 

rural community beyond agriculture. Because of the System’s capital strength, institutions are also making investments that support the quality of life in rural communities. Institutions have invested in bonds issued to support critical care hospitals, 

nursing facilities, congregate housing for the elderly, and schools. Because our owners understand the needs of their communities, these investments demonstrate their 

commitment to making their hometowns the places where their children and grandchildren will want to live. 

A Commitment to Serving Young, Beginning and Small Farmers 

Every Farm Credit association must have programs in place targeted specifically 

at meeting the needs of three special categories of borrowers: those that are young, 

those that are beginning in farming, and those that are small farmers. Our regulator sets the definitions for each of these categories. Young farmers are defined as 

those 35 years old or younger. Beginning farmers are those with 10 or fewer years 

of farming experience. In the case of small farmers, we are required to look specifically at the gross farm sales of the individual producers. Small farmers are those 

with less than $250,000 in annual gross farm sales. 

Each institution is required to report on their lending activity to these individual 

categories of producers. This data is not additive since individuals may fall into 

more than one category. During 2013 Farm Credit institutions made $8.3 billion in 

new loans to young farmers, almost $11 billion in new loans to beginning farmers 

and $11.4 billion to small farmers. 

We work hard to serve the needs of young, beginning and small farmers. Across 

the country we do this not only by fulfilling their credit needs but also by supporting 

training and education programs, hosting seminars on intergenerational transfer of 

family farms, on risk management techniques and establishing and maintaining effective business plans. We are engaged across the spectrum with those entering agriculture whether they are focused on organic, sustainable, or local food related operations, direct-to-retail, or any other emerging business models. Our trade association, The Farm Credit Council, has been actively engaged with the support of USDA 

in reviewing the effectiveness of financial skills training for young and beginning 

farmers and encouraging the development of new tools that will help ensure those 

starting out in agriculture do so with the improved business management skills that 

are so necessary for farm businesses to be successful over the long term. 

Current Conditions in Agriculture 

Agriculture has experienced some very good years recently. As you know, however, several sectors have seen stress. We have seen many in what we call the green 

industry—sod, nursery and ornamental growers and greenhouse—struggle alongside 

the struggling housing industry. The stagnant housing sector also affected the timber industry. While the protein sector was hit by high feed costs, we have seen improvements recently. In the Midwest, there has been considerable attention paid to 

land value inflation. Our institutions early on took aggressive steps to manage their 

lending programs so as to not take on increased credit risk exposure as land values 

increased similar to what some lenders did during the housing bubble. Farm Credit 

System institutions approach their markets prudently. Caps were placed on lending 

51 

against land based on realistic projections regarding commodity prices. We make 

credit decisions based on the repayment capacity of the individual borrower rather 

than the inflating value of the collateral. Because we hold virtually all of our loans 

on our own balance sheet, we have a strong interest in seeing that our customers 

are successful and prudent in their own risk-taking, including the purchase and financing of farm real estate. 

Crop Insurance 

Crop insurance remains an extremely important risk management tool for farmers throughout the country. We appreciate very much that the farm bill provided 

more crop insurance options and ensured new policies will be made available for 

specialty crops. We believe that it is important as a lender to agriculture that we 

know our customers have insured their production. This protects the farmer and it 

protects the lender as we provide credit to farmers to cover their operating expenses. A strong, effective, fully funded Federal Crop Insurance Program is vitally 

important to maintaining credit flows to agriculture. We look forward to providing 

input as implementing regulations are developed and proposed. 

Drought Conditions 

Our institutions continue to monitor drought conditions in parts of Texas, Oklahoma, Kansas, New Mexico and particularly in California. While there has been 

some improvement in certain areas of the country, severe conditions still exist. I will 

address California separately but across all Farm Credit institutions it is important 

to note that in each situation we assess the circumstances of individual borrowers 

adversely impacted by weather conditions and work with them accordingly. 

California is now in its third consecutive year of drought conditions and experiencing water restrictions to most areas of the state. This situation poses significant 

risk to agricultural production across the state in 2014, with ramifications into 2015 

and beyond. It is fortunate that California farmers and agricultural cooperatives 

strengthened their balance sheets coming in to the current situation and are in a 

better overall financial position to withstand drought-related business impacts. 

The drought’s impact differs from region to region. Farm Credit institutions in 

California assess the drought’s impacts by understanding the specific and unique 

circumstances of each customer. Our institutions then work collaboratively with individual borrowers who are experiencing distress related to the drought. 

Overall, high grower liquidity, coupled with relatively strong commodity prices 

mean most agricultural producers should be able to adjust their plantings and their 

feed rations for livestock in the near term. It also is fortunate that the agricultural 

sector has become much more sophisticated in utilizing conservation measures to 

more efficiently use the water they have. However, the continuation of drought conditions risks adverse impacts on reserve groundwater storage and a substantial increase in groundwater overdraft. If this results, there will be substantial long-term 

costs of groundwater overdraft that are yet to be determined. Furthermore, if another critically dry year occurs in 2015, studies suggest the impacts likely will be 

much more severe, including reduction in water availability, crop acres and farm related employment. This will require close monitoring and early coordination among 

all interested parties to manage through without significant disruption. 

The Farm Credit System remains well positioned to meet borrowing needs of agricultural producers impacted by the drought. The System’s role is to stand by its customers and it will continue to fulfill that role in a safe and sound manner. This includes working collaboratively with individual borrowers who are experiencing financial distress related to the drought. Whatever the challenges presented by the 

drought, access to credit will not be one of them. 

Conclusion 

The Farm Credit System remains financially strong, economically vital, and focused on fulfilling its mission of service to U.S. agriculture and rural America. We 

continue to make credit available to all segments of agriculture, including commercial producers as well as young, beginning and small farmers and ranchers. We support agricultural cooperatives, rural infrastructure and the marketing channels that 

agriculture depends on to sell their product and we serve the needs of rural communities to the extent our authority permits. We are proud of our commitment to rural 

America. 

There are no Federal dollars invested in the Farm Credit System. We pay for the 

expense of being regulated by the Federal Government through assessments on all 

Farm Credit System institutions. We pay insurance premiums to provide protection 

for those who invest in our debt securities. To continue serving our mission, we rely 

on continued access to the national debt markets and an independent, arm’s-length 

regulator that comprehends the unique requirements of our cooperative structure 

52 

and agriculture. In addition to being closely regulated, we have the built-in oversight mechanism of our member-owners holding our feet to the fire to keep service 

quality high while protecting their equity in their cooperative. 

Mr. Chairman, thank you again for the opportunity to testify today on behalf of 

the Farm Credit System. I will be pleased to respond to your questions. 

The CHAIRMAN. Thank you, Mr. Frazee. I now recognize Mr. Timothy L. Buzby, President and CEO of Farmer Mac. You are recognized for 5 minutes. 

STATEMENT OF TIMOTHY L. BUZBY, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, FEDERAL AGRICULTURAL MORTGAGE 

CORPORATION (FARMER MAC), WASHINGTON, D.C. 

Mr. BUZBY. Chairman Crawford, and distinguished Members of 

the Subcommittee, thank you for your invitation to appear today to 

testify on behalf of the Federal Agricultural Mortgage Corporation, 

which is commonly known as Farmer Mac. My name is Tim Buzby, 

and I am the President and CEO of Farmer Mac. 

Farmer Mac exists to deliver capital and liquidity to rural America, and offers a variety of financing options tailored to the needs 

of its customers, America’s rural lenders. In Farmer Mac’s role as 

the secondary market for rural America, we work closely with all 

types and sizes of rural lenders. Through alliances and partnerships, we work with over 900 institutions, including commercial 

and community banks, Farm Credit System institutions, insurance 

companies and rural electric lender cooperatives. By working with 

such a vast network, Farmer Mac introduces additional competition 

into the marketplace to ensure that your constituents are receiving 

the lowest interest rates and most favorable terms possible for 

their financing needs. 

To fund the needs of our lending partners, Farmer Mac raises 

money in the capital markets as investors have looked to Farmer 

Mac as one vehicle to invest in rural America. Investors are attracted to the fact that today’s agricultural producers are more efficient and productive than ever, more sophisticated in their financing arrangements and are providing quality commodities at competitive prices. 

One indication of this interest in the investment of rural America 

is regular demand for Farmer Mac’s debt and equity securities. As 

an example, Farmer Mac has seen great demand in its auction of 

over $250 million of securities during just the past 3 months. These 

securities have attracted competitive bids from multiple financial 

institutions, driving down Farmer Mac’s cost of funds. Lower cost 

funding for Farmer Mac directly benefits your farmers, ranchers 

and rural utility cooperatives in the form of lower interest rates on 

products financed by Farmer Mac. 

With regard to credit, the quality of Farmer Mac’s portfolio remains a great story. We are extremely proud of our credit profile. 

And it will continue to be the cornerstone of our success in the future. Currently, our overall borrower delinquency rate on the loans 

in our $14.1 billion portfolio is only 1⁄5 of 1 percent. That said, 

Farmer Mac understands that agriculture is cyclical with many diverse industries that respond in different ways to changes and economic conditions. We take pride in the diversified nature of our 

loan portfolio that ranges from almond groves in California to 

wheat, corn and soybean crops in the Midwest, and from cattle 

53 

ranches in the Southwest to electric distribution cooperatives in the 

Southeast and across America. 

We have found over the years that this diversification serves us 

well as the inevitable cycles of weather and commodity prices impact profits in agricultural industries across geographies. 

As we look forward, although farm incomes are projected to decrease in 2014 compared to 2013, they are still very high from a 

historical perspective and will be above the 10 year average. In 

Farmer Mac’s experience, farmers and ranchers today generally 

have stronger balance sheets than in the past, with higher working 

capital and lower leverage. In the agricultural lending space, there 

is great competition, particularly for the most successful producers 

who have become more sophisticated in their financing and are 

able to demand lower rates and more favorable terms. Very often, 

these borrowers are prudently choosing to finance farm purchases 

and refinancings with long-term fixed rate mortgages to lock in low 

and known interest costs. 

I realize there is concern about the agriculture land value increases experienced over the past several years. But recent market 

activity suggests that land values have moderated, most notably in 

those areas that experienced the greatest increases in recent years 

such as the Midwest. Although lower commodity prices and increases in interest rates could put downward pressure on the value 

of farmland, Farmer Mac does not expect a repeat of the 1980s 

when agricultural land values collapsed. Fortunately, we see what 

others in the rural lending industry have observed, that farmers 

and ranchers simply are not taking on as much debt as they had 

in the past. 

In summation, Farmer Mac continues to provide a stable source 

of liquidity, capital and risk management tools to help rural lenders meet the financing needs to their customers. With a diverse 

array of lending products and sources of capital, Farmer Mac is 

well positioned to provide rural America with the sophisticated and 

low-cost products and services demanded by today’s rural borrowers. 

Thank you, and I would be happy to answer any questions you 

may have. 

[The prepared statement of Mr. Buzby follows:] 

PREPARED STATEMENT OF TIMOTHY L. BUZBY, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, FEDERAL AGRICULTURAL MORTGAGE CORPORATION (FARMER MAC), 

WASHINGTON, D.C. 

Introduction 

Chairman Crawford, Ranking Member Costa, and distinguished Members of the 

Subcommittee, thank you for your invitation to appear today to testify on behalf of 

the Federal Agricultural Mortgage Corporation, which is commonly known as Farmer Mac. My name is Tim Buzby, and I am the President and Chief Executive Officer 

of Farmer Mac. I appreciate the opportunity to appear before your Subcommittee 

today to provide you with some insight into what we at Farmer Mac see taking 

place in the rural credit financing markets. 

Farmer Mac is a stockholder-owned, federally chartered corporation that combines 

private capital and public sponsorship to serve a public purpose. The company was 

established under Federal legislation first enacted in 1988 and amended most recently in 2008. Congress has charged Farmer Mac with the mission of providing a 

secondary market for a variety of loans made to borrowers in rural America, including mortgage loans secured by agricultural real estate, rural utility loans, and certain loans guaranteed by the U.S. Department of Agriculture (USDA). This secVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00057 Fmt 6633 Sfmt 6621 I:\DOCS\113-15\88547.TXT BRIAN
54 

ondary market increases the availability of long-term credit at stable interest rates 

to America’s rural communities, including farmers, ranchers, other rural residents 

and businesses, and rural utility cooperatives, and provides those borrowers with 

the benefits of capital markets pricing and product innovation. In Farmer Mac’s role 

as the secondary market for rural America, we work closely with all types and sizes 

of rural lenders, including commercial and community banks, Farm Credit System 

institutions, insurance companies, credit unions, and lenders to rural electric cooperatives. We also deal directly with other financial counterparties as we serve as 

a bridge between the national capital markets and the rural credit markets by attracting new capital for financing rural borrowers. Farmer Mac’s position at the 

intersection of Main Street, where the lending industry and borrower community 

come together in rural America, and Wall Street allows us to provide a unique perspective about the environment for rural credit. 

Farmer Mac exists to deliver capital and liquidity to rural America and offers a 

variety of effective financing options and products tailored to the needs of its rural 

lender customers that increase the ability of those lenders to offer low-cost funding 

to their rural borrower customers. Although we work directly with rural lenders, ultimately the greatest benefit we are able to provide is to your constituents—America’s farmers, ranchers, rural utility cooperatives, and business owners in rural communities. Farmer Mac’s current book of business includes loans originated by approximately 900 different financial institutions across the nation. By working with 

such a vast network of rural lenders, we introduce more competition into the marketplace and ensure that your rural constituents are receiving the lowest interest 

rates and most favorable terms possible for their financing needs. In fact, the interest rates available to borrowers through the products offered by Farmer Mac are 

some of the most competitive in the market today. However, whether or not a rural 

borrower ultimately chooses a Farmer Mac loan product, Farmer Mac’s participation 

in the rural lending arena provides that borrower with the opportunity to obtain a 

low interest rate on terms that work for that individual. That is good for rural borrowers, their families, their communities, and rural America in general. Since its 

creation in 1988, Farmer Mac has helped to fund loans to over 60,000 borrowers 

in all 50 states, resulting in nearly $35 billion of investment in rural America. 

Current Conditions 

The agricultural economy has been robust for several years, driven by increased 

demand for food both in the United States and around the world as well as efficiencies in farming production, among other factors. This has not gone unnoticed in 

the capital markets, as investors have looked to Farmer Mac as a vehicle to invest 

in rural America. These investors are attracted to the fact that today’s agricultural 

producers are more efficient and productive than ever, more sophisticated in their 

financing arrangements, and are providing the marketplace with quality commodities at competitive prices. One indication of this interest in investing in rural America is the regular demand for Farmer Mac’s debt and equity securities. As an example, Farmer Mac has seen great demand in its auction of over $250 million of term 

debt over the past 3 months. These debt offerings have attracted competitive bids 

from multiple financial institutions, driving Farmer Mac’s cost of funds down by an 

average of 10 basis points per offering. Lower cost funding for Farmer Mac directly 

benefits farmers, ranchers, and rural utility cooperatives in the form of lower interest rates on products financed by Farmer Mac. 

The credit quality of Farmer Mac’s portfolio remains a great story. We are extremely proud of our credit quality, and it will continue to be the cornerstone of our 

success in the future. As of March 31, 2014, Farmer Mac’s overall 90 day delinquency rate on the loans in its $14.1 billion portfolio was near historical lows at 

only 0.21%. Through the end of first quarter 2014, Farmer Mac has never experienced any credit losses in its Rural Utilities, USDA Guarantees, and Institutional 

Credit lines of business and has experienced cumulative losses of only $31 million 

in its Farm & Ranch line of business during Farmer Mac’s entire 26 year history 

on $19.2 billion of cumulative originations (0.16%). Although Farmer Mac’s talented 

underwriting staff can take much of the credit for the credit quality in Farmer 

Mac’s portfolio, growing conditions, commodity prices, and agriculture exports from 

across the nation have been very good over the past 10 years and have contributed 

to growth in U.S. agriculture production and, consequently, borrower repayment capacity. Nonetheless, Farmer Mac understands that agriculture is cyclical, with 

many diverse industries that respond in different ways to changes in economic conditions. Those individual industries often are affected differently, sometimes positively and sometimes negatively, by prevailing domestic and global economic factors 

and regional weather conditions. This results in cycles where one or more industries 

may be under stress at the same time that others are not. 

55 

Our policy at Farmer Mac is to diversify our Farm & Ranch portfolio both geographically and by agricultural commodity. We direct our marketing efforts toward 

agricultural lenders throughout the nation to achieve commodity and geographic diversification in our exposure to credit risk. Farmer Mac’s Farm & Ranch portfolio 

remains diverse both geographically and by agricultural commodity, as illustrated 

in the two charts below that are current as of March 31, 2014. We take pride in 

the diversified nature of our loan portfolio that ranges from almond groves in California to wheat, corn, and soybean crops in the Midwest and from cattle ranches 

in the Southwest to electrical distribution cooperatives in the Southeast. We have 

found over the years that this diversification serves us well as the inevitable cycles 

of weather and commodity prices impact profits in agricultural industries or geographies because as certain portfolio segments are stressed, others can benefit. Farmer Mac’s overall portfolio also benefits from the diversification added by its lines of 

business other than Farm & Ranch, including USDA Guarantees, Rural Utilities, 

and Institutional Credit. We continue to closely monitor sector profitability, economic conditions, and agricultural land value and geographic trends to tailor underwriting practices to changing conditions as part of our robust underwriting process. 

March 31, 2014 

Commodity Type Geography 

Although farm incomes are projected to decrease in 2014 compared to 2013 primarily because of lower cash grain prices, farm incomes are still very high from a 


11315015.eps 11315016.eps
56 

historical perspective and above the 10 year average. In Farmer Mac’s experience, 

farmers and ranchers generally have stronger balance sheets compared to several 

years ago, with high working capital and low leverage. There is great competition 

in the agricultural lending space, particularly for the most successful producers who 

have become more sophisticated in their borrowing and take advantage of lender 

competition to obtain low rates and favorable terms. More and more, these borrowers are choosing mortgage loan products with long-term fixed rates to lock in 

low and known interest costs. Another trend that Farmer Mac has observed is that 

the primary use of funds for many new loans is to refinance existing debt rather 

than to purchase new real estate. 

Agricultural land values have increased over the past several years, but recent 

market activity suggests that land values may have moderated, most notably in 

those areas that have experienced the greatest increase, such as the Midwestern region. While the increase in land values has varied by geographic region, it appears 

to have been spurred by a combination of factors, including strong demand for agricultural products and resulting high commodity prices, particularly for corn, soybeans, and wheat, as well as good yields, low interest rates, and landowners choosing to reinvest their profits in the acquisition of more land. Lower commodity prices 

and increases in interest rates could put downward pressure on the values of farmland, although Farmer Mac does not expect a repeat of the 1980s when agricultural 

land values collapsed. Some of the reasons for this belief are that debt loads are 

lighter today, the interest rate environment is much more transparent than in the 

1970s and 1980s, world markets are more transparent and interconnected today, 

and the current run-up in land values is lower and more gradual than the increase 

in land values in the 1970s. We see what others in the rural lending industry have 

observed—that farmers and ranchers simply are not taking on as much debt as they 

have in the past. The general increase in land values has resulted in less acreage 

encumbered as collateral, as much of the financing being done today is with cash 

or a mix of cash, free and clear collateral, and debt. It appears that farmers and 

ranchers have learned from the mistakes of the past and are not buying land at 

inflated prices with debt, and lenders are also more disciplined than in the 1980s. 

Farmer Mac has been diligent in monitoring land values and has instituted measures to ensure that its Farm & Ranch portfolio remains sound. For example, last 

year we adopted stricter loan-to-value ratio (LTV) requirements for loans located in 

the Corn Belt in the Midwestern states where land prices have seen the highest escalation in recent years. Even before this change, the LTVs of loans in Farmer Mac’s 

Farm & Ranch portfolio have historically been very low. The weighted average original LTV (based on original appraised value that has not been indexed to provide 

a current market value or reflect amortization of loans) for the loans in Farmer 

Mac’s Farm & Ranch portfolio was approximately 48% as of March 31, 2014. The 

weighted average current LTV (based on original appraised value but which reflects 

loan amortization since purchase) for Farmer Mac’s Farm & Ranch loans was approximately 41% as of March 31, 2014. The average LTV of Farmer Mac’s Farm & 

Ranch loans decreases even more if the values in the original appraisals are indexed 

to current land values. 

Like others with a strong interest in agriculture, Farmer Mac continuously monitors significant weather events throughout the country and has been paying close 

attention to the current drought conditions in the western part of the United States, 

including California. The water level in many California reservoirs is only half of 

their average year-to-date water storage levels, and the snowpack in the higher elevations whose runoff would typically replenish low reservoir levels is at a third or 

less than normal levels. Though many farm irrigation districts will receive little or 

no water from the governing water authorities, the impact on individual farmers 

will vary due to alternative water sources the farmer may have in place. Farmer 

Mac has not observed any material effect on its portfolio due to these drought conditions as of March 31, 2014, but any continuation of extreme or exceptional drought 

conditions beyond the 2014 water year could have adverse future effects. This is 

particularly true in the permanent plantings sector, where the value of the related 

collateral is closely tied to the production value and capability of the permanent 

plantings, and in the dairy sector, which may experience increased feed costs as 

water is diverted away from hay acreage commonly relied upon by dairy producers 

and toward land supporting other agricultural commodities. 

In addition to Farmer Mac’s secondary market activities in its Farm & Ranch line 

of business that involves mortgage loans secured by first liens on agricultural real 

estate, Farmer Mac has also been an active participant in the secondary market for 

loans guaranteed by the USDA under the Consolidated Farm and Rural Development Act (the CONACT) since 1991 after Congress granted that authority to Farmer Mac. In that time, Farmer Mac has provided lenders and their customers with 

57 

liquidity and competitive rates, including longer-term fixed rates, on loans guaranteed by the USDA under the CONACT that are eligible for Farmer Mac to purchase. 

With regard to Farmer Mac’s Rural Utilities line of business, the demands of that 

industry for capital and financing have historically tended to be linked to the state 

of the general economy and applicable environmental regulations. Continued weakness in the general economy in the United States has reduced the demand for rural 

electric power and, consequently, the need for rural utilities cooperatives to expand 

in recent years. This lower demand within the industry has increased competition 

for Farmer Mac’s customer base from other lenders. Domestic economic indicators 

continue to show modest growth, and Farmer Mac and industry sources expect that 

demand for rural utilities loans will increase as the economy eventually strengthens. 

Farmer Mac believes that the rural utilities industry will have significant needs for 

financing over the course of the next decade, as capital will be needed for growth 

and modernization, including generation and transmission (G&T) and distribution 

system improvements and demand-side management. In addition, the industry will 

also require capital to comply with any future public policy initiatives such as environmental regulations and clean energy initiatives. Farmer Mac stands ready to 

work with the lenders to help meet the needs of their rural electric cooperative borrowers. Since the inception of the Rural Utilities line of business in 2008, Farmer 

Mac’s secondary market activities have helped nearly 170 rural electric cooperatives 

throughout the United States obtain financing to serve approximately 4.6 million 

customers in rural areas. 

Conclusion 

Farmer Mac continues to provide a stable source of liquidity, capital, and risk 

management tools to help rural lenders meet the financing needs of their customers. 

With a diverse array of lending products and capital sources, Farmer Mac is well 

positioned to provide rural America with the sophisticated and low cost lending 

products demanded by today’s rural borrowers. Last year marked Farmer Mac’s 

25th anniversary of serving rural America, and we at Farmer Mac are more energized than ever to continue to deliver the benefits envisioned by Congress at Farmer 

Mac’s creation—greater access to affordable credit and a wide variety of loan products for rural communities. As I reflect on my nearly 14 year tenure at Farmer Mac, 

I am proud to say that the addition of Farmer Mac to the rural financing arena has 

fulfilled Congress’s vision. Farmer Mac is a valuable and much relied upon asset 

for rural America, as lenders seek to offer their customers long-term interest rates 

at low levels, fund larger real estate loans, and manage borrower exposure levels. 

We are proud to partner with America’s agricultural bankers, Farm Credit System 

institutions, and rural electric cooperatives to serve rural communities, and we remain steadfast in our commitment to meet their needs. Farmer Mac is committed 

to fulfilling its mission of delivering capital and increasing lender competition for 

the benefit of rural communities throughout the nation. Rest assured that we are 

prepared to build on our recent positive results and will continue to innovate, collaborate, and provide unparalleled service with a renewed focus on the stewardship 

of our public mission as we help build a strong and vital rural America. 

Thank you for the opportunity you have generously provided Farmer Mac to give 

testimony on current credit conditions in rural America. We look forward to working 

with Members of Congress and our business partners to do even more to fulfill our 

mission. I would be happy to answer any questions you may have. 

Background Information About Farmer Mac 

Farmer Mac currently employs just over 70 people who are located primarily at 

offices in Washington, D.C. and in Johnston, Iowa. Farmer Mac accomplishes its 

Congressional mission of providing liquidity and lending capacity to rural lenders 

by: 

• purchasing eligible loans directly from lenders; 

• providing advances against eligible loans by purchasing obligations secured by 

those loans; 

• securitizing assets and guaranteeing the payment of principal and interest on 

the resulting securities that represent interests in, or obligations secured by, 

pools of eligible loans; and 

• issuing long-term standby purchase commitments (‘‘standby commitments’’) for 

eligible loans. 

Farmer Mac’s activities are intended to provide lenders with an efficient and competitive secondary market that enhances these lenders’ ability to offer competitivelypriced financing to rural borrowers. This secondary market is designed to increase 

the availability of long-term credit at stable interest rates to America’s rural comVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 I:\DOCS\113-15\88547.TXT BRIAN
58 

munities and to provide rural borrowers with the benefits of capital markets pricing 

and product innovation. Farmer Mac’s activities are subject to oversight by Congress 

as well as a dedicated safety and soundness Federal regulator (the Office of Secondary Market Oversight within the Farm Credit Administration) and the U.S. Securities and Exchange Commission. 

Farmer Mac’s purchases of both eligible loans and obligations secured by eligible 

loans, as well as Farmer Mac’s guaranteed securities sold to third party investors, 

increase lenders’ liquidity and lending capacity and provide a continuous source of 

funding for lenders that extend credit to borrowers in rural America. Farmer Mac’s 

standby commitments for eligible loans held by lenders, as well as Farmer Mac’s 

guaranteed securities retained by lenders in exchange for the related securitized 

loans, result in lower regulatory capital requirements for the lenders and reduced 

borrower or commodity concentration exposure for some lenders, thereby expanding 

their lending capacity. By increasing the efficiency and competitiveness of rural finance, the secondary market provided by Farmer Mac has the potential to lower the 

interest rates paid on loans by rural borrowers. 

Farmer Mac conducts its secondary market activities through four lines of business—Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit. 

The loans eligible for the secondary market provided by Farmer Mac include: 

• mortgage loans secured by first liens on agricultural real estate, including parttime farms and rural housing (encompassing the Farm & Ranch line of business); 

• agricultural and rural development loans guaranteed by the United States Department of Agriculture (USDA) (encompassing the USDA Guarantees line of 

business); and 

• loans made by cooperative lenders to finance electrification and telecommunications systems in rural areas (encompassing the Rural Utilities line of business). 

Farmer Mac also purchases and guarantees general obligations of rural lenders 

that are secured by pools of the types of eligible loans described above (encompassing the Institutional Credit line of business). As of March 31, 2014, the total 

outstanding amount of the eligible loans included in all of Farmer Mac’s lines of 

business was $14.1 billion. 

Under the Farm & Ranch line of business, Farmer Mac purchases or commits to 

purchase eligible mortgage loans secured by first liens on agricultural real estate 

and rural housing. Farmer Mac also guarantees securities representing interests in 

pools of mortgage loans eligible for the Farm & Ranch line of business. Loans must 

meet credit underwriting, collateral valuation, documentation and other standards 

specified by Farmer Mac. As of March 31, 2014, the average unpaid loan balance 

for loans outstanding in the Farm & Ranch line of business was $449,000, and the 

majority of loans were to small farms (less than $350,000 in gross farm income) and 

family farmers (majority owned and operated by a family). At the end of 2013, 

Farmer Mac had 669 approved lenders eligible to participate in Farmer Mac’s Farm 

& Ranch line of business. In addition to participating directly in the Farm & Ranch 

line of business, some of the approved lenders facilitate indirect participation by 

other lenders by managing correspondent networks of lenders from which the approved lenders purchase loans to sell to Farmer Mac. 

Under the USDA Guarantees line of business, Farmer Mac’s wholly-owned subsidiary purchases the portions of certain agricultural, rural development, business 

and industry, and community facilities loans guaranteed by the USDA under the 

Consolidated Farm and Rural Development Act (CONACT). Any lender authorized 

by the USDA to obtain a USDA guarantee on a loan under the CONACT may participate in Farmer Mac’s USDA Guarantees line of business. During 2013, 195 lenders, consisting mostly of community and regional banks, sold USDA-guaranteed portions of loans to Farmer Mac. As of March 31, 2014, the aggregate outstanding principal balance of assets in the USDA Guarantees line of business was $1.7 billion. 

Farmer Mac initiated the Rural Utilities line of business after Congress expanded 

Farmer Mac’s authorized secondary market activities to include rural utility loans 

in the Farm Bill of 2008. Farmer Mac’s authorized activities under this line of business are similar to those conducted under the Farm & Ranch line of business—purchases of, and guarantees of securities backed by, eligible rural utilities loans for 

the financing of electrification and telecommunications systems in rural areas. To 

be eligible, loans must meet Farmer Mac’s credit underwriting and other specified 

standards. As of March 31, 2014, the aggregate outstanding principal balance of 

rural utilities loans held by Farmer Mac was $1.0 billion. 

59 

Under the Institutional Credit line of business, Farmer Mac purchases or guarantees general obligations of rural lenders that are secured by pools of loans that 

would be eligible for purchase under one of Farmer Mac’s other lines of business. 

Farmer Mac refers to these obligations as AgVantage® securities. Farmer Mac guarantees AgVantage® securities as to the timely payment of principal and interest and 

may retain AgVantage® securities in its portfolio or sell them to third parties in the 

capital markets. Farmer Mac’s purchase and guarantee of AgVantage® securities 

provide a continuous source of funding for lenders that extend credit to borrowers 

in rural America. As of March 31, 2014, outstanding securities held or guaranteed 

by Farmer Mac in its Institutional Credit line of business totaled $6.1 billion. 

After buying eligible loans, Farmer Mac can either retain them for investment or 

pool the loans together, securitize them, and guarantee the timely payment of interest and principal on the resulting securities. Securities that Farmer Mac guarantees 

are sold to investors in the capital markets, exchanged for the loans and retained 

by the lender, or held by Farmer Mac. 

Farmer Mac’s charter establishes three capital standards for Farmer Mac—minimum capital, critical capital, and risk-based capital. Farmer Mac is required to 

comply with the higher of the minimum capital requirement and the risk-based capital requirement. Also, in accordance with a recently effective FCA regulation on 

capital planning, Farmer Mac’s board of directors has adopted a policy for maintaining a sufficient level of Tier 1 capital and imposing restrictions on dividends and 

bonus payments in the event that Farmer Mac’s Tier 1 capital falls below specified 

thresholds. As illustrated in the chart below that is current as of March 31, 2014, 

Farmer Mac has continually improved its capital position over the past several 

years through a combination of retained earnings and equity offerings. Farmer Mac 

also just completed a $75 million preferred stock offering last week to further enhance its capital position. 

Key Company Metrics—Capital 

Additional information about Farmer Mac is available on Farmer Mac’s website 

at www.farmermac.com. 


11315017.eps
60 

The CHAIRMAN. Thank you. I appreciate that. I now recognize the 

President and CEO, United Bank and Trust of Marysville, Kansas, 

on behalf of the American Bankers Association, Mr. Leonard Wolfe. 

You are recognized for 5 minutes. 

STATEMENT OF LEONARD WOLFE, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, UNITED BANK & TRUST, MARYSVILLE, 

KS; ON BEHALF OF AMERICAN BANKERS ASSOCIATION 

Mr. WOLFE. Chairman Crawford, and Members of the Subcommittee, my name is Leonard Wolfe, and I am the President of 

United Bank & Trust in Marysville, Kansas. We are the largest 

commercial agricultural lender in Kansas, second only to the Farm 

Credit System. I am also currently serving as the Chairman of the 

Kansas Bankers Association, and I serve as Vice Chairman of the 

American Bankers Association Agricultural Credit Taskforce. I appreciate the opportunity to present the views of the ABA on credit 

conditions and credit availability in rural America. 

The topic of today’s hearing is very timely. The agriculture economy has been performing extremely well. Farm and ranch incomes 

for the past 5 years have been some of the best in history. With 

the new farm bill in place, farmers, ranchers and their bankers 

have certainty from Washington about future agricultural policy. 

Interest rates continue to be at or near record lows. And the banking industry has the people, capital and liquidity to help American 

farmers sustain this excellent agricultural economy. 

Banks continue to be the first place that farmers and ranchers 

turn when looking for agricultural loans. In fact, more farmers and 

ranchers receive credit from the banking industry than from any 

other source today. In 2013, farm banks, which the ABA defines as 

any bank with more than 14 percent of their loans made to farmers 

or ranchers, increased agricultural lending nine percent to meet 

these rising credit needs, and now provide nearly $90 billion in 

total farm loans. Farm banks are an essential resource for small 

farmers, holding $45 billion in small farm loans and $12 billion in 

micro-small farm loans. These farm banks are healthy, well capitalized and stand ready to meet the credit demands of our nation’s 

farmers, large and small. 

I would like to thank Congress and especially the Agriculture 

Committees for repealing borrower term limits on USDA Farm 

Service Agency guaranteed loans. Banks work closely with the 

USDA to make additional credit available by utilizing the Guaranteed Farm Loan Programs. The repeal of borrower limits on 

USDA’s Farm Service Agency guaranteed loans has allowed farmers to continue to access credit from banks like mine as they grow, 

ensuring credit access for farmers across the country. 

We remain concerned with certain areas of the agriculture credit 

market. In particular, we believe that the Farm Credit System, a 

government sponsored entity, has veered away from its intended 

mission and now represents an unwarranted risk to taxpayers. The 

Farm Credit System was founded in 1916 to ensure that young, beginning and small farmers and ranchers had access to credit. It has 

since grown into a $261 billion behemoth. To put this into perspective, if the Farm Credit System were a bank, it would be the ninth 

61 

largest bank in the United States, and larger than 99.9 percent of 

banks in the country. 

This System operates as a government sponsored entity, and represents a risk to taxpayers the same way that Fannie Mae and 

Freddie Mac do. The Farm Credit System benefits from significant 

tax breaks valued at $1.3 billion in 2013, giving it a significant 

edge over private sector competitors. Moreover, the Farm Credit 

System enjoys government backing formalized by the creation of a 

$10 billion line of credit with the U.S. Treasury in 2013. 

The Farm Credit System has moved significantly from its charter 

to serve young, beginning and small farmers, and now primarily 

serves large established farms who could easily obtain credit from 

the private sector. In fact, the majority of Farm Credit System 

loans outstanding are in excess of $1 million. Any farmer able to 

take in over $1 million in debt is not a small farmer. Moreover, 

small borrowers accounted for less than 16 percent of all new Farm 

Credit System loans in 2013. 

Our nation’s farmers and ranchers are a critical resource to our 

economy. Ensuring that they continue to have access to adequate 

credit is essential for the wellbeing of our whole nation. America’s 

banks remain well equipped to serve the borrowing needs of farmers of all sizes. An important step in ensuring credit availability is 

to review entities such as the Farm Credit System and ensure that 

they stick to their charter of helping young, beginning and small 

farmers. 

Thank you. I would be happy to answer any questions you may 

have. 

[The prepared statement of Mr. Wolfe follows:] 

PREPARED STATEMENT OF LEONARD WOLFE, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, UNITED BANK & TRUST, MARYSVILLE, KS; ON BEHALF OF AMERICAN

BANKERS ASSOCIATION

Chairman Crawford, Ranking Member Costa, and Members of the Subcommittee, 

my name is Leonard Wolfe, and I am the President, CEO and Chairman of the 

Board of United Bank & Trust in Marysville, Kansas. United Bank is a $570 million 

bank with fifteen branches serving Marshall, Nemaha, Brown, Clay, Washington, 

Cloud, and Riley counties in Kansas. We have over $176 million in agricultural real 

estate and production loans in our portfolio—nearly 1⁄2 of all of our loans are to 

farmers and ranchers. In addition, we finance businesses that support, in some way, 

the needs of farmers and ranchers in our part of the state. 

I am also the Chairman of the Kansas Bankers Association and I serve as Vice 

Chairman of the American Bankers Association’s Agricultural Credit Task Force. I 

appreciate the opportunity to present the views of the ABA on credit conditions and 

credit availability in rural America. The American Bankers Association is the voice of the nation’s $14 trillion banking 

industry, which is composed of small, regional and large banks that together employ 

more than two million people, safeguard $11 trillion in deposits and extend nearly 

$8 trillion in loans. ABA is uniquely qualified to comment on agricultural credit 

issues as banks have provided credit to agriculture since the founding of our country. Over 5,470 banks—nearly 81% of all banks—reported agricultural loans on 

their books at year end 2013 with a total outstanding portfolio of over $149 billion. 

The topic of today’s hearing is very timely. The agricultural economy has been 

performing extremely well. Farm and ranch incomes for the past 5 years have been 

some of the best in history. With the new farm bill in place, farmers, ranchers, and 

their bankers have certainty from Washington about future agricultural policy. Interest rates continue to be at or near record lows, and the banking industry has the 

people, capital, and liquidity to help American farmers and ranchers sustain this 

excellent agricultural economy. 

Banks continue to be the first place that farmers and ranchers turn when looking 

for agricultural loans. In fact, more farmers and ranchers receive credit from the 

62 

banking industry than from any other source. Our agricultural credit portfolio is 

very diverse—we finance large and small farms, urban farmers, beginning farmers, 

women farmers, and minority farmers. To bankers, agricultural lending is good 

business and we make credit available to all who can demonstrate they have a 

sound business plan, the experience, and the ability to repay. 

In 2013, farm banks—banks with more than 14% of their loans made to farmers 

or ranchers—increased agricultural lending 9.1 percent to meet these rising credit 

needs, and now provide nearly $90 billion in total farm loans. Farm banks are an 

essential resource for small farmers, holding $45 billion in small farm loans, and 

$12 billion in micro-small farm loans. These farm banks are healthy and well capitalized and stand ready to meet the credit demands of our nation’s farmers large 

and small. 

In addition to our commitment to farmers and ranchers, thousands of farm dependent businesses—food processors, retailers, transportation companies, storage facilities, manufacturers, etc.—receive financing from the banking industry as well. 

Agriculture is a vital industry to our country, and financing it is an essential business for many banks, mine included. 

Banks work closely with the USDA’s Farm Service Agency to make additional 

credit available by utilizing the Guaranteed Farm Loan Programs. The repeal of 

borrower limits on USDA’s Farm Service Agency guaranteed loans has allowed 

farmers to continue to access credit from banks like mine as they grow, ensuring 

credit access for farmers across the country. 

We remain concerned with certain areas of the agricultural credit market. In particular, we are worried that the Farm Credit System—a government sponsored entity—has veered away from its intended mission and now represents an unwarranted 

risk to taxpayers. The Farm Credit System was founded in 1916 to ensure that 

young, beginning, and small farmers and ranchers had access to credit. It has since 

grown into a $261 billion behemoth offering complex financial services. To put this 

in perspective, if the Farm Credit System were a bank it would be the ninth 

largest in the United States, and larger than 99.9% of the banks in the country. 

This System operates as a government sponsored entity and represents a risk to 

taxpayers in the same way that Fannie Mae and Freddie Mac do. It benefits from 

significant tax breaks—valued at $1.3 billion in 2013—giving it a significant edge 

over private sector competitors. Moreover, the Farm Credit System enjoys a government backing, formalized by the creation of a $10 billion line of credit with the U.S. 

Treasury in 2013. 

The Farm Credit System has veered significantly from its charter to serve young, 

beginning, and small farmers and ranchers, and now primarily serves large established farms, who could easily obtain credit from the private sector. In fact, the majority of Farm Credit System loans outstanding are in excess of $1 million. Any 

farmer able to take on over $1 million in debt is not a small farmer. Moreover, small 

borrowers accounted for less than 16% of all new Farm Credit System Loans in 

2013. 

Our nation’s farmers and ranchers are a critical resource to our economy. Ensuring that they continue to have access to adequate credit to thrive is essential for 

the wellbeing of our whole nation. America’s banks remain well equipped to serve 

the borrowing needs of farmers of all sizes. An important step in ensuring credit 

availability is to review entities such as the Farm Credit System and ensure that 

they stick to their charter of helping young, beginning and small farmers. 

In my testimony today I would like to elaborate on the following points: 

➢ Banks are the primary source of credit to farmers and ranchers in the United 

States; 

➢ Banks work closely with the USDA to make additional credit available via the 

Guaranteed Farm Loan Program; and 

➢ The Farm Credit System has become too large and unfocused, using taxpayer 

dollars to subsidize large borrowers. 

I. Banks Are the Primary Source of Credit to Farmers and Ranchers in the 

United States 

For my bank and for many of our members, agricultural lending is a significant 

component of their business activities. ABA has studied and reported on the performance of ‘‘farm banks’’ for decades and, we are pleased to report that the performance of these highly specialized agricultural lending banks continues to be 

strong. ABA defines a farm bank as one with more than fourteen percent farm or 

ranch loans (to all loans). 

63 

Farm Banks Exhibit Solid Farm Lending Growth 

Source: Federal Deposit Insurance Corporation. 

At the end of 2013, there were 2,152 banks that met this definition. Farm lending 

posted solid growth during 2013. Total farm loans at farm banks increased by 9.1 

percent to $87.8 billion in 2013 up from $80.4 billion in 2012. Approximately $1 in 

every $3 lent by a farm bank is an agricultural loan. 

Farm production loans grew at a faster rate than farm real estate loans. Outstanding farm production loans grew at a pace of 9.7 percent, or $3.8 billion, to a 

total of $43.0 billion. Farmland loans rose by 8.6 percent, or $3.5 billion, to $44.7 

billion. 

Farm banks are a major source of credit to small farmers—holding approximately 

$45.2 billion in small farm loans (less than $500,000) with $11.5 billion in microsmall farm loans (less than $100,000) at the end of 2013. The number of outstanding small farm loans at farm banks totaled 778,545 with the vast majority— 

over 513,000 loans—under $100,000. 

One area of concern for farm bankers and their customers has been the rapid appreciation in farmland values in some areas of the country. The run up in farmland 

values so far has not been a credit driven event. Farm banks are actively managing 

the risks associated with agricultural lending and underwriting standards on farm 

real estate loans are very conservative. The key consideration in underwriting any 

loan is the ability of the customer to repay regardless of the collateral position in 

the loan. To further manage risk, we regularly stress test our loan portfolios to 

judge repayment capacity under different scenarios. 

After several years of large increases in farmland values, the consensus view 

among bankers I know is that the increase in cropland values has slowed. USDA 

estimates of lower commodity prices in 2014 seem to have cooled off the demand 

for farm real estate somewhat. We watch the farm real estate market very closely, 

as do my customers. Eighty-two percent of farmer and rancher wealth is tied up in 

their real estate. 

II. Banks Work Closely With the USDA’s Farm Service Agency to Make Additional Credit Available by Utilizing the Guaranteed Farm Loan Programs 

I would like to thank Congress, especially the Agricultural Committees, for repealing borrower term limits on USDA Farm Service Agency guaranteed loans. Term 

limits restricted farmer access to capital, and with the expansion of the farm economy over the past 10 years, there are some farmers who are not able to obtain credit from banks like mine without a guaranty from USDA. The USDA’s Farm Service 

Agency guaranteed loan program has been a remarkable success. Today, nearly $12 

billion in farm and ranch loans are made by private sector lenders like my bank 

and are guaranteed by the USDA. There are nearly 43,000 loans outstanding—of 

course some farmers have more than one guaranteed loan, so this number is not 

to be confused with the number of individual farmers and ranchers, but the numbers of individuals accessing credit under this program is very significant. 

This program has grown over the past 5 years, with less than $9 billion outstanding at the close of FY08 to nearly $12 billion today. The loans made by banks 

like mine under this program are modest in size. The average outstanding guaranteed real estate loan is $439,000 and the average outstanding guaranteed non real 


11315018.eps
64 

1Federal Farm Credit Banks Funding Corporation; 2013 Annual Information Statement of the 

Farm Credit System; February 28, 2014. Page F–52. 2Federal Farm Credit Banks Funding Corporation; 2013 Annual Information Statement of the 

Farm Credit System; February 28, 2014, page 23. 

estate secured loan is $250,000. Clearly, we are reaching customers who have modest-sized operations, who are in the process of starting their farm or ranch operation, or who are recovering from some sort of financial set-back. Despite the fact 

that these customers do not have either the earnings or collateral to qualify for conventional credit, losses in the program have been extremely small. Over the last 5 

fiscal years losses have ranged from a high of 0.6% in FY10 to a low of 0.3% in 

FY13. These are extremely low losses—especially for customers who are perceived 

to be a higher risk than other customers, hence the need for the USDA credit enhancement. Bankers who utilize the guaranteed farm loan programs offered by 

USDA know what they are doing and work very closely with their farm and ranch 

customers to properly service these loans. The Farm Service Agency deserves a 

great deal of credit for administering such a successful public/private partnership. 

We urge you to continue to support this very worthwhile program. 

III. The Farm Credit System is a Large Government Sponsored Entity That 

Primarily Serves Large Borrowers at the Expense of Taxpayers 

I mentioned earlier in my testimony that the market for agricultural credit is very 

competitive. I compete with several other banks in my service area, finance companies from all of the major farm equipment manufacturers, several international 

banks, credit unions, life insurance companies, and finance companies owned by 

seed and other supply companies to name a few. The most troublesome competitor 

I face is the taxpayer-backed and tax-advantaged Federal Farm Credit System 

(FCS). The FCS was chartered by Congress in 1916 as a borrower-owned cooperative 

farm lender at a time when banks did not have the legal authority to make longterm farm real estate loans. Over the ensuing 98 years the FCS has received numerous charter enhancements, and has ventured into areas that are not appropriate 

for a farmer-owned farm lending business. 

Today the FCS is a large and complex financial services business with $261 

billion in assets. If it were a bank, it would be the ninth largest bank in the 

United States. It is tax-advantaged and enjoyed a combined local, state, and Federal 

tax rate in 2013 of only 4.5%. According to the Federal Farm Credit Banks Funding 

Corporation, the tax advantages enjoyed by the FCS in 2013 were worth $1.348 

billion or 29% of the Farm Credit System’s net income in 2013.1

The Farm Credit System is a Government Sponsored Entity 

In spite of their size, profitability, and tax advantages the Farm Credit System 

presents the same kind of potential threat to the American taxpayer as Fannie Mae 

and Freddie Mac. As a Government Sponsored Enterprise (GSE) like Fannie Mae 

and Freddie Mac, the American taxpayer is the ultimate back stop should the Farm 

Credit System develop financial problems. This reality was formalized in 2013 when 

the Farm Credit System Insurance Corporation arranged a $10 billion line of credit 

‘‘with the Federal Financing Bank, a Federal instrumentality subject to the supervision and direction of the U.S. Treasury—to which the Federal Financing Bank 

would advance funds to the [Farm Credit System] Insurance Corporation. Under its 

existing statutory authority, the [Farm Credit System] Insurance Corporation will 

use these funds to provide assistance to the System Banks in exigent market circumstances which threaten the Banks’ ability to pay maturing debt obligations. The 

agreement provides for advances of up to $10 billion and terminates on September 

30, 2014, unless otherwise extended.’’ 2

We believe the farmers who own stock of the Farm Credit System—and the American taxpayers who back it—deserve a better understanding of what transpired between the Farm Credit System and the U.S. Treasury last September, but very little 

information is available to the public. Unlike the housing GSEs which are subject 

to reform efforts to lessen the taxpayer’s exposure, the Farm Credit System seems 

to be increasing its dependence upon the U.S. Treasury. 

65 

3 ‘‘FCA’s Annual Report on the Farm Credit System’s Young, Beginning, and Small Farmer 

Mission Performance: 2013 Results’’. Office of Regulatory Policy, June 12, 2014 Board Meeting. 

FCS Loans Going to Large Borrowers 

Source: FCA’s Annual Report of the Farm Credit System’s Young, Beginning and Small Farmer Mission Performance. 

Congress created the Farm Credit System as a public option for farm finance 

when farmers were having trouble getting the credit they needed from non-government sources. The conditions that led to the creation of the Farm Credit System 

nearly 100 years ago no longer exist, and yet we continue have a government assisted, tax advantaged farm lender providing credit to customers who would be able 

to easily borrow from taxpaying institutions like mine. In fact, the heavily subsidized credit that FCS lends goes to those who need it least. Despite amendments 

to the Farm Credit Act of 1980 requiring each FCS lender to have a program for 

furnishing credit to young, beginning and small farmers and ranchers (YBS), the 

share of new YBS loans to total new FCS loans continues to decline—even as the 

assets of the System have expanded enormously. In all categories of YBS lending, 

new young, beginning, and small farm loans continues to steadily drop with small 

farm loans declining the most—from a high of 30% of total new loan volume in 2003 

to just 15.4% in 2013.3 Clearly, those who would benefit the most from the highly 

subsidized credit made available by the FCS are not receiving the benefits that Congress intended them to receive. 

Large Borrows Benefit Most from Farm Credit System Subsidy 

A review of the 2013 Annual Information Statement from the Federal Farm Credit Banks Funding Corporation indicates that 51.3% of all Farm Credit System outstanding loans at the end of 2013 were in excess of $1 million. The Farm Credit 

System does not provide the public with aggregated data by borrower; if they did, 

we would see a much higher percentage of borrowers with debt in excess of $1 million. In addition, the Farm Credit System does not disclose approved, but unfunded 

commitments. If it did, the numbers would be even higher. In short, well more than 

half of the entire Farm Credit System’s portfolio at the end of 2013 was to individuals who owed it much more than a million dollars. 

We do not believe this is the highest and best use of the Farm Credit System’s government sponsorship. Borrowers who can amass over $1 million in credit from 

the FCS do not need taxpayers to subsidize their debt. Again, small farm borrowers, 

according to data supplied by the Farm Credit Administration, accounted for less 

than 16% of all new FCS loans in 2013. 

Moreover, the Farm Credit System has wandered dangerously off course into 

areas of finance that have nothing to do with agriculture, or rural America for that 

matter. Two recent Farm Credit System loans demonstrate this point: 

In 2013, Denver based CoBank, the largest Farm Credit System bank, approved 

a $750 million loan to Verizon. CoBank’s loan was part of a financing package that 

totaled over $6 billion. Financial institutions from all over the world shared a portion of the loan. CoBank was the only government sponsored enterprise to be a participant in the loan. CoBank’s share of the loan was the largest single piece of the 

credit package. The purpose of the loan was to enable Verizon to purchase the portion of Verizon Wireless that it did not already own. The proceeds of the loan, which 


11315019.eps
66 

closed in 2014, went to London based Vodafone, the corporate entity that owned the 

rest of Verizon Wireless. The Farm Credit Administration, the regulator of the FCS, 

has publicly stated that the loan is perfectly legal because Verizon is a ‘‘similar-entity’’ to a rural cooperatively owned telephone company. In other words, since Verizon 

provides telephone services like a rural telephone cooperative, the loan is a legal for 

a Farm Credit System lender to make. 

On June 2, 2014, CoBank entered into a $350 million ‘‘credit agreement’’ with 

Connecticut based Frontier Communications Corporation to help finance a $2 billion 

acquisition by Frontier Communications from AT&T. Frontier Communications is a 

$16 billion publicly traded company. CoBank played a major role in this financing 

package in that they are credited with being the ‘‘administrative agent and lead arranger’’ by Frontier. While we have not seen a finding from the Farm Credit Administration about the eligibility of Frontier Communications to borrow from CoBank, 

we suspect that the regulator will again cite the notion that $16 billion Frontier 

Communications Corporation is ‘‘similar’’ to a rural cooperatively owned telephone 

company. 

What new benefit has accrued to rural America as a result? These loans facilitated corporate deals designed to maximize shareholder returns. In the case of the 

Vodafone buyout, U.S. taxpayer supported money was transferred to European investors. As a banker, I understand the concept of maximizing shareholder wealth, 

but as a taxpayer I have a hard time understanding how the Farm Credit System 

can be involved in these deals and how the regulator of the Farm Credit System 

seems to be working to aid and abet their activities. 

Conclusion 

The banking industry is well positioned to meet the needs of U.S. farmers and 

ranchers. U.S. agriculture has enjoyed one of the longest periods of financial prosperity in history; financially, American agriculture has never been stronger. USDA 

projected that at year-end 2013, farm and ranch net worth was nearly $2.7 trillion. 

This unprecedented high net worth is due in part to a robust increase in farm asset 

values (mainly farm real estate), but is equally due to solid earned net worth as 

farmers used their excess cash profits to retire debt and to acquire additional equipment and additional land. As a result, farmers and ranchers today have the capacity 

to tap their equity should there be a decline in farm profitability resulting in diminished cash flows. While no farmer or rancher wants to take on additional debt, the 

strength of the U.S. farm and ranch balance sheet gives producers options to do so 

if the need arises. 

When the agricultural economy collapsed in the middle 1980s, the banking industry worked closely with farmers and ranchers to restructure their businesses and 

to rebuild the agricultural economy. Since that time banks have provided the majority of agricultural credit to farmers and ranchers. While other lenders, including the 

Farm Credit System, shrank their portfolios of agricultural loans or exited the business altogether, banks expanded agricultural lending. Bankers saw opportunity 

where others did not. Bankers still see great opportunities in agriculture. 

Thank you for the opportunity to express the views of the American Bankers Association. I would be happy to answer any questions that you may have. 

The CHAIRMAN. Thank you, Mr. Wolfe. I am now pleased to recognize one of my constituents who made the trip up from Arkansas, 

the President and CEO of The First National Bank of Wynne, 

Wynne, Arkansas, on behalf of the Independent Community Bankers of America, Mr. Sean Williams. You are recognized for 5 minutes. 

STATEMENT OF SEAN H. WILLIAMS, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, THE FIRST NATIONAL BANK OF 

WYNNE, WYNNE, AR; ON BEHALF OF INDEPENDENT 

COMMUNITY BANKERS OF AMERICA 

Mr. WILLIAMS. Thank you, Mr. Chairman. I appreciate the invitation to be here today and testify. I am Sean Williams, President 

and CEO of The First National Bank of Wynne, in Wynne, Arkansas. And I am testifying today at your invitation on behalf of the 

Independent Community Bankers of America. 

67 

Our bank was established in 1915, nearly 100 years ago. And we 

have branches in five communities, 80 employees and approximately $285 million in assets. Seventy percent of our $150 million 

loan portfolio serves farmers. The remainder serves businesses that 

farmers depend on. We are one of the largest ag focused lenders 

in the State of Arkansas, and serve row crop agriculture, primarily 

rice, soybeans and corn. But cotton, wheat and milo are also grown 

in our area. America’s 7,000 community banks, primarily in rural 

areas and in every—nearly every small town in rural America do 

an outstanding job of providing the credit that farmers and businesses need to be successful in both good times and in bad. Banks 

under $1 billion in assets extend 50 percent of farm operating loans 

and 60 percent of farm real estate loans from the banking sector. 

Corn and soybean prices are declining. Livestock producers will 

do better, but drought is of concern. USDA projects net cash and 

net farm income will be down 22 to 27 percent. We expect about 

a 15 percent drop locally: 2014 expenses will be the second highest 

level on record. Federal Reserve district bank surveys project lower 

income, stable to lower land prices, and higher loan demand and 

slower repayment rates. Rural credit markets remain highly competitive, and banks have ample liquidity for loan demand and want 

to make farm loans. 

We thank you for passing the new farm bill. Crop insurance 

funding is extremely important, with 290 million acres insured. We 

urge Congress not to lower funding or coverage levels. Community 

bankers and rural communities continue to be hampered by the 

CFPB’s definition of rural as it relates to home mortgage lending. 

We have urged the CFPB to fix the rural definition and to better 

align the QM and escrow rules to eliminate this confusion. 

ICBA’s Agriculture-Rural America committee, with bankers in 

every geographical region, recently completed a survey. Credit is 

plentiful. Farm land prices are stable but could decline if commodity prices remain lower. Drought and weather conditions, problems in many states are concerning. The farm bill and crop insurance are vital to extending credit. Reference prices are adequate 

but won’t always cover production costs. And more farm bill details 

and decision making tools are needed. 

Bankers surveyed are alarmed by the Farm Credit System cherry picking. The FCS leverages tax and funding advantages as a 

government sponsored enterprise to undercut the loan rates on 

community banks biggest and financially strongest customers, and 

ignores less creditworthy borrowers. The Farm Credit Act prohibits 

undercutting loan rates. Bank’s larger, more stable borrowers are 

important to bank portfolios, allowing lending risks to be spread 

over both small and large operations. Losing the biggest and the 

best borrowers elevates risk in our portfolios. This diminishes 

bank’s ability to serve agriculture, lessens credit expertise available 

to farmers, lessens credit choices for borrowers, and lessens credit 

availability in rural America. 

The regulator, FCA, wants to allow FCS to broadly make nonfarm loans. The FCS—when FCS will continue—they won’t continue to make farm loans. They want to also now cherry pick the 

best non-farm loans from bank portfolios, although not authorized 

by law. FCA’s proposed mission related investments regulation 

68 

1About ICBA 

The Independent Community Bankers of America® (ICBA), the nation’s voice for nearly 7,000 

community banks of all sizes and charter types, is dedicated exclusively to representing the interests of the community banking industry and its membership through effective advocacy, bestin-class education and high-quality products and services. ICBA members operate 24,000 locations nationwide, employ 300,000 Americans and hold $1.3 trillion in assets, $1 trillion in deposits and $800 billion in loans to consumers, small businesses and the agricultural community. 

For more information, visit www.icba.org. 

would allow FCS lenders to seek approval for broad non-farm lending programs labeled as investments, loan for manufacturing, 

apartments, office buildings and hospitals. The FCA’s apparent lack of awareness of CoBank’s $725 million 

Verizon loan is alarming. Verizon and Vodafone are located in New 

York City and in London. This isn’t a rural loan and isn’t authorized by the statute. FCA’s excuse that this is allowed under the 

similar-entity provision is not credible as this provision isn’t intended to allow enormous non-farm loans for hundreds of millions 

of dollars in size in non-rural areas in the world’s largest cities to 

non-cooperatives or Fortune 500 corporations. We question the 

FCA obtaining a $10 billion line of credit at a time of record profits 

without seeking Congressional approval as recommended in a 

Brookings Institution Report. Why did the FCA act in secret and 

behind Congress’ back? We strongly recommend a series of hearings reviewing these and other questions. The FCS cherry picks the 

best farm loans they now seek to aggressively win for non-farm 

purposes. This diminishes the number of rural lenders in America. 

The FCA actions therefore threaten the availability of credit to 

rural America as this Congress created this GSE. 

Again, thank you. I am happy to respond to any questions. 

[The prepared statement of Mr. Williams follows:] 

PREPARED STATEMENT OF SEAN H. WILLIAMS, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, THE FIRST NATIONAL BANK OF WYNNE, WYNNE, AR; ON BEHALF OF

INDEPENDENT COMMUNITY BANKERS OF AMERICA

Introduction 

Mr. Chairman, and Members of the Subcommittee, thank you very much for the 

opportunity to testify today on a topic of great interest to everyone in rural America 

including particularly the community banking industry. The availability of credit to 

rural America is vital for our nation’s farmers and ranchers, and the thousands of 

community banks that serve rural America. 

My name is Sean Williams. I am President and CEO of the First National Bank 

of Wynne in Wynne, Arkansas. I testify today on behalf of the Independent Community Bankers of America (ICBA). Our bank is a forty-six year member of ICBA.1 Our 

bank is a long-time member of the Arkansas Community Bankers Association. 

First National Bank of Wynne 

Wynne is located approximately 60 miles northwest of Memphis, or 120 miles 

northeast of Little Rock. First National Bank of Wynne was established in 1915, 

providing financial services for almost 100 years. Our bank has branches in five 

communities throughout the region; nearly 80 employees; approximately $285 million in total assets and a $150 million loan portfolio. Seventy percent of our loans 

focus on farmers and the remainder serves businesses that supply farmers or are 

depend on their financial health for survival. 

On a personal level, agriculture and the availability of credit are very important 

to me. I was born and raised on a farm in a northeast Arkansas community near 

McCrory. My father, grandfather and I raised rice and soybeans. I worked on the 

farm while attending college and also for several years after beginning to work in 

the financial services industry. My farming background led me to pursue both a 

bachelors and masters degree in agricultural business and economics from Arkansas 

State University. 

69 

Focus of Our Testimony 

Mr. Chairman, our testimony this morning focuses on how our bank and community banks in general serve rural America; the key factors that influence credit 

availability in rural America; the effects of competition in influencing credit availability and the results of a brief survey conducted with ICBA’s Agriculture-Rural 

America committee. 

However, I want to stress up-front the vast majority of bankers believe credit 

availability is plentiful and competition for loans is intense. To the benefit of farmers and ranchers, interest rates are at or near historically low levels. 

Serving Our Community; Serving Agriculture; Serving Main Street 

Like most community banks, our bank’s employees serve our communities by volunteering in many civic organizations, churches, city councils, school boards, and 

other activities. 

First National Bank is one of the largest agricultural lenders in the State of Arkansas. Our employees know the people who bank at First National Bank and care 

about their success. We are predominately a farming region where the economic impact of farmers and their success is critical to the economic fortunes of our communities. Our market is row crop agriculture where rice, soybeans and corn are produced. Cotton, wheat and milo are other crops raised in our area. First National 

Bank provides the vital credit that farmers need to be successful. 

On a broader scale, community banks play an important role in the nation’s economy. There are approximately 7,000 community banks in the U.S. and the vast majority of these are located in communities of 50,000 or fewer residents. Thousands 

of community banks are in small, rural, and remote communities across our nation. 

While community banks comprise just 20 percent of the banking industry’s assets, 

institutions with less than $10 billion in assets provide nearly 60 percent of the industry’s small-business loans. According to the Federal Deposit Insurance Corporation’s third quarter 2013 industry data, small-business lending at banks with less 

than $1 billion was up 3.8 percent from the previous quarter and 3.0 percent from 

the previous year. 

This is important since small businesses represent an astounding 99 percent of 

all employer firms and employ 1⁄2 of the private sector workforce. In addition, the 

more than 26 million small businesses in the U.S. have created 70 percent of the 

net new jobs over the past decade. Small businesses are important in rural America 

since many farmers and/or their spouses have off-farm jobs. As small businesses 

ourselves, community banks specialize in small business relationship lending. When 

our customers do well, community banks do well. 

Community banks under $500 million in assets extend about 50 percent of all agricultural credit from the banking sector. In addition, commercial banks under $1 

billion in asset size extend approximately 56 percent of non-real estate loans to the 

farm sector and about 62 percent of all real estate credit from the banking sector. 

Farm Bill and Crop Insurance 

There are a number of factors that determine whether credit is available in rural 

America. Congress achieved an important objective in February when the President 

signed the new farm bill into law. The farm bill includes a number of programs that 

provide an economic safety net for the nation’s farmers and ranchers. 

These programs will provide farmers the choice of reference prices, formerly 

known as target prices, or the new Agriculture Risk Coverage (ARC) program on 

either a whole farm basis using individual farm data or an individual crop basis by 

using county based data. Cotton producers will have a new STAX program. The cyclical nature of agriculture and the uncontrollable risks of severe adverse weather 

combined with unknown commodity prices and costs of production expenses require 

a continued safety net for farmers and ranchers. 

These programs are intended to complement a strong crop insurance program 

going forward and supplement crop insurance by providing support in periods of 

multi-year price declines and helping producers cover the crop insurance policy’s deductible. 

In 2013, over 86 percent of insurable acreage was covered by Federal crop insurance in the U.S., over 290 million acres. Crop insurance protected $1.6 billion of 

cropland in Arkansas last year. Crop-hail insurance provided an additional $1.5 billion in liability insurance for Arkansas crops. This is very important since nearly 

90 percent of Arkansas farms are less than 500 acres in size. 

Crop insurance is essential as it allows community banks security for loan repayments if disastrous weather strikes. It is very important that Congress not diminish 

the crop insurance program by adopting amendments that restrict the ability of producers to enroll or discourage producers from obtaining high levels of coverage. 

70 

Guaranteed Loan Programs 

The farm bill also continues the important guaranteed operating loan and guaranteed farm ownership (real estate) loan programs. Importantly, as ICBA requested, 

the farm bill also wisely removes the arbitrary 15 year term limit on guaranteed 

operating loans. This change ensures thousands of family farmers can continue 

farming utilizing credit extended by private sector community banks. 

We are pleased the agriculture appropriations bills also contain funding levels 

adequate to meet loan demand. These programs are almost entirely self-funding. 

The farm bill’s farm programs, combined with guaranteed loan programs and a 

strong crop insurance program are essential elements allowing community banks to 

ensure adequate credit is available to our nation’s farmers and ranchers. 

Farmer Mac 

Another important tool for agricultural lenders is Farmer Mac, the secondary 

market for agricultural real estate loans and rural residential mortgages. Farmer 

Mac offers community bankers the opportunity to provide farm customers access to 

longer term, fixed rate mortgages. These loans, when sold to Farmer Mac’s secondary market, allow lenders to replenish their existing funds so they can then 

make additional loans. As interest rates rise in the future, which they inevitably 

will, Farmer Mac will become an even more important program as farmers seek to 

lock in long term rates. 

Some Concerns for Agriculture 

A farm safety net is vital to agriculture and rural America due to the uncertainty, 

volatility, weather and cyclical nature of agriculture. Many farmers and ranchers 

and their lenders were concerned at the start of this year about the potential for 

lower farm income. In some areas, lower farm income is expected due to the severe 

drought impacting many Western states. In other areas, a large corn crop is expected to continue the downtrend in corn prices which began last year. Soybean 

prices are expected to be down as well. 

Net Farm Income and Net Cash Income, 2000–2014F 

Note: Data for 2013 and 2014 are forecasts. 

Source: USDA, Economic Research Service, Farm Income and Wealth 

Statistics. 

Data as of February 11, 2013. 

http://www.ers.usda.gov/ersDownloadHandler.ashx?file=/media/ 

1013171/net-farm-income-and-net-cash-income.png 

For example, USDA projects that net farm Income will decrease about 27 percent 

in 2014 to approximately $96 billion led by a projected $11 billion decline in corn 

receipts and a $6 billion decline in soybean receipts. Net cash income, projected at 

$102 billion, is projected to be down 22 percent from the $123.5 billion achieved in 

2013. 

Although USDA notes net farm income will still be $8 billion above the previous 

10 year average, we point out the last time we testified before this Subcommittee 

in 2012, the net farm income projection was $16 billion above the previous 10 year 

average. 

Although production expenses will be down slightly, by about $4 billion, 2014 is 

expected to still mark the second highest year ever for production expenses and 


11315020.eps
71 

2Federal Reserve Bank of Saint Louis, Agricultural Finance Monitor, First Quarter, 2014. 

http://research.stlouisfed.org/publications/afm/2014/afmq1.pdf. 3 Burgundy Book, A Report on Economic Conditions in the Little Rock Zone, First Quarter, 

2014. 

farmers and ranchers have witnessed an 85 percent increase in production expenses 

from 2002 to 2013. 

Additionally, USDA’s Economic Research Service (ERS) noted recently that high 

operating costs, along with a sharp drop in prices, contributed to an 18 percent decline in net returns to corn operators from 2012 to 2013. 

Fortunately, the ag economy has experienced record price levels in recent years 

allowing many farmers to pay down their debt load. Livestock producers are also 

now benefitting from lower feed costs and higher prices providing them much needed profits. The rapid rise in farmland values has slowed or stalled meaning that 

land prices are expected to be stable or slightly decline in the near future if crop 

prices continue declining or remain below the cost of production. 

Federal Reserve Agriculture Perspectives 

The Federal Reserve districts conduct quarterly surveys of agricultural bankers 

to determine their views on agricultural credit conditions. We have summarized a 

few of these surveys from the first quarter of 2014. 

Little Rock Zone Ag. Bankers’ Expectations Q1–14 vs. Q1–13 

Lower Higher Net 

Loan demand 20 20 0 

Available funds 0 20 20 

Loan repayments 20 0 ¥20

Farm income 29 14 ¥14

Capital expenditure 29 29 0 

Federal Reserve Bank of St. Louis Survey of Agricultural Credit Conditions 2–3

Producers are concerned about lower corn and soybean prices and high input 

costs. Lower feed prices will help producers retain cow herds. Quality farmland 

prices fell slightly in the first quarter, a reversal of the gain reported in the fourth 

quarter of 2013. However, quality farmland prices in the first quarter were 7.5 percent higher than a year earlier. Bankers continue to expect farm income and quality 

farmland values to decline over the next 3 months compared with year-earlier levels. 

Interest Rates 

2014:Q1 2013:Q4 Change 

Interest Rates (%) 

Operating: 

Fixed 5.28 5.39 ¥0.12 

Variable 4.84 5.01 ¥0.17 

Machinery/Intermediate term: 

Fixed 5.53 5.65 ¥0.12 

Variable 5.02 5.21 ¥0.19 

Farm real estate: 

Fixed 5.20 5.23 ¥0.03 

Variable 4.77 4.93 ¥0.16 

Similarly, bankers also expect farm household expenditures and farm equipment 

expenditures in the second quarter to be lower than a year earlier. The Saint Louis 

Fed noted their survey included an important conclusion: The vast majority of bankers’ indicated the expectation of lower farm income in 2014 has not changed the 

highly competitive agriculture loan market. 

72 

4Federal Reserve Bank of Kansas City, Survey of 10th District Agricultural Credit Conditions, 

First Quarter, 2014. http://www.kc.frb.org/research/indicatorsdata/agcredit/#/articles/research/agcredit/05-15-2014/farm-income-land-values-soften-further.cfm. 5Federal Reserve Bank of Minneapolis, First Quarter 2014 Agricultural Credit Conditions 

Survey, http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=5318. 6The Agricultural Newsletter from the Federal Reserve Bank of Chicago, Number 1964, May 

2014 http://chicagofed.org/digital_assets/publications/agletter/2010_2014/may_2014.pdf. 

Federal Reserve Bank of Kansas City 10th District Agricultural Credit Conditions 4

Crop producers faced tighter profit margins although livestock producers experienced improved profits. Lower corn and soybean prices and relatively high input 

costs limited farm income and cropland values. Winter wheat growers were concerned poor yields would limit profits despite a rally in wheat prices. With lower 

income, more crop producers borrowed to pay for operating expenses. Bankers saw 

higher levels of carry-over debt versus a year ago. 

Cropland prices have generally stalled due to expectations of lower profits. The 

value of nonirrigated farmland dipped 1.4 percent from the fourth quarter of 2013 

to the first quarter of 2014, and irrigated farmland values rose just 0.5 percent. 

Higher incomes for livestock producers resulted in slight increases in ranchland values. 

Funds for farm loans remained sufficient to satisfy additional borrowing and interest rates on farm loans remained steady. Most bankers indicated collateral requirements were unchanged despite a slight decline in loan repayment rates. 

Federal Reserve Bank of Minneapolis Agricultural Conditions Survey 5

Reduced crop prices and high input costs continue to take a financial toll on farmers and may be putting downward pressure on land prices. The outlook for the second quarter of 2014 is downbeat, with bankers predicting further declines in incomes, capital expenditures and household spending. Bankers indicated crop producers face tighter profit margins but livestock producers are more profitable with 

lower grain prices. 

Even with the drop in incomes, agricultural producers maintained their rate of 

loan repayments, but renewals increased slightly. Loan repayments were unchanged 

for 75 percent of bankers, while 13 percent reported repayment rates decreased. 

A quarter of lenders reported increased loan demand, while another 2⁄3 experienced no change. The amount of required collateral increased slightly, with 92 percent of bankers reporting no change. After several years of very strong growth land 

prices have moderated, a trend that continued in the first quarter. Values decreased 

in some cases along with cash rents. Land values fell the most in Minnesota, where 

nonirrigated cropland prices dropped eight percent compared with a year earlier. 

Federal Reserve Bank of Chicago AgLetter 6

Increases in farmland values in some areas contrasted with decreases in others. 

Demand to purchase agricultural land was weaker in the 3 to 6 month period ending March 2014 than 1 year earlier, yet pockets exist where farmers remained interested in buying more land. 

Percent Change in Dollar Value of ‘‘Good’’ Farmland 

January 1, 2014 to April 

1, 2014 

April 1, 2013 to April 1, 

2014 

Illinois ¥4 0 

Indiana ¥4 +7 

Iowa +1 ¥2 

Michigan ¥3 ¥1 

Wisconsin +1 +2 

Seventh District ¥1 +1 

Demand for non-real-estate loans was up relative to a year ago for a second 

straight quarter, which hadn’t occurred in 4 years. The availability of funds to lend 

improved compared with a year earlier, but repayment rates for non-real-estate 

farm loans were lower than a year ago. There were higher levels of renewals and 

extensions of these loans. The average loan-to-deposit ratio remained close to 67 

percent for the third quarter in a row. Interest rates moved lower during the first 

quarter and a record low rate was set for feeder cattle loans. The livestock sector 

returned to profitability as milk, hog and cattle prices rose sharply (31 percent, 48 

73 

percent and 19 percent) since April 2013. Lower feed costs raised livestock profits 

helping support farmland values in some areas. 

Survey Results of ICBA’s Agriculture-Rural America Committee 

ICBA conducted a survey of its Agriculture-Rural America committee in June to 

get our bankers’ views on credit availability in rural America. ICBA’s AgricultureRural America committee consists of twenty-five bankers from every geographical 

region of the U.S. representing most agricultural commodities produced in the 

United States. 

The survey asked bankers whether credit is plentiful, adequate or constrained in 

their area. No bankers felt credit was constrained and nearly all members stated 

credit was plentiful in their marketplace. We asked banks if they would desire to 

make more agricultural loans if demand existed. All bankers stated they desired to 

make more agricultural loans. 

Record high commodity prices over the past 4 years, combined with good yields 

in many areas, has generated significant cash for producers, allowing them to pay 

down term debt, pay cash for capital purchases and has reduced the need to borrow 

for operating expenses. Banks are very liquid, allowing them ample funds to make 

more farm and rural loans. Regulators, of course, want to ensure that farm loans 

can cash flow. 

We asked bankers if they believed their customers’ farm income and farmland values would increase, decline or remain stable. Generally, bankers stated farm income 

and farmland values would decline or remain stable. Some bankers felt farm income 

would increase, reflecting their customers’ involvement in livestock operations. 

A large majority of bankers responded crop insurance is essential, allowing them 

to make loans to farmers and most bankers could not extend loans to most customers without the assurance of repayment which crop insurance provides. As a 

banker stated, ‘‘our ability to lend would be hurt dramatically without crop insurance.’’ 

Regarding farm bill programs, most bankers felt the farm bill was also indispensable to their ability to make farm loans. Regarding program options, most bankers 

felt the new reference prices were adequate but would not cover production costs. 

Most bankers also felt there was not enough information for customers to choose 

which farm program to sign up for. Most banks said they would work with their 

customers to help them decide farm program options. 

Farm Credit System Abuses 

We asked bankers several questions related to activities of the Farm Credit System (FCS). FCS is a tax advantaged, government sponsored enterprise given tax 

and funding advantages by Congress in the early years of the previous century. The 

expectation was that FCS would provide farmers and ranchers access to credit at 

a time when such access was much more limited than today, particularly for longterm, fixed-rate financing. However, the banker responses discussed below are quite 

troubling in terms of FCS abuses of their GSE advantages. 

We asked bankers whether they had lost loans to the FCS and if so, was this a 

result of the FCS undercutting banks on their loan rates or a result of the FCS providing better service? Nearly all bankers said they had lost loans to the FCS and 

this was a result of FCS undercutting loan rates and in no case did bankers say 

that FCS provided better service. 

Next, we asked if banks had lost loans to FCS due to FCS undercutting loan 

rates, was FCS targeting primarily the bank’s financially strongest customers or a 

broad mix of customers based on financial strength. Nearly all bankers stated that 

FCS exclusively targets their best customers in terms of financial strength. As one 

banker stated, ‘‘I haven’t seen FCS take any customers except the best and the biggest.’’ 

We asked bankers whether FCS was making non-farm loans in their marketplace. 

Several banks stated that FCS was indeed making non-farm loans. An example provided were FCS lenders making rural hospitals loans (an authority the FCS has 

never been granted by Congress). 

The Harmful Impact of FCS Actions on Credit Availability to Rural America 

We asked bankers if FCS activities undermine community banks’ ability to make 

agricultural credit available in their market. Bankers believed this is the case and 

noted FCS targets the best operations, attracting these businesses through low rates 

which community banks are unable to match since they lack the tax and funding 

advantages of a GSE. Community banks cannot match the below market rates FCS 

offers to the best customers and still remain profitable. One banker noted there is 

74 

stiff competition among all banks in his area; however, they cannot match the low 

rates offered by the FCS to the best customers. 

The large, more stable operations are important to community bank portfolios as 

they spread lending risks over both small and large operations. By targeting the 

large and financially strongest borrowers, FCS elevates the risks in community 

banks’ farm loan portfolios. 

As one banker explained, ‘‘Almost every community and regional bank in our market is more than willing to make agricultural loans (operating, equipment and real 

estate), yet find ourselves undercut by FCS in all those categories.’’ 

As another banker stated, ‘‘Not only is there an issue with FCS lenders cherry 

picking the best loans in community bank portfolios, but also when FCS urges the 

newly acquired customers to move their deposit accounts to one of the large banks, 

thus taking deposits out of local, small communities and hurting the economic base 

of these remote, rural communities. This hurts community banks’ ability to loan 

funds locally because of lower deposit balances.’’ 

Another example of a questionable lending practice by the FCS was a banker’s 

comment noting they had lost a large real estate loan to the FCS because FCS was 

willing to take a minimal down payment while financing 93 percent of the real estate debt. The banker noted this is the type of practice common in the 1980s that 

led to the ag credit crisis and does not put borrowers in a healthy financial position. 

Borrowers with heavy debt loads ultimately lost farms in the 1980s. 

FCS almost exclusively targets top borrowers; offers these targeted borrowers 

below market rates and is willing to fix those below market rates at longer terms. 

By taking top borrowers from community banks, FCS weakens the overall community bank portfolio, and leaves the less seasoned/younger borrowers and higher leveraged borrowers with community banks. Similarly, if community banks stretch to 

keep top borrowers, community banks must accept less return and assume more interest rate risk by fixing the rate for a longer period. 

Bankers typically stated the FCS largely ignores young, beginning and small 

farmers. As one banker stated, ‘‘FCS wants us to get these types of farmers started 

first and then later attempts to take them away once they become financially 

stronger.’’ 

FCS Mission Creep 

We remind the Subcommittee the FCS is a GSE, granted several unique advantages not afforded to the private sector. These advantages were intended to allow 

the FCS to serve the specialized niche of agricultural producers and their cooperatives. However, we are seeing the FCS run amuck into non-farm related activities. 

The FCS’s regulator, the Farm Credit Administration (FCA), is complicit in aiding 

and abetting this unauthorized behavior. The FCA works hand-in-hand with FCS 

to expand the customer base of the FCS even though Congress has said no to the 

FCS’s non-farm legislative agenda. 

Illegal Investment Schemes: Through its ‘Investments in Rural America’ (i.e., 

also termed by FCA as ‘mission related investments’) proposal, the FCA has sought 

to grant FCS powers to engage in practically all types of non-farm lending. These 

activities were initially granted as ‘pilot projects’ enabling FCS lenders to engage 

in loans to hospitals, commercial offices (doctors, lawyers), manufacturing, apartment complexes, hotels and motels, etc. While their initial proposal to grant national, blanket authority by regulation for these activities was withdrawn, the FCA 

is now proposing allowing these same activities if approved by FCA on a case-bycase basis. We point out these are loans, not ‘investments’ and they are inconsistent 

with the statute’s focus on agricultural based lending. FCA needs to stop playing 

name games, calling loans ‘investments’ and stick to the laws Congress passed. 

$725 Million Verizon Loan: Additionally, the FCA apparently was unaware that 

CoBank, the FCS’s large lender to cooperatives, had made a $725 million loan to 

Verizon to buyout Vodafone’s interest in a joint venture. Verizon and Vodafone are 

headquartered in New York City and London and this extremely large loan was not 

rural-based, nor is it an allowable lending activity. While the FCA has excused this 

illegal loan as eligible under the Farm Credit Act’s ‘similar-entity’ provision, this 

provision was never intended to allow FCS lenders to make loans that are completely different from loans that are eligible under the statute. FCA is again abandoning their regulatory oversight responsibilities in an effort to go to any length 

necessary to allow FCS lenders to make whatever types of non-farm loans they desire. 

$10 Billion Line of Credit: On September 24, 2013, the Treasury Department, 

through its Federal Financing Bank, entered into a $10 billion note purchase agreement with the Farm Credit System Insurance Corporation (FCSIC) to establish a 

standby line of credit to provide FCS lenders funds at the Treasury’s cost of funds. 

75 

7The Brookings Institution: Farm Credit System Liquidity and Access to a Lender of Last Resort, Report for the Farm Credit System Insurance Corporation, page 8, Kohn and McGarry; 

http://www.brookings.edu/∼/media/research/files/papers/2012/11/06%20farm%20credit%20 

system%20liquidity%20kohn/06%20farm%20credit%20system%20liquidity%20kohn.pdf. 

This line of credit, which the FCA sought in secret, raises a number of serious questions. For example, why did the FCA seek a $10 billion line of credit at a time when 

FCS lenders were reporting record profits of $4.64 billion in 2013? Why did the FCA 

not seek Congressional approval? 

When the FCS failed in the 1980s, the farmland values which the FCS utilized 

as collateral had collapsed. Yet, the $10 billion line of credit, according to FCA is 

‘‘collateralized’’ meaning that the collateral backing for this line of credit could be 

dramatically reduced. If the FCS were to collapse, as it did in the 1980s, American 

taxpayers would be on the hook for the bailout. 

It would appear the FCA and FCS desired to lower their borrowing costs even further by acquiring this line of credit. The FCSIC was created to collect premiums 

from FCS institutions as a backstop in the event of financial deterioration within 

the System. Why then did the FCA seek and obtain a line of credit from the Treasury’s FFB as additional protection? 

Further, a report 7 to the FCSIC prepared by the Brookings Institution on behalf 

of the FCSIC stated: ‘‘FCS should be required to approach the Congress and the Administration for legislative help (emphasis added).’’ Yet, FCA did not go to Congress but secretly went to the Treasury to obtain the line of credit. 

Mr. Chairman, we could raise a number of additional issues regarding FCS 

abuses. We believe these types of issues and questions warrant a series of separate 

hearings. 

There are many concerns Congress should explore in their oversight capacity of 

the FCS. Understandably, Congress has been knee-deep in writing a farm bill in recent years. However, Congress should not lose sight of this GSE’s activities particularly when Congress is debating what to do with the housing GSEs. Certainly this 

GSE needs to have greater scrutiny. 

Conclusion 

Mr. Chairman, thank you for the invitation to testify. As explained, there is a 

plentiful amount of credit available to farmers and ranchers at very low interest 

rates. Community bankers and their customers will continue to look forward to implementing the new farm bill and we thank you for your hard work on the legislation. We also thank you for ensuring a strong crop insurance program and continuing the guaranteed loan programs with greater flexibility. 

However, more attention and scrutiny needs to be paid to the FCS’s inappropriate 

activities and their unauthorized actions as well as to the FCA’s laissez-faire attitude towards regulating the mission of this GSE, particularly the expansion of their 

scope and eligibility parameters. 

The purpose of today’s hearing is to examine credit availability in rural America. 

However, the actions of the FCS undermine the availability of credit in rural America as they seek to drive out other providers of credit by leveraging their unique 

GSE advantages in their efforts to lend to the very best customers and often ignoring producers in a weaker financial position. Is that really what the purpose of a 

GSE should be? 

We look forward to working with you in the future. Thank you. 

The CHAIRMAN. Thank you, Mr. Williams. I now recognize Mr. 

Brett Melone, Loan Officer, California FarmLink, Santa Cruz, California, on behalf of the National Sustainable Agriculture Coalition. 

Mr. Melone, you are recognized for 5 minutes. 

STATEMENT OF BRETT MELONE, LOAN OFFICER, CALIFORNIA 

FARMLINK, SANTA CRUZ, CA; ON BEHALF OF NATIONAL 

SUSTAINABLE AGRICULTURE COALITION 

Mr. MELONE. Thank you. Good morning, Chairman Crawford, 

Members of the Committee. It is an honor and a pleasure to address you this morning and talk about credit availability in particular for small, beginning and socially disadvantaged farmers. 

Again, my name is Brett Melone. I am a loan officer with California FarmLink. We are a nonprofit agricultural lender based in 

76 

Santa Cruz, California. And, again, a member of the National Sustainable Agriculture Coalition. 

FarmLink’s mission is to link independent farmers in California 

with the land and financing that they need to be successful. We 

provide micro and small business loans, lines of credit and technical assistance. As a statewide nonprofit, our—the farmers that 

benefit from our lending are primarily low to moderate income 

farmers, about 1⁄3 are very low income. We do take advantage of 

the Federal programs available to us to serve this population, in 

particular FSA guaranteed program, the rural micro-entrepreneur 

assistance program, and recently within the last year became a certified community development financial institution, one of the few 

agriculturally focused CDFIs in the country. 

The typical assistance services and financial products that we 

provide have a strong focus on high risk populations. FarmLink’s 

development services focus on farm financing, cash flow protections, credit counseling, financial management and land access 

strategies. We see this technical assistance as critical not only to 

their business’ success but simply for them to be able to access the 

financing that they need to grow their businesses. Due to the cost 

of making these micro and small loans, most banks and commercial 

lenders don’t want to make them. Building a pipeline of viable 

loans requires relationships with farming communities that commercial lenders generally lack. And, again, it takes time in the 

form of technical assistance to get applicants to the point where 

they can actually qualify. 

As we have heard, the FSA microloan program became permanent, and we applaud that. I think this is really going to help increase access to capital for this farming population, and in addition 

the lifting of the term limits so that beyond the microloans they 

will be able to have full access to those programs. The increased— 

we would like to thank the Agriculture Appropriation Subcommittee for increasing funding for FSA direct loans, and also ask 

you to think about as FSA seeks to continue access to credit for 

farmers who have not historically used FSA loans, it will be imperative to ensure FSA has the administrative and staffing resources 

to serve this growing demand. 

As the first organization in the country to offer agriculture individual development accounts and a champion of the effort to establish a national program, we are pleased to see the reauthorization 

of this program in the 2014 Farm Bill. And we urge you to work 

with your colleagues on the Appropriations Committee to fund this 

program for $2.5 million in Fiscal Year 2015. 

The 2014 Farm Bill authorized USDA to develop the WholeFarm Revenue Protection Program, and this is a welcome addition 

to the risk management toolkit for sustainable and organic producers, a segment of American agriculture that has historically 

been under-served by crop insurance. It is an important tool, crop 

insurance is, for lenders in mitigating their risk. And we urge you 

to work with the USDA to expand the coverage of this program nationwide, in our area in particular. Sustainable and organic growers have been left out of this program currently. 

Section 6025 of the farm bill was revised and renewed. And this 

is Strategic Economic and Community Development. And we enVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00080 Fmt 6633 Sfmt 6601 I:\DOCS\113-15\88547.TXT BRIAN
77 

courage you to work with the USDA in shaping how this program 

will serve the community and regional needs of agriculture and 

particularly around sustainable and organic where we are seeing 

significant growth in California. 

The Rural and Micro-Enterprise Assistance Program was reauthorized in the farm bill with $15 million in mandatory funding 

over the 5 year cycle. We would also like to see an additional $3 

million per year in discretionary funding for that program to meet 

the demand. 

The Microloan Cooperative Lending Pilot Project, which we 

heard a little bit about earlier as well, we think this is going to 

really help FSA reach the farmers that are difficult to reach, serve 

them in a way that is going to meet their needs. So we urge USDA 

to work with partners to shape that program in providing underwriting support, guarantees and the like. 

Thank you, Chairman Crawford. 

[The prepared statement of Mr. Melone follows:] 

PREPARED STATEMENT OF BRETT MELONE, LOAN OFFICER, CALIFORNIA FARMLINK, 

SANTA CRUZ, CA; ON BEHALF OF NATIONAL SUSTAINABLE AGRICULTURE COALITION

Introduction 

Chairman Crawford, Ranking Member Costa, and Members of the Agriculture 

Subcommittee on Livestock, Rural Development and Credit, thank you for this opportunity to provide information about credit availability in rural America. 

My name is Brett Melone. I am a loan officer with California FarmLink. 

FarmLink is a nonprofit lender based in Santa Cruz, California. FarmLink is also 

a member of the National Sustainable Agriculture Coalition. My remarks reflect the 

credit needs of farmers in California as well as nationally. 

Both of my parents worked in agriculture when I was growing up in South Florida. I have dedicated my professional career to supporting the success of beginning, 

minority and small farmers, primarily in California, though I have been involved 

in national policy efforts, and spent a number of years living in Latin America as 

well. My commitment to these farmers comes from my first-hand knowledge of their 

ability to make a living in agriculture, provide jobs for others, feed the country, and 

steward our natural resources. This is what I am passionate about, and it is clear 

to me that a key factor in this farmer population being able to realize these goals 

is their ability to access capital. 

Much has been done over the last several decades to create programs that provide 

business development services and access to credit programs for small businesses. 

Since the financial crisis this effort has increased. Microloans are now part of the 

vernacular for anyone that is interested in economic development. Crowd funding 

is also becoming commonplace. We are even hearing more about policy efforts to 

allow Direct Public Offerings, where individuals who are not certified investors can 

invest their savings in ‘‘Main Street’’ or in our case, regional farms. 

Despite all of this activity and progress, there are still gaps between what farmers 

with $1 million or less in revenue can access in terms of capital. FarmLink recognized these gaps several years ago, and is now in its fourth year of direct lending 

to small, sustainable farmers. In 2011 we obtained Standard Eligible Lender status 

with the Farm Service Agency, and began making Rural Microentrepreneur Assistance Program loans. In 2013 we became a certified Community Development Financial Institution, one of just a handful nationwide that focus on agricultural lending. 

California FarmLink is a statewide nonprofit serving Low-Income Targeted Populations (LITP) throughout the State of California with three regional offices in the 

North Coast, Central Valley and Central Coast. FarmLink’s mission is to link independent farmers and ranchers with the land and financing they need for a sustainable future. FarmLink provides business development services, microloans, small 

business loans and small lines of credit. 

FarmLink serves a target market across California of immigrant and other underserved beginning and small farmers. Since 2011, FarmLink has made more than 80 

loans, deploying $1.5 million in capital to farmers, with an average loan size of 

$25,000, and loan size range of $5,000 to $100,000. In 2012, 63% of FarmLink’s cliVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00081 Fmt 6633 Sfmt 6621 I:\DOCS\113-15\88547.TXT BRIAN
78 

1Shute,‘‘L.L.’’ (2011) Building a Future with Farmers: Challenges Faced by Young, American 

Farmers and a National Strategy to Help Them Succeed. 

ents were at or below 80% of the Area Median Income (AMI) and approximately 

24% were very low-income, at or below 30% AMI. 

There are very few sources of small agricultural loans available to low-income and 

beginning farmers. The target market has a difficult time securing land and/or financing due to: limited history as entrepreneurs; limited traditional collateral; no 

or limited credit history; small loan size required; language or cultural barriers; and 

non-traditional marketing and business models. 

The barriers to entry and to gaining stability for new and beginning farmers are 

formidable. According to the 2012 USDA Census of Agriculture, the average age of 

California’s farmers has increased to 60. At the same time, beginning farmers lost 

ground. From 2007 to 2012, California lost more than 6,000 beginning farmers, a 

23% drop, largely due to the economic downturn starting in 2008. 

FarmLink knows from experience that the first 5 years of farming are the most 

critical. Many start-up farmers have developed solid production skills, but have not 

developed an ideal mix of market options, economies of scale, or business savvy to 

survive. While the number of beginning farmers declined over the last 5 years, the 

number of Latino farmers, many of them immigrants, increased by 8% to almost 

10,000 farmers throughout California. In fact Latinos comprise about 70% of 

FarmLink’s borrowers and 40% of farmers who receive one-on-one technical assistance on finances and land tenure. 

Clearly, small farmers lack capital to expand. In a 2011 survey of 1,000 beginning 

farmers conducted by the National Young Farmers Coalition, 78% identified lack of 

capital as the biggest challenge to achieving success.1 As the number of small and 

beginning farmers continues to grow, the financial products and technical assistance 

services offered by FarmLink are essential to ensure that these growers succeed. 

FarmLink has made more than half of its loans in Monterey and Santa Cruz 

counties where farm labor income is seasonal and closely tied to minimum wage, 

creating endemic poverty in spite of chronic, seasonal labor shortages. Unemployment in Monterey County peaked at 17.5% 2 years ago in the winter months and 

peaked this past winter at 15%. Workers earning subsistence wages turn to self-employment in agriculture as a way to increase their income. These small and beginning farmers need access to capital and technical assistance to start, stabilize, or 

expand their farming business. 

FarmLink’s technical assistance services and financial products have a strong 

focus on higher risk populations. FarmLink development services focus on farm financing, cash flow projections, credit counseling, financial management and land access strategies. Our experience shows that one-on-one technical assistance and 

training is effective in helping farmers establish, operate and expand strong farm 

businesses and access and manage loans. 

National Credit Context 

FarmLink is part of a nascent movement of CDFI’s working with farmer networks, and in particular, farmer networks that serve beginning farmers, farmers of 

color, immigrant farmers, and other farmers that have difficulty accessing credit 

through traditional means. 

Current research funded by the Kellogg Foundation and being conducted by 

Michigan State University’s Center for Regional Food Systems has documented the 

fact that very few farmer networks, and in particular farmer of color networks, are 

aware of the mission, structure and function of CDFIs. At the same time, even those 

CDFIs that have taken steps to increase their agricultural lending admit to having 

limited knowledge of the farming sector. 

This research points to the need to be intentional, at a national level, to build 

the capacity of CDFI and other community lenders to serve agriculture. Specifically, 

the research recommends creating an agricultural lending caucus among CDFI’s and 

Farmer of Color Networks that focuses on the development of short and long term 

policies and best practices, including designated funding for farmer network projects 

modeled after the Healthy Food Financing Initiative. 

Due to the cost of making micro and small loans, most banks and commercial 

lenders don’t want to make them. Building a pipeline of viable loans requires relationships with farming communities that commercial lenders generally lack. It takes 

time, in the form of technical assistance, to get the applicants to a point where they 

are ready to apply, and the underwriting requires knowledge of direct and alternative markets, that commercial lenders typically don’t have. 

79 

Important Federal Policy Changes 

Policy changes within the USDA, and in large part led by this Committee, have 

created opportunities for FarmLink and other community-based lenders, to begin to 

address the need for capital among this under-served farmer population. 

On behalf of California FarmLink, the National Sustainable Agriculture Coalition, 

and NSAC’s member organizations, and the farmers that we serve, I’d like to genuinely thank the Members of this Committee for their commitment to improving and 

increasing access to capital for beginning, small and minority farmers. 

The FSA Microloan program that started out as a pilot program is now permanent—thanks to the efforts of this Committee during debate of the 2014 Farm Bill. 

Microloans made to beginning and veteran farmers will now be exempt from the 

term limits that otherwise apply on all direct operating loans. This important 

change will allow these farmers to continue to take advantage of Federal credit resources as they continue to grow their farm operations in the future. 

Additionally, the Microloan Cooperative Lending Pilot Projects provision will 

allow USDA to work with nonprofit community lenders to expand access to 

microloans and financial training for small, beginning, veteran and socially disadvantaged farmers. 

The increased priority on lending to beginning and socially disadvantaged farmers 

through FSA Direct and Guaranteed Farm Ownership and Operating loan programs 

will increase access to capital for these farmer groups. In addition, increased flexibility in determining what types of experiences should count towards the ‘‘farm 

management experience’’ requirement for direct farm ownership loans will further 

expand access to these loans. 

The lower interest rate for Joint Financing (or Participation) loans that bring together farmers, USDA, and a private lender in order to leverage scarce Federal 

credit appropriations with private lending resources will harnesses the power of 

leveraging and will allow FSA to serve more farmers for the same amount of Federal appropriations. 

We also thank the farm bill conference committee for continuing mandatory funding the Rural Microentrepreneur Assistance Program (RMAP) at the 2008 Farm Bill 

level of $15 million over the 5 year cycle. This program has been essential to 

FarmLink’s ability to make loans to beginning, immigrant and small farms in California. In addition to the direct spending of $3 million per year, we would like to 

see discretionary funding of $3.3 million in FY15, consistent with the USDA request, and more robust discretionary funding in subsequent years. I urge you to 

work with your colleagues on the Appropriations Committee to get the $3.3 million 

request into the FY15 bill. Furthermore, we believe greater flexibility is needed in 

how the formula for technical assistance funds is applied, and urge you to work with 

USDA to achieve a workable solution to this problem. 

As the first organization in the country to offer agricultural IDAs, and a champion 

of the effort to establish a national program, we were pleased to see the reauthorization of the Beginning Farmer and Rancher Individual Development Accounts 

(BFRIDA) Pilot Program, designed to help beginning farmers and ranchers of limited means finance their agricultural endeavors through business and financial education and matched savings accounts. As the age of the average American farmer 

continues to rise, now is the time to launch this important new credit tool, and I 

urge you to work with your colleagues on the Appropriations Committee to fund this 

program in FY15. 

We’d also like to thank your colleagues on the Agriculture Appropriations Subcommittee for increasing funding for FSA direct loans. Historically low interest 

rates and lower default rates certainly have helped a great deal in increasing loan 

volume. In addition, agency leadership and staff are doing a great job increasing access to credit to farmers, despite dwindling staffing resources. For the first time in 

recent memory, there is no backlog in the number of farmers who have been approved but not yet received direct loans. As FSA seeks to continue access to credit 

for farmers who have not historically used FSA loans (including a growing number 

of microloans to smaller, diversified farms selling to local and regionally markets), 

it will be imperative to ensure FSA has the administrative and staffing support to 

service and provide technical assistance on the larger loan portfolio each office will 

likely carry. 

The 2014 Farm Bill authorized USDA to develop Whole Farm Revenue Protection 

(WFRP). WFRP is a welcome and long-awaited addition to the risk management 

toolkit for sustainable and organic diversified farming operations, a segment of 

American agriculture that has historically been under-served by traditional crop insurance. Crop insurance is an important tool that lenders look at to evaluate a 

farmer’s perceived risk in their farming operation. We therefore commend USDA for 

responding quickly under its new farm bill authority to develop WFRP in time for 

80 

the 2015 crop insurance year. In order to avoid suffering the same under-utilization 

as AGR and AGR-Lite, and to provide an appropriate and accessible risk management option for all producers in all states, it is critical that USDA develop and 

swiftly implement a plan to expand WFRP nationwide. 

Finally, revisions to and renewal of Section 6025 of the 2014 Farm Bill, Strategic 

Economic & Community Development hold promise for supporting regionally significant economic development efforts. Local and regional governments are taking steps 

to support agriculture and rural economic development through planning efforts, 

and this program will leverage those efforts in synergistic ways. We urge you to 

work with local and regional partners to shape this program. 

Strategic Partnership 

Increasing consumer demand for local food and a growing recognition of the role 

of food systems in addressing rural economic development, public health, climate 

change preparedness, veteran transition to civilian life, among many other national 

issues, is driving farmer demand for micro and small loans all across the country. 

FarmLink and FSA are strategic partners in facilitating access to credit. FSA’s 

role as the lender of last resort/first opportunity is very complementary to 

FarmLink’s role as an agriculturally-focused CDFI making relatively high risk 

loans. While there are loans that we would potentially both make, and thus be competing with one another, the reality is that FSA is reaching those farmers that feel 

comfortable going into the USDA Service Center, and FarmLink, as a communitybased lender, is going to where borrowers are, in the field, and providing technical 

assistance to help them be loan-ready. 

The power of leverage that comes with providing loan guarantees is tremendous. 

The Cooperative Lending Pilot Project represents an important opportunity to build 

on this leverage. 

For example, the current drought in California is affecting farmers in diverse 

ways, depending on where they are located, and what their options for accessing 

water are in each location. California FarmLink is working to facilitate access to 

credit for these farmers who have water emergencies. Where possible, California 

FarmLink is making bridge loans to finance irrigation and water efficiency projects 

supported by the Environmental Quality Incentives Program cost-share. California 

FarmLink expects to begin conducting water audits later this summer for farmers, 

and connecting them with financing for irrigation and water development projects 

based on audit findings. 

California FarmLink is also developing a farm mortgage product, in response to 

the growing demand and need we see from farmers in our region. We look forward 

to working with FSA to create a product that will serve the needs of our target market and ensure affordable and stable land tenure for the next generation of California farmers. 

Farmer Profiles 

In addition to the loans that FarmLink has made with FSA guarantees, which 

are an important part of our portfolio, have ranged from $25,000–$100,000, and include a diversity of production systems and business models, there are other ways 

that we support each other’s efforts to facilitate access to credit. 

The borrower target market for FSA and California FarmLink has some overlap, 

and each also has a distinct market. By way of example, this becomes clear by considering a few examples of mutual referrals: 

• A well-established Community Supported Agriculture farm in Fairfield had obtained two FSA direct operating loans and was then referred to FarmLink in 

hopes of graduating to more conventional financing. They obtained an annual 

operating loan with an FSA guarantee from FarmLink for the 2013 season. For 

the 2014 season the borrower was able to ‘‘graduate’’ to a loan with Farm Credit 

West, benefitting from a lower interest rate and more flexible terms. 

• A 12 acre direct market diversified organic fruit and vegetable operation in 

Humboldt County applied for a microloan from their local FSA office. For reasons that are not completely clear, the applicant was denied, but was referred 

to California FarmLink. FarmLink made an equipment and operating loan totaling $21,000. 

• The FSA Farm Loan Officer in Modesto recently referred a borrower to 

FarmLink that has reached the term limit on FSA Direct Operating Loans, having received 7 years of Direct Operating Loans, and then an additional 2 years 

on waiver. FarmLink is likely to finance this bee operation, with the benefit of 

knowing the type of credit risk they represent. 

81 

• A start-up aquaponics operation in the Bay Area sought an operating loan from 

FarmLink. The borrower was a returning veteran who had completed a training 

program and apprenticeship, but his experience was not sufficient to meet 

FarmLink’s underwriting standards. FarmLink referred the applicant to FSA, 

where he was able to obtain a microloan to launch his operation, producing specialty vegetables to restaurants. 

These are just a few examples of farmers that have benefitted from the FSAFarmLink relationship. 

Key Policy Recommendations 

As this Committee evaluates the current state of agricultural credit across the 

country, we would like to recommend a few ways that Congress and USDA could 

better meet the credit needs of our nation’s farmers—especially those beginning, minority and small farmers who have struggled over the years to find adequate credit 

options needed to finance their farms. 

First, we would urge the leaders of this Committee to sponsor an amendment to the Agriculture Appropriations bill to fund IDA’s for the 2015 Fiscal Year. This is a program that this Committee authorized in the new farm bill. 

USDA sees this program as a key tool they need to recruit a new generation of 

farmers and has requested an initial $2.5 million to jumpstart the program next 

year. The Senate also recognized this need and the value this program could serve, 

and matched the Administration’s request. I therefore strongly urge you to consider 

sponsoring an amendment to the appropriations bill in order to launch this important and long overdue credit resource for new farmers, and follow through on the 

House’s commitment to this program. 

Second, we would also urge the leaders of this Committee to work with 

stakeholders to shape Section 6025—Strategic Economic & Community Development. This updated provision prioritizes the funding of projects that are consistent with an adopted regional economic or community development plan. It will 

be important for the success of this program to be shaped by regional partners. 

Third, we would urge the leaders of this Committee to work with USDA 

to expand coverage of Whole Farm insurance nationwide as soon as possible. The 2014 Farm Bill mandated a pilot program because organic and diversified vegetable growers have been pretty much excluded from Federal crop insurance. 

We believe the Congressional intent in the 2014 Farm Bill was to make the program 

available to farmers in the major organic and specialty crop growing areas—that 

would without question include Monterey and Santa Cruz counties. The pilot as currently described by USDA, relies on the current AGR and AGR-Lite designations for 

geographic coverage and crop specifics—which excludes key agricultural regions in 

California and other parts of the country. The lack of this risk management tool 

places these farmers and their creditors at a distinct disadvantage, relative to farmers who can access this program. We therefore urge you to work with USDA to expedite the process of making this program apply nationwide as soon as feasible. 

Fourth, we urge this Committee to work with your colleagues on the Appropriations Committee to increase discretionary spending for Rural 

Microenterprise Assistance Program (RMAP). In addition to the direct spend- ing of $3 million per year that this Committee provided in the farm bill, we would 

like to see an additional $3.3 million in discretionary funding for FY15 as requested 

by USDA, in order to meet the high demand for small business loans that exist in 

rural America. This too would be a high priority amendment to the pending FY15 

agriculture appropriations bill. 

Fifth, we urge this Committee to work with USDA to provide greater 

flexibility in the application of the formula that determines technical assistance grant awards under Rural Microenterprise Assistance Program 

(RMAP). We believe greater flexibility is needed in how the formula for technical 

assistance funds is applied. RMAP partners—like FarmLink—are at a distinct disadvantage in accessing technical assistance funds because they emphasize annual 

operating loans—with the associated faster pay down of those loans, followed by 

those funds being revolved out in the form of new loans—rather than longer-term 

equipment and infrastructure loans. 

Finally, we urge leaders of this Committee to work with stakeholders and 

USDA to shape the Microloan Cooperative Lending Pilot Projects. The bulk 

of loans that FarmLink has made to date have been microloans. We have not sought 

guarantees on loans less than $25,000, due to the underwriting costs and guarantee 

fee. We are optimistic about the promise of this pilot program that may open new 

opportunities to make microloans while providing the much-needed technical assistance microloan applicants typically require, along with additional risk mitigation 

features. We are eager to see the new intermediary microlending option that this 

82 

Committee authorized rolled out across the country, and would urge you to work 

with USDA to ensure this option is available as soon as possible. 

Conclusion 

The face of agriculture in this country is undergoing dramatic transformations. 

Our Federal support structure and safety net has been adapting in response to 

these changes, and must continue to do so if we aspire to be efficient with our limited natural and financial resources, increase equity and fairness in our delivery of 

programs, and embrace those who seek to produce our food, fiber and fuel, now and 

in the future. 

Thank you for the opportunity to provide this testimony on behalf of beginning, 

small and immigrant farmers and ranchers across the country. I look forward to answering any questions you have about their credit needs, and California FarmLink’s 

efforts on their behalf. 

The CHAIRMAN. Thank you. I appreciate it. And once again, I 

want to thank all the witnesses. I now recognize the gentleman 

from Texas for 5 minutes, Mr. Conaway. 

Mr. CONAWAY. Thank you, Mr. Chairman. And, gentlemen, thank 

you for being here. Mr. Franz—Frazee, I am sorry. In your testimony, you had a couple of comments that I found interesting. One 

that you are working under a 40 year old law and that that is causing you challenges in your operations. Can you give us a couple of 

examples of where that is binding—— 

Mr. CONAWAY. Do I have a hand? 

Mr. FRAZEE. Sure. I mentioned that we are seeing agriculture 

evolve. And I also indicated that we are focusing on trying to respond to the credit needs of an evolving agriculture that includes 

more local sustainable foods, urban oriented markets. And sometimes the authorities that we have are a bit challenging in terms 

of being able to provide the financing that is needed to support that 

infrastructure. 

Mr. CONAWAY. So is this the rub that Mr. Wolfe and Mr. Williams talked about you are trying to push out beyond the original 

young farmer, beginning farmer, small farmer issue? 

Mr. FRAZEE. I think what we are talking about aligns very well 

with the young startup issue, the kind of operations we are talking 

about that are locally or sustainable operations that are going to 

serve the farmer’s markets here in the area. 

Mr. CONAWAY. Okay. Well, I would like to visit with you about 

how the law itself is binding that up. You have also mentioned in 

written testimony you have provided—the System provided financially to $4.7 billion in exports. Can you put some meat on the bone 

as to what that meant? 

Mr. FRAZEE. Yes, that is—those are authorities that are provided 

for CoBank to authorize export financing related to farmers, cooperatives—— 

Mr. CONAWAY. Is that directly related to rural America that—— 

Mr. FRAZEE. Pardon? 

Mr. CONAWAY. That is where those exports are coming from, is 

that rural America? 

Mr. FRAZEE. Correct. 

Mr. CONAWAY. Okay. 

Mr. FRAZEE. That is correct. It is all directly related to the ag 

production changes. 

Mr. CONAWAY. All right. Mr. Wolfe, Mr. Williams, crop insurance 

both—I know Mr. Williams mentioned it. Could you talk about— 

is that a requirement on your loans to production farmers? And 

83 

what—I get both of you on the hook here to comment about the importance of crop insurance and the other risk management tools 

under the farm bill. 

Mr. WILLIAMS. Yes. Crop insurance is extremely important to us 

in our portfolio. It is not required on 100 percent of our loans, but 

I would guess about 90 percent of our loans it is a factor. And so, 

certainly, maybe even more than 90 percent. But crop insurance is 

extremely important in allowing us to make a decision and having 

a comfort level with where the income base is going to be for that 

operation. The farm bill, the target prices and—is also something 

that is very important. But over the last 10 years, and certainly in 

the last 2 or 3, I have seen crop insurance play a bigger role than 

it ever has in risk management for farmers, and it is certainly important for banks. 

Mr. CONAWAY. Mr. Wolfe? 

Mr. WOLFE. Yes. We require crop insurance on 100 percent of our 

borrowers that we have—that we provide loans for crop production. 

And I ask our lenders last year to find a borrower at any level that 

didn’t have crop insurance. We couldn’t find any in our banks. So 

it is close to 100 percent of our borrowers, no matter whether they 

borrow money for crop production, but they do participate in that 

program today. 

Mr. CONAWAY. All right. The FSA is under—and RMA are both 

trying to implement the changes to the farm bill. Any issues with 

the pace of that implementation and changes that are affecting 

your borrowers? Maybe—— 

Mr. WOLFE. What change are you referring to, sir? 

Mr. CONAWAY. Say again. 

Mr. WOLFE. What change—— 

Mr. CONAWAY. Well, we—based on changes to those risk management tools, and there would be the process of implementing those. 

Has it impacted this year’s borrowings, lendings in production agriculture’s, or something that they should be doing quicker than they 

are doing? 

Mr. WOLFE. In our case, it has not. We typically do those on interim loans. We work very closely with USDA Farm Service Agencies in our area. And if there is the high likelihood that that is 

going to happen, we go ahead and provide interim financing for 

those. 

Mr. CONAWAY. Right. So you are working—Mr. Williams, anything going on about that that we need to know about? 

Mr. WILLIAMS. It has not had an impact on us either. We have 

about a $60 million operating loan portfolio, and about 20 percent 

of that volume is guaranteed by FSA guarantees. So we have been 

able to do that. It has been very efficient and hadn’t caused any 

problems for us. 

Mr. CONAWAY. Right. Mr. Melone, any issues with you? 

Mr. MELONE. Yes, it is virtually nonexistent for our—the borrowers that we serve. And that is why we would like to see it go 

nationwide as soon as possible. 

Mr. CONAWAY. Mr. Frazee, quickly, you keep 100 percent of your 

loans on your balance sheet. Is that a requirement or why do you 

do that? 

84 

Mr. FRAZEE. We keep our loans on our balance sheet for a couple 

of reasons. One, because we are a cooperative, and we want our 

members to benefit from the ability to have their loans on a balance sheet and receive patronage benefits. There are times that we 

may sell loans into a secondary market for risk management purposes. But substantially all, we keep on our balance sheet. 

Mr. CONAWAY. All right. Thank you. I yield back. 

The CHAIRMAN. The gentleman yields back. I now recognize the 

gentleman from Florida, Mr. Yoho, for 5 minutes—Mr. Yoho. 

Mr. YOHO. Thank you, Mr. Chairman. I appreciate it. Let me see. 

Let me get back to my questions here. You were talking about— 

or let me ask you, is it—— 

Mr. FRAZEE. Frazee. 

Mr. YOHO. Frazee. Mr. Frazee, do you guys classify under-performing loans and Farmer Mac the same way as Dodd-Frank and 

commercial loans used to do it? Like, say I borrowed $500,000 on 

a piece of property and was farming it, paid it off—paid on it on 

a 5 year note. Say I paid 3 years on it. And I have it paid down 

to $350,000. Land prices dropped, or the value of the land is now 

say $250,000. Traditionally, or with the Dodd-Frank, that was considered an under-performing loan, even though I didn’t make a— 

miss a payment. Do you guys, in the Farmer Mac program, evaluate loans that way as under-performing? 

Mr. FRAZEE. We use a risk rating system that is consistent with 

other financial institutions. It is a 14 point rating system that 

looks at the probability of default. We look at our loss given default. And, obviously, we have to comply with the standards that— 

our financial statements are audited by external auditors, Price 

Waterhouse Cooper. So—— 

Mr. YOHO. All right. Mr. Wolfe, how about you and your loan 

portfolio, if you have a loan in that kind of a situation, that illustration? 

Mr. WOLFE. Well, we would recognize it as a troubled asset, if 

you will, and we would reserve higher for that. But, no, we 

wouldn’t just, by the fact that it is under collateral, show it as a 

default. 

Mr. YOHO. Okay. Because in some of the banking situations, correct me if I am wrong, I know they looked at it that way, and they 

said you have to get these off the book because it is an under-performing based on the rules of the Dodd-Frank. Now, they may have 

corrected that I heard in some of the smaller banks. 

Mr. WOLFE. I think that applies to residential real estate loans, 

but not necessarily to ag loans. 

Mr. YOHO. Okay. Let me ask Mr. Wolfe and Mr. Williams, do you 

feel you are in direct competition with Farmer Mac? 

Mr. WOLFE. Well, not with Farmer Mac. No. Farmer Mac—what 

we do. 

Mr. YOHO. With—— 

Mr. WOLFE. Farm Credit—— 

Mr. YOHO. Farm Credit? 

Mr. WOLFE. Yes. Farm Credit is our largest competitor. We compete with local banks every day. But Farm Credit is our largest 

competitor and our biggest competition. 

85 

Mr. YOHO. Have you ever lost a loan based on competitive interest rates where they are more competitive than the interest rates 

that you can charge today? 

Mr. WOLFE. Yes. I did—yes, we do every day—not every day. 

Mr. YOHO. What causes that? Why is there that discrepancy? 

Why can you not adjust your interest rates where they can, or they 

can be more competitive? 

Mr. WOLFE. Well, in Kansas, we have a state income tax that is 

applied to banks called a privilege tax that is 4.375 percent. We are 

also subject to 34 percent Federal income tax. And so when we 

have to give them a 38 percent head start, it does create some 

added competition for us. Yes. 

Mr. YOHO. What I would like for all of you to do is give some 

recommendations on how we can make this more equitable so that 

there is not this competition, so that in the next farm bill we can 

correct some of these inequities so that it—when it comes out to 

pass, we won’t have these discussions. We will already have addressed them. Is—I would love for you guys to enter in some recommendations so that we can address those before they become an 

issue. 

Mr. Melone, on the end, I have some questions for you. In what 

you do, are—what is the amount of loans you give you in a year’s 

time? 

Mr. MELONE. So last year—we have been lending since 2011. We have made about 90 loans, $1.5 million so far last year, 2013. 

Mr. YOHO. Yes. And 100 percent of that money comes from the 

Federal Government, right? 

Mr. MELONE. No. Probably about 1⁄3 of it directly, and about the 

same amount is FSA guaranteed. But we have investors that are 

banks and foundations as well. 

Mr. YOHO. Okay. What is the failure rate of that? 

Mr. MELONE. We have a two percent default rate. 

Mr. YOHO. That is great. 

Mr. MELONE. So we made about $900,000 in loans last year. We 

are looking to make $1.25 million this year, and doubling the number of loans that we are making to about 50 this year. 

Mr. YOHO. Okay. I don’t really have any more questions, other 

than my goal is to make agriculture remain a strong sector. And 

my working together with the information and the suggestions that 

you have, we can make better policies up here that will affect the 

availability of credit for our farmers to keep ag strong in this country so that we remain a leader in that. And I look forward to any 

comments, and always feel that you can reach out to our office. 

And I appreciate you being here. 

The CHAIRMAN. The gentleman yields back. The chair now recognizes Ranking Member Costa for 5 minutes. 

Mr. COSTA. Thank you. Thank you, Mr. Chairman. To any of the 

panel members, and maybe we will start with Mr. Melone. We 

heard a lot of things that we talked about earlier that have been 

positive with the farm economy. Obviously, with different regions 

of the country, especially the West as we talked, this multi-year 

drought has been devastating. But, we have the opposite conditions 

along the Mississippi River where we have floods that have been 

occurring. How do you believe that the impacts of floods and 

86 

droughts taking place concurrently will hit the overall outlook on 

the farm economy at the end of this year? Have you made some estimations? 

Mr. MELONE. So as you probably well know, there is a lot of geographic variability even within California. For instance, about how 

the drought is affecting different farmers, depending on how they 

get their water. 

Mr. COSTA. Right. 

Mr. MELONE. We are seeing, probably, 1⁄4 to 1⁄3 of our portfolio 

being affected in some direct way by the drought. So we are looking 

at making bridge loans to farmers that are getting funding through 

NRCS. 

Mr. COSTA. How about individual loans for well drilling? 

Mr. MELONE. Yes. We are actually working on a couple right 

now, putting in new pumps as well, farmers that were getting 

water from the Central Valley Project, for instance, that now no 

longer have access to that water. 

Mr. COSTA. Yes. As you know, we are looking at a 6 to 10 month 

waiting list just to get a well driller online. The costs for those 

wells are anywhere from $1⁄2 million dollars to $11⁄2 million and 

higher. So these kind of loans are important. Let me move over to 

the dairy industry, which I spoke about with the first panel and 

the changes in the dairy title as a result of the 2014 Farm Bill. I 

noted we had some terrible years in 2009 and 2010 when we had 

milk prices at $9 per hundredweight, and the input costs were far, 

far higher, and we had a number of significant bankruptcies in 

California to underline it. Are you, as lenders, being more selective 

on how you deal with the loans to dairies? And I don’t know who 

would like to opine here first? 

Mr. WOLFE. We do finance some dairies in northeast, north-central Kansas and southern Nebraska. And we haven’t seen any large 

issues, except with the milk prices. That is something that is very 

difficult to manage for our borrowers, but it is something that they 

have gone out a little farther, contracted prices. It is limited on the 

upside, obviously. But there are some vehicles they can use, and 

we do require that if we finance. And we have half a dozen large— 

relatively large dairies that we finance out of our bank. But we do 

require forward pricing. 

Mr. COSTA. And so notwithstanding the volatility, your lending 

has remained somewhat constant? 

Mr. WOLFE. Yes, it has. 

Mr. COSTA. On that. Have any of you looked at—in terms of forward lending, under the new dairy title, the insurance program 

and how you anticipate that might factor in on future loans for 

dairies? 

Mr. FRAZEE. We have looked at it. We think it provides some stability to the industry in looking at the credit risk around dairy. You 

know, as a cooperative and with the mission charge that we have 

to be there to provide for the income and wellbeing of farmers and 

to be a sustainable source of credit, we look at that as being something that helps to provide some stability in the industry and helps 

us to take a longer term view of the risk associated with those 

farmers. 

Mr. WOLFE. I would agree. 

87 

Mr. COSTA. So you don’t see any different application between 

those dairies that belong to co-ops and those that have a different 

process in which they sell their milk? 

Mr. WOLFE. No, I don’t. We finance both cooperative dairies and 

privately owned dairies. 

Mr. COSTA. And do any of you have any reaction to the tax treatment on bonus depreciation under Section 179 provisions? 

Mr. WOLFE. Would you restate the question, please? 

Mr. COSTA. The tax depreciation that is allowed today—— 

Mr. WOLFE. Right. 

Mr. COSTA. Do any of you think that it provides any more favorable conditions for lending that you are involved in? 

Mr. WOLFE. Perhaps. Again, in our area specifically, Farm Credit 

System owns that space through their leasing programs. And we 

do a few farm building programs or farm sheds, if you will. But, 

primarily, that is owned by the Farm Credit System in our area. 

Mr. COSTA. All right. Well, my time has expired. Thank you very 

much, Mr. Chairman. 

The CHAIRMAN. The gentleman yields. I now recognize the gentleman from Iowa, Mr. King, for 5 minutes. 

Mr. KING. Thank you, Mr. Chairman. And I thank the witnesses 

for their testimony. I would turn first to Mr. Wolfe and ask you, 

I believe you were in the gallery listening to the previous panel’s 

testimony. And when I asked the question if the Farm Credit personnel could identify an independent bank rate that was lower 

than their rate for credit for our farmers, and they apparently 

could not do so. Were you surprised at their response? 

Mr. WOLFE. No. 

Mr. KING. And neither was I. But I would ask if you could speak 

to that issue, because I don’t think we heard from your side of this. 

Mr. WOLFE. Well, yes. I agree that it is—I mean, it is—she got 

into predatory lending. I don’t think that is where you were going 

with that. You just wanted to know about general pricing. Pricing 

is very difficult for us to match, even the Farm Credit System in 

our areas, I mentioned before, in Kansas anyway, my specific bank, 

it is a 38 percent head start, 34 percent Federal tax, 4.375 percent 

for a state income tax. That is what makes it difficult to match 

fund—or match any rate that Farm Credit has out there. 

Mr. KING. And would you have any comments to make on the 

mission creep question that I asked of the original panel? 

Mr. WOLFE. Well, obviously, it has crept. I mean, the Verizon 

loan is one example of that. Frontier is another that has just been 

recently done. I don’t think that that can be described by anything 

other than a mission creep. Their mission has expanded. The size 

of the Farm Credit System has doubled in the last 10 years. And 

it—they haven’t done that all within traditional agriculture, I do 

not believe. 

Mr. KING. Would it be your recommendation to this Congress to 

take a look at the mission and perhaps help write a mission statement since they write their own? 

Mr. WOLFE. Absolutely. 

Mr. KING. I thought it might. I don’t know if that was in your 

original testimony. I was called away. Was it? 

88 

Mr. WOLFE. No. No, it wasn’t. But, absolutely, I would support 

that. 

Mr. KING. And, Mr. Williams, your comments on this subject 

matter? 

Mr. WILLIAMS. Yes, I would echo Mr. Wolfe’s comments. But, specifically, in east Arkansas, I could provide about 30 examples over 

the last 3 years where we have lost a borrower to the Farm Credit 

System. And without exception, it is a rate issue. So what we see 

is typically 150 to 200 bases points difference in short-term rates. 

And then, of course, as you stretch out our real estate lending, it 

even widens out from there. So time after time after time, we see 

it. And it is always based on rate. 

Mr. KING. Could you speak to the scope of your competition’s real 

estate loans, how broad that scope might be? 

Mr. WILLIAMS. Yes, it is pretty well formed in our area. But we 

have also seen the scope widen from the Farm Credit System over 

the past couple years to things like lumber companies and things 

of that nature. So it appears, from our perspective, that there is 

not a lot of restriction in what they can or can’t do. And we certainly are willing to compete and want to compete. And I have in 

Wynne—we have seven banks in Wynne that we compete with 

every day, as well as the Farm Credit System. So we are not afraid 

to compete. We just would like to do it with a level playing field. 

Mr. KING. What about non-farm, say grain handling or processing, is that also a field of competition? 

Mr. WILLIAMS. Absolutely. 

Mr. KING. And what about residential? 

Mr. WILLIAMS. Absolutely. 

Mr. KING. Would that be urban, small town, as well as rural residential? 

Mr. WILLIAMS. In our area, and we are pretty urban—Wynne’s 

a population of about 8,000 people. But Farm Credit certainly is 

making housing loans in Wynne and in our entire market in eastern Arkansas. 

Mr. KING. Thank you, Mr. Williams. Since I have asked you all 

these questions, Misters Wolfe and Williams, I should turn to Mr. 

Frazee and give him an opportunity to perhaps eliminate the other 

side of this. 

Mr. FRAZEE. I appreciate that opportunity. First, the story I hear 

about competition are similar to what I hear from my loan officers 

about commercial banks. We are losing deals every day to commercial banks. It is a competitive environment. There is a lot of liquidity in the banking system. And we have seen pressure on our loans 

and our margins. So—and we think that is a good thing for customers, because ultimately farmers are going to benefit if they get 

lower rates. So we see that competition as well from banks that are 

losing loans. 

Mr. KING. Mr. Frazee, if I would just ask this, if Farm Credit is 

at 46 percent of their real estate loans, as we heard in the previous 

panel, would there be a number that—if that number increased, 

would there be a number that you would think of that this Congress should be concerned about? 

Mr. FRAZEE. I believe that the FCA panelist said that we had 41 

percent of the total agricultural debt. 

89 

Mr. KING. Yes. 

Mr. FRAZEE. That means that 59 percent, or the majority of it, 

is somewhere else with other lenders. So the majority of the agriculture of that is somewhere other than the Farm—— 

Mr. KING. But you would agree that 100 percent is too much? 

Mr. FRAZEE. I would agree with 100 percent is too much. 

Mr. KING. But we weren’t going to agree on whatever that number might be in between 41 and 100? 

Mr. FRAZEE. I think it ought to be—whatever the number is, it 

ought to be what is in the best interest of the farmers and ranchers 

of this country. 

Mr. KING. I gave you the last word. Thank you, Mr. Frazee. 

Mr. FRAZEE. Sure. 

Mr. KING. I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman yields. And with that, we will dismiss the panel with our thanks from the entire Agriculture Committee. We appreciate you being here today. 

Under the rules of the Committee, the record of today’s hearing 

will remain open for 10 calendar days to receive additional material and supplementary written responses from the witnesses to 

any questions posed by a Member. 

The Subcommittee on Livestock, Rural Development and Credit 

hearing is now adjourned. 

[Whereupon, at 12:00 p.m., the Subcommittee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

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SUBMITTED MATERIAL BY FARM CREDIT ADMINISTRATION

Insert 1 

The CHAIRMAN. . . . 

You testified that non-performing loans totaled $2.1 billion, which is a decrease of nearly $600 million. Is the non-performing loan portfolio—is that a geographic prerogative? Is it dominated by any certain sector of the ag industry, 

or is there a region in the country that may contribute more so than others? 

Dr. LONG THOMPSON. Well, certainly, among those institutions that we regulate, if they happen to be located in a part of the country where there has been 

stress, you might see some additional—a higher level of non-performing loans. 

But we haven’t detected a specific pattern geographically. I would, however, be 

very happy to provide you—we have very good data. We do analyses of the overall farm economy, as well as of the health of the System regularly. And we have 

some very good data that I would be happy to share with you and your staff. 

Insert 2 

Mr. ROGERS. Thank you, Mr. Chairman. That is what I was going to ask 

about. And I was late. And I am sorry. And I know that the Chairman visited 

this topic earlier. But one—the primary criticisms I get about the Farm Credit 

System is issuing loans in non-agriculture. And so do you know what percentage of the loan portfolio the Farm Credit System is issued to non-farm entities? 

Dr. LONG THOMPSON. I think it probably would be best for me to get a detailed breakdown for you. But it is primarily agriculture and ag related. It is 

agriculture—and let me also say that, even though the System did not fall for 

the most part under the jurisdiction of Dodd-Frank, there are other kinds of 

rules that statute requires—for example, the territories, the districts that are 

established. So there are a number of restrictions in the Farm Credit System 

that simply are not restrictions in the banking sector. And I also think that 

there is a very strong case to be made for a group of farmers going together 

and setting up a cooperative model of lending, particularly when there is not 

always access in traditional banking. 

Source: FCS Annual Information Statements. 


11315022.eps
92 

Nonaccruals as a Percentage of Loans Outstanding 

The chart shows nonaccruals as a percent of loans outstanding for the System as 

a whole and six key stressed sectors for the past 3 years. The nonaccrual rate for 

the six combined sectors is also shown. 

The combined six sectors’ nonaccrual rate was 1.8 percent at December 2013 compared to 0.9 percent for the System as a whole. 

Each of the stressed sectors experienced improvement in 2013, except poultry and 

eggs. 

The stress experienced by these sectors was due to the high corn and soybean 

prices of the past few years in the case of cattle, dairy, poultry/eggs and biofuels; 

and problems in the housing industry in the case of forestry and horticulture. 

The percentage in parentheses indicates that sector’s loan volume as a percent of 

total FCS volume. 

The six stressed sectors combined accounted for 56 percent of all FCS nonaccruals 

at December 2013. 

Farm Credit System Institutions Nonaccrual Ratio 1

(as of 3/31/14) 

AgFirst District AgriBank District 

AgFirst FCB 0.3% AgriBank FCB 0.1% 

Ag Credit ACA 1.2% 1st Farm Credit Services, ACA 0.5% 

AgCarolina ACA 2.0% AgCountry ACA 0.6% 

AgChoice ACA 1.7% AgHeritage ACA 0.2% 

AgGeorgia ACA 4.6% AgStar ACA 2.0% 

AgSouth ACA 1.3% Badgerland Financial ACA 0.3% 

ArborOne, ACA 1.2% Delta ACA 0.9% 

Cape Fear ACA 1.6% Farm Credit Illinois, ACA 0.1% 

Carolina ACA 1.8% Farm Credit Mid-America ACA 1.2% 

Central Florida ACA 2.3% FCS Financial, ACA 0.5% 

Central Kentucky ACA 1.0% FCS of America ACA 0.4% 

Colonial ACA 1.8% GreenStone ACA 1.2% 

FC of the Virginias ACA 1.4% Mandan ACA 0.5% 

First South ACA 0.3% Midsouth ACA 0.2% 

Florida ACA 6.5% North Dakota ACA 0.4% 

MidAtlantic ACA 1.1% Progressive FCS, ACA 0.1% 

Northwest Florida ACA 4.1% United ACA 0.4% 

Puerto Rico ACA 7.9% Western Arkansas ACA 1.0% 

River Valley AgCredit, ACA 2.1% 

Southwest Georgia ACA 0.0% 

CoBank District Texas District 

CoBank ACB 0.2% FCB of Texas 0.2% 

AgPreference, ACA 0.0% Ag New Mexico, FCS, ACA 2.5% 

American AgCredit, ACA 0.9% AgTexas FCS 0.2% 

Central Oklahoma ACA 0.1% Alabama ACA 0.3% 

Chisholm Trail ACA 0.1% Alabama Ag Credit, ACA 1.7% 

Colusa-Glenn ACA 0.5% Capital Farm Credit, ACA 1.2% 

East Central Oklahoma ACA 2.1% Central Texas ACA 0.0% 

Enid ACA 0.7% Great Plains Ag Credit, ACA 1.4% 

Farm Credit East, ACA 1.2% Heritage Land Bank, ACA 1.8% 

Farm Credit West, ACA 1.4% Legacy Ag Credit, ACA 1.7% 

FCS Southwest ACA 1.4% Lone Star, ACA 1.0% 

Fresno-Madera ACA 0.0% Louisiana Land Bank, ACA 0.6% 

Frontier ACA 0.2% Mississippi Land Bank, ACA 0.4% 

Golden State ACA 0.0% Panhandle-Plains FLCA 0.2% 

Hawaii ACA 1.8% Southern AgCredit, ACA 1.1% 

High Plains ACA 0.0% Texas FCS 0.3% 

Idaho ACA 0.1% 

Ness City, FLCA 0.0% 

New Mexico ACA 1.9% 

Northwest FCS, ACA 0.9% 

Premier ACA 0.2% 

Southern Colorado ACA 1.2% 

Southwest Kansas ACA 0.0% 

93 

Farm Credit System Institutions Nonaccrual Ratio 1—Continued 

(as of 3/31/14) 

Western AgCredit, ACA 0.5% 

Western Kansas ACA 0.0% 

Western Oklahoma ACA 0.0% 

Yankee ACA 0.7% 

Yosemite ACA 0.8% 

1 Represents nonaccruals loans as a % of loans outstanding including accrued interest. 

Farm Credit Institution Territories 

ACAs & FLCAs by Districts (abbreviated names) 

January 1, 2014 


11315023.eps
94 

Trends in Farm Credit System Outstanding Farm Loans 

Farm Credit System Outstanding Loans, December (million $) 

Source: FCS Annual Information Statements. 

Percent Change from the Prior Year 

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 

Real estate mortgage loans 4.8% 8.3% 7.1% 12.3% 13.3% 4.8% 3.5% 3.4% 9.4% 6.7% 

Production & intermediate-term loans 3.4% 9.7% 20.2% 12.3% 16.1% 5.7% 2.5% 1.7% 6.3% 3.5% 

Total FCS Farm Loans 4.4% 8.7% 11.2% 12.3% 14.2% 5.1% 3.2% 2.8% 8.4% 5.7% 

Farm Credit System Loan Portfolio 

(as of December 31, 2013) 

(in millions) % 

Agricultural related loans: 

Real estate mortgage loans $94,194 46.8% 

Production and intermediate-term loans 45,412 22.6% 

Agribusiness loans 27,242 13.5% 

Agricultural export finance 4,588 2.3% 

Lease receivables 2,706 1.3% 

Other 746 0.4% 

s/t agricultural related loans 174,888 87.0% 

Non-agricultural related loans: 

Rural residential real estate loans 6,557 3.3% 

Rural utility 1 19,615 9.8% 

s/t non-agricultural related loans 26,172 13.0% 

Total loans $201,060 100.0% 

1 Represents energy loans, water/waste water loans, and communication loans. 

In addition to participating in loans to eligible borrowers, FCS institutions have 

the authority to work with non-System lenders that originate ‘‘similar-entity’’ loans. 

A similar-entity borrower is not eligible to borrow directly from an FCS institution, 


11315024.eps
95 

but because the borrower’s operation is similar in function to that of an eligible borrower’s operation, the System can participate in the borrower’s loans (the participation interest must be less than 50 percent). 

As of December 31, 2013, similar-entity lending accounts for approximately 5% of 

total System loans. 

Of the 13% in non-agricultural related lending, 2% are similar-entity loans associated with rural utility lending. 

More than 95% of similar-entity lending is associated with title II and title III 

lending authorities. 

SUBMITTED LETTER BY KENNETH E. AUER, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, THE FARM CREDIT COUNCIL

July 14, 2014 

Hon. ERIC A. ‘‘RICK’’ CRAWFORD, Chairman, 

Subcommittee on Livestock, Rural Development, and Credit, 

House Committee on Agriculture, 

Washington, D.C. 

Dear Mr. Chairman: 

We applaud you and your colleagues on the Subcommittee for holding the recent 

hearing on credit availability in rural America. The Farm Credit System appreciated very much the opportunity to present testimony and to provide the Subcommittee our insights regarding rural credit conditions. 

Unfortunately others appearing before the Subcommittee, specifically witnesses 

for the commercial banks, the American Bankers Association (ABA) and the Independent Community Bankers of America (ICBA), chose to provide testimony regarding the Farm Credit System that was highly inaccurate and deceptive. This letter 

addresses the most egregious inaccuracies in their testimony. We ask that it be 

made a part of the hearing record to ensure that those inaccuracies are not left unanswered on the record. 

The Farm Credit System’s Mission is to Be Agriculture’s and Rural America’s Customer-Owned Partner 

As you may recall, questions were raised during the hearing regarding the mission of the Farm Credit System. The mission of the Farm Credit System was established by the Congress and is found in the Farm Credit Act of 1971, as amended. 

Congress stated it clearly in the opening clause of the Act, ‘‘. . . making credit 

available to farmers and ranchers and their cooperatives, for rural residences, and 

to associations and other entities upon which farming operations are dependent, to 

provide for an adequate and flexible flow of money into rural areas, and . . . to 

meet current and future rural needs.’’ 

The System’s mission is to serve all types of agricultural producers who have a 

basis for credit, as well as others who help ensure that agriculture and rural America are economically successful. That includes farm-related businesses, rural homeowners, rural infrastructure providers including electric, telecommunications, water 

and waste as well as other entities. The System was not created to serve only 

young, beginning or small producers, as the bankers alleged. The Farm Credit Act 

specifically directs the System to serve all types of agricultural producers. In fact, 

it was almost 65 years after the System was established that language was added 

to the Farm Credit Act to require System lending associations to report on programs 

that focus on young, beginning and small farmers. The ABA and the ICBA continually and deliberately misstate the mission of Farm Credit System institutions including suggestions that Farm Credit institutions are supposed to be the lenders of 

last resort. 

The institutions of the Farm Credit System comprise a borrower-owned, permanent system of credit for agriculture and rural America, just as intended by Congress and provided for in the Farm Credit Act. System institutions are doing what 

they are supposed to do when they compete with government-backed commercial 

banks in the marketplace and when they participate in loans with those same banks 

to support the rural economy. 

Congress established the Farm Credit System and over the years expanded the 

operating authority of System institutions to compete effectively because farmers, 

ranchers and rural communities depend on timely and reliable access to capital and 

because it is well understood that government-backed commercial banks will seek 

to maximize profits in the face of limited competition. 

96 

1Debt Use by U.S. Farm Businesses, 1992–2011; USDA/ERS Economic Information Bulletin 

Number 122; Jennifer Ifft, Amirdara Novini, Kevin Patrick. April 2014 2http://www.ers.usda.gov/amber-waves/2013-may/the-revised-ers-farm-typology-classifyingus-farms-to-reflect-todaysagriculture.aspx#.U7rXz7cU_cs. 

Farm Credit Associations Have a Great Record of Serving Young, Beginning and Small Farmers and Are the Only Lenders Reporting on Actual 

Service 

The bankers stated in their testimony that the data reported by Farm Credit institutions show that Farm Credit institutions are not making loans available to 

young, beginning and small farmers. This is inaccurate, and we are happy to correct 

the record. 

The truth of the matter is that 83% of the loans made by Farm Credit institutions in 2013 were for less than $250,000. Almost 55% of all loans made were for $50,000 

or less. Over 16% of the loans made by the System in 2013 were made to individuals 

35 years old or less. This represents a great record of service since, according to the 

2012 Agricultural Census, only 6% of principle farm operators are 35 years old or 

less. 

The most relevant data for measuring service to these categories of borrowers is 

the number of loans made and the number of loans outstanding that support young, 

beginning and small farmers. The number of loans is the relevant data set instead 

of the percentage of total loan volume because the average loan size to young, beginning and small farms is naturally going to be smaller since in most cases their 

farming operations are smaller and can only support smaller amounts of debt. 

Just over 40% of the number of new loans made by Farm Credit institutions in 2013 were made to borrowers that had less than $250,000 in gross sales from their 

farming operation. These are actual loans to small farmers. At the end of 2013, 

more than 49% of the total number of loans outstanding were made to individual 

farmers that had less than $250,000 in sales. 

Even if you look at the volume of loans outstanding, the portfolio of the System 

reflects what is happening in agriculture. A study by USDA’s Economic Research 

Service released in April 2014 1 describes the overall percentage of debt held by various sized farm businesses. Using this analysis is somewhat complicated because 

USDA recently increased the income threshold in its definition for ‘‘small farm’’ to 

those with less than $350,000 of gross farm income 2 resulting in a larger number 

of farmers being included in the category. Farm Credit institutions have maintained 

their definition of small farmer at $250,000 of sales. According to the USDA study, 

small farmers using their broader definition held 27% of total farm debt. As of the 

end of 2013, 21% percent of the Farm Credit System’s total loan volume was to 

farmers with $250,000 or less of gross farm sales—and this was in a year of high 

commodity prices that drove up the number of farmers with gross farm sales that 

exceeded $250,000. 

Farm Credit institutions are the only lenders that collect data on their lending 

to young, beginning and small farmers. Farm Credit institutions know how well 

they are serving these farmers and ranchers and are very proud to talk about it. 

Commercial banks do not collect similar data on whom they serve in agriculture. 

The ABA often reports on ‘‘small farm loans’’ made by banks. In fact, what they are 

reporting on is the size of loans made not whether the borrower’s operation is small 

or large. Small loans are often made to large farmers. The commercial bank data 

provides very little information regarding their service to small farmers. Commercial banks do not track whether those ‘‘small farm loans’’ actually are made to small 

farmers, large farmers, beginning farmers, retired farmers or any other type of 

farmer since they are not required to collect the same types of data required of 

Farm Credit institutions. Because Farm Credit institutions collect this data, they 

know the types of borrowers to whom they are lending. In fact, and they are required to report on this annually to the Farm Credit Administration which reports 

the collective data to the Congress and posts it on their website. 

Do Farm Credit institutions make and participate in large loans? Of course they 

do. The reality of modern agricultural production and the modern rural economy requires that large loans be made to finance successful projects and businesses that 

create jobs and provide for the quality of life in rural America. It takes a lot of capital for rural infrastructure providers to deliver services in rural communities. Agricultural cooperatives and other agribusinesses that store or add value to the agricultural products of farms or that provide necessary inputs to farmers have substantial 

capital needs. 

Most commercial-sized farming operations, which produce the majority of our food 

and fiber, require substantial credit. Even a modest 15 acre pick-your-own strawberry operation requires credit that can exceed a million dollars, between land, 

97 

3Page 3, ABA letter to Mary Rupp, Secretary of Board, National Credit Union Administration, 

August 7, 2012; Maintaining Access to Emergency Liquidity. 4See Federal Farm Credit Banks Funding Corporation (FFCBFC) Third Quarter 2013 Information Statement page XXX and the 2013 FFCBFC Annual Information Statement, Page 71; 

both accessible through www.farmcreditfunding.com. 

equipment, plant purchases and soil requirements. According to the USDA/ERS 

analysis, large-scale family farms that produced close to 40% of all agricultural production in 2011 had average agricultural debt that exceeded $1.1 million per family 

farm. Adequate supplies of competitively priced credit are the lifeblood of the rural 

economy and Congress charged Farm Credit institutions with the mission of helping 

to ensure that supply is always available irrespective of market conditions. 

Every Financial Institution Must Have a Liquidity Line 

Liquidity is the lifeline for financial institutions. Every commercial bank and credit union in the U.S. has access to government-backed liquidity. This became very 

evident in 2008 and 2009 when financial markets were seizing up due to the debacle 

that was created, for the most part, by banks in the mortgage markets. In excess 

of a trillion dollars of liquidity backed by taxpayers was pumped into the commercial banking sector. Having a Federal liquidity line backstop is so important that 

the American Bankers Association, undeniably no friend to credit unions, submitted 

a comment letter to the National Credit Union Administration in 2012 commenting 

on the importance of Federal backstops for liquidity. They stated, ‘‘ABA also believes 

that access to Federal liquidity backstops is part of any sound liquidity risk management program.’’ 3 Their ‘‘belief’’ apparently stops before it applies to the Farm 

Credit System. 

Farm Credit System institutions were the only U.S. financial institutions without 

a direct Federal backstop ensuring continued access to funding. In fact, the Farm 

Credit System is the only Government Sponsored Enterprise (GSE) that does not 

have a direct statutory backup line of credit with the Treasury. 

When the world financial markets collapsed in 2008, the Farm Credit System 

could only access short-term debt in the financial markets. The System could not 

sell longer term paper. The market for that had disappeared virtually overnight. 

System institutions had to change the tenor of loans they could offer farmers and 

other customers, not because of anything the Farm Credit System had done—such 

as being a greater risk due to credit losses or diminished capital strength—but because of the fallout from the bad behavior of others. 

The leadership of the System realized that such a situation was at odds with the 

Congressionally mandated mission to ensure credit availability for agriculture and 

rural America. Discussions were held with the Federal Reserve and the Department 

of Treasury. The Farm Credit System Insurance Corporation (FCSIC) initiated an 

interagency discussion with Treasury and the Federal Financing Bank (FFB) to explore whether the FFB could provide liquidity under exigent circumstances to support FCSIC in fulfilling its responsibility to see that investors in System debt are 

repaid in a timely manner. The goal was to provide liquidity in the event that financial markets completely stopped working and only after the assets of the Insurance 

Fund and other System liquidity had been committed. 

It is important to differentiate between a liquidity line and other types of Federal 

backstop. The liquidity line provided to FCSIC is limited to providing access to capital when the funding markets are somehow compromised. The liquidity line is not 

accessible for Farm Credit if the System is experiencing financial stress that makes 

FCS bonds unattractive to investors. The FCSIC/FFB agreement makes clear that 

any funds provided would be temporary in nature and provided only to ensure that 

the System can continue to meet its obligations until normal financial market conditions return. 

Both ABA and ICBA raised misleading questions about this interagency agreement in their testimony. ABA went so far as to suggest that the Farm Credit System is ‘‘increasing its dependence upon the U.S. Treasury’’ and that taxpayers ‘‘deserve a better understanding of what transpired between the Farm Credit System 

and the U.S. Treasury last September.’’ ICBA stated that, ‘‘the FCA and FCS desired to lower their borrowing costs even further by acquiring this line of credit.’’ 

Both characterized this as some sort of secret arrangement. None of these are accurate and appear intended to mislead the Subcommittee. 

The agreement between FCSIC and the FFB was the subject of briefings with key 

members of the Agriculture Committees. The existence of the liquidity agreement 

has been consistently disclosed to the public by the System 4 and FCSIC has simiVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00101 Fmt 6621 Sfmt 6621 I:\DOCS\113-15\88547.TXT BRIAN
98 

5See FCSIC Annual Report for 2013, page 9, available at www.fcsic.gov. 6http://www.fdic.gov/about/learn/board/hoenig/govsubsidy.pdf. 7 How Large Has the Federal Financial Safety Net Become? Nadezhda Malysheva and John 

R. Walter, FEDERAL RESERVE BANK OF RICHMOND, ECONOMIC QUARTERLY—Volume 96, Third 

Quarter 2010, pages 273–290. 8https://www.richmondfed.org/publications/research/special_reports/safety_net/pdf/safety_net_methodology_sources.pdf. 

larly disclosed it publicly in its annual report that is available to the public as well.5

Both the ABA and ICBA are attempting to make an issue out of an action taken 

by a Federal agency to address something administratively that needed no Congressional action to resolve and something that every commercial bank already has in 

place to a greater extent than the Farm Credit System. This was not an attempt 

to lower the cost of funds or to become dependent on the Treasury. This was a very 

responsible risk-mitigation arrangement undertaken by two Federal agencies. ABA 

and ICBA have sought to paint it as some sort of sinister plot, while failing to inform the Subcommittee regarding the extensive Federal liquidity backstop commercial banks have. 

Commercial Banks Are Subsidized and Backed by Taxpayers—Farm Credit 

Brings the Benefit of Its GSE Status to Agriculture and Rural America, 

While Not Operating at Taxpayer Expense 

Both ABA and ICBA frequently make the assertions that the institutions of the 

Farm Credit System operate at ‘‘taxpayer expense’’ and that because the System has 

access to government sponsored enterprise (GSE) funding, that System institutions 

harm community banks by providing competitive rates for agriculture. The Farm 

Credit System does not operate at taxpayer expense. System institutions are privately owned by the farmers, ranchers, agricultural cooperatives and others in rural 

America that borrow from them. The Farm Credit System even pays for the cost 

of the independent Federal regulatory agency that examines System institutions 

and writes the regulations that govern the operations of Farm Credit System institutions. In addition, System institutions support their own insurance fund that protects investors that buy System consolidated notes and debentures used to fund 

credit operations. Unlike commercial banks, System institutions do not borrow from 

the Federal Reserve. As a GSE System institutions obtain their loanable funds by 

issuing paper to the private financial markets. This access to dependable funding 

is essential to the ability of the System to fulfill its mission, and no taxpayer dollars 

are directly involved. 

GSE funding is by no means exclusive to the Farm Credit System. Commercial 

banks have direct access to GSE funding as well. Commercial banks obtain GSE 

funds through Fannie Mae and Freddie Mac. They have direct access to GSE funds 

through Farmer Mac for agricultural lending activities. Commercial banks even own 

their own GSE, the Federal Home Loan Bank System, which provides commercial 

banks advances of GSE funds for housing, small business and agricultural lending 

as well as pays them the extra bonus of patronage based on their use of Home Loan 

Bank advances. The Federal Home Loan Banks that are owned by the banks are 

fully tax-exempt. Banks also have direct taxpayer backing on the major source of 

their loanable funds through the Federal Deposit Insurance Corporation (FDIC). 

Thomas Hoenig, the vice-chairman of the FDIC, recently noted his view that, ‘‘the 

government safety net of deposit insurance, central bank loans, and ultimately taxpayer support provides a multibillion dollar subsidy to commercial banks . . .’’ 6

The size of the Federal safety net for commercial banks is substantial. In 2010, 

the Federal Reserve Bank of Richmond published a paper that focused on identifying the extent of taxpayer backing for financial institutions. The paper notes a distinction between certain liabilities of commercial banks that are ‘‘explicitly guaranteed’’ by taxpayers and those of GSEs that are ‘‘implicitly guaranteed.’’ 7 The estimates of the level of direct taxpayer explicit guarantee for commercial banks and 

savings firms was updated in a follow up study published in 2013 using data available through the end of 2011. They found that the explicit Federal guarantee for 

commercial banks and savings firms had grown to a staggering $7.156 trillion at 

that time.8 It is unfortunate that the facts get in the way of the picture that the 

ABA and ICBA want to paint, but the facts are clear that commercial banks have 

far more taxpayer backing than does Farm Credit. 

Farm Credit institutions do have the benefit of specific tax treatment that helps 

them provide long-term mortgage credit to farmers and ranchers across the U.S., 

but Farm Credit institutions are not tax-exempt entities. Corporate taxes are paid 

by Farm Credit institutions on income derived from short and intermediate term 

loans, and loans made under title III of the Farm Credit Act to cooperatives, rural 

utilities, etc. As cooperatives, System institutions also distribute patronage to the 

99 

9 Are Rural Credit Markets Competitive? Is There Room for Competition in Rural Credit Markets? Maureen Kilkenny and Robert W. Jolly; CHOICES MAGAZINE; 1st Quarter 2005, pages 25– 

29. 10 Agricultural Lending Shifts to Large Banks, Nathan Kaufman and Maria Akers, AGRICULTURAL FINANCE DATABOOK, Federal Reserve Bank of Kansas City, July 2013. 

farmers and cooperatives that own those institutions. Those owners pay ordinary income tax on that patronage. Subchapter S commercial banks, which make up the 

majority of agricultural banks, pay little to no Federal tax at the institution level 

for income derived from all of their business. Like cooperatives, taxes are paid by 

the owners on the bank profits that are directly passed through to those owners, 

but since these taxes are paid by the owners, and not by the bank itself, Federal 

tax obligations do not impact on the ability of these institutions to price products 

competitively. The reality is commercial banks have considerable direct backing by 

taxpayers. 

Farm Credit System Lending Improves Credit Availability in Rural America 

The existence of the Farm Credit System in the agricultural credit markets does 

not harm commercial banks as they suggested in their testimony. ICBA relies on 

surveys of their own members—commercial banks—to conclude that the System is 

adversely affecting bankers. Anecdotal stories from bankers hardly qualify as evidence of harm. Surveys of Farm Credit institutions would conclude the same 

thing—that System institutions lose credits to bankers all the time as well. What 

is playing out is competition. The beneficiaries of this competition are farmers and 

ranchers across the U.S. It results in agriculture having access to competitive rates 

and terms for an input critically important for the success of today’s farming operations. 

Ask farmers or rural business owners if they are better off having one, two or 

more lenders competing for their business. We all know that asking bankers this 

question will result in a different answer. There is limited credibility, if any, in the 

ICBA survey of bankers other than to provide a picture painted by bankers eager 

to minimize their competition and maximize their profits. 

An interesting study conducted by two Iowa State economists in 2005 noted that 

commercial banks in rural communities in the Midwest may be focusing too much 

on agricultural credit to the detriment of Main Street. They noted that, ‘‘banks that 

specialize in farm lending are more profitable,’’ but that ‘‘agricultural credit demands may crowd out nonfarm demands for bank loans in farming-dependent rural 

areas.’’ They also noted that, ‘‘Price discrimination and barriers to entry may result 

in less credit being extended in rural areas than is optimal.’’ 9 The point of this is 

the exact opposite that the ICBA bankers would have you believe—competition in 

credit markets is a good thing. Both banking organizations failed to mention that 

the real challenge for smaller banks is not the Farm Credit System but broader 

competition from larger banks.10

‘‘Similar-Entity’’ Lending Helps Farm Credit Partner with Commercial 

Banks and is Consistent with the Intent of Congress 

Both the ABA and the ICBA have pointed to several recent lending transactions 

that Farm Credit System institutions have participated in and suggested that those 

are ‘‘illegal’’ and inconsistent with what the Farm Credit Act allows. These transactions are not illegal and are specifically provided for in the Farm Credit Act. Further, they are exactly what the Congress contemplated when the authority to engage in these types of transactions was provided to the System in 1992 as a part 

of the Farm Credit Banks and Associations Safety and Soundness Act of 1992, P.L. 

102–552 and then expanded in 1994 in the Farm Credit System Agricultural Export 

and Risk Management Act of 1994, P.L. 103–376. 

In providing this authority to the System, the Congress recognized the growing 

capital needs of agriculture. The Congress noted at that time that in order for those 

needs to be met, Farm Credit System institutions and commercial banks would need 

to work together by sharing participations in loans back and forth to spread risk 

and continue to make the capital available to agriculture and rural America that 

is vital to its continued economic growth. The ABA and ICBA may want to rewrite 

history to fit their own goals, but the words spoken by the leaders in the Senate 

upon final passage of the 1994 legislation that expanded the similar-entity lending 

authority within the Farm Credit System are the ones that matter in explaining 

this authority. 

Senator Patrick Leahy described these provisions as follows, ‘‘The Act will accomplish something additional that I believe both the Farm Credit System and private 

100 

11Senator Leahy, Page S14235, Congressional Record, October 5, 1994. 12Senator Lugar, Page S14235, Congressional Record, October 5, 1994. 

banks have been seeking for some time and will find mutually beneficial. It creates 

the opportunity for farm credit institutions and private banks to manage and reduce 

their concentration of loan loss risk in terms of geography, industry, and account 

exposure by expanding the System’s ability to purchase and sell loan participations 

from commercial banks and other non-System lenders.’’ 11

Senator Lugar added to Senator Leahy’s explanation providing additional detail 

regarding how this authority would help the Farm Credit System manage the risk 

associated with the large loans it was involved with to support agriculture and rural 

America. Senator Lugar said, ‘‘. . . these changes will enhance the System’s ability 

to reduce its concentration of risk in terms of geography, industry, and account exposure. System institutions both purchase and sell participations from and to other 

lenders, a practice that is important particularly in the case of larger loans. For example, CoBank recently administered a $650 million syndication for Farmland Industries, Inc., a major farmer-owned marketing and supply cooperative. Seven commercial banks joined CoBank to provide funding for the syndication, illustrating the 

growing number of cases where banks and System institutions are working together 

harmoniously to meet the credit needs of rural America.’’ 

Lugar went on to say, ‘‘It is important to note that the legislation will not give 

System institutions an unfair advantage over the commercial banking industry. For 

example, in the case of loans to agricultural entities that are similar to System borrowers, the System would be prohibited from providing 50 percent or more of the 

funds for such loans, ensuring that the System’s use of loan participations will be 

limited to those cases where commercial lenders desire to involve the System, and 

that the System still will not be able to originate loans of this type.’’ 12

As noted by Senator Lugar, the similar-entity lending authority contains very specific limitations regarding the ability of the System to hold a majority of one of these 

loans and the ability of the System to have these types of transactions to be a major 

portion of its total assets. The law limits these to no more than 15% of total assets 

of the participating System institution. The ABA and ICBA should stop their 

disinformation efforts regarding these transactions and instead embrace, as their 

own members have done, the opportunity to work with Farm Credit institutions to 

enhance the agricultural and rural economy. 

Focus of Financial Institutions Should be on Improving Rural Economy 

The Farm Credit System on a daily basis works with commercial banks across 

America. In addition, when Farm Credit provides financing for a rural electric cooperative, a rural water system, a rural telephone company, an agricultural cooperative, and to individual farmers and ranchers, all of this activity is enhancing the 

rural economy. The Farm Credit System allows rural areas to benefit from both national and international capital markets by moving this capital efficiently from 

those national markets into rural communities. 

The credit needs in rural America are greater than either the commercial banks 

or the Farm Credit System can alone finance. We would welcome a discussion on 

how Farm Credit and commercial bankers can work together even more to improve 

the rural economy. 

Thank you and the Subcommittee for your efforts on behalf of agriculture and 

rural America. 

Sincerely yours, 

KENNETH E. AUER, 

President and CEO. 

SUBMITTED LETTER BY JO ANN EMERSON, CHIEF EXECUTIVE OFFICER, NATIONAL

RURAL ELECTRIC COOPERATIVE ASSOCIATION

July 3, 2014 

Hon. ERIC A. ‘‘RICK’’ CRAWFORD, Hon. Jim Costa, 

Chairman, Ranking Minority Member, 

Subcommitte on Livestock, Rural Development, and Credit, Subcommittee on Livestock, Rural Development, and Credit, 


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House Committee on Agriculture, House Committee on Agriculture, 

Washington D.C.; Washington D.C. 

Dear Chairman Crawford and Ranking Member Costa: 

On behalf of the National Rural Electric Cooperative Association (NRECA), thank 

you for the opportunity to submit a letter as part of the record for your Subcommittee’s June 25, 2014 hearing about credit availability in rural America. As the trade 

association representing the nation’s more than 900 rural electric cooperatives 

which serve over 42 million Americans in 47 states, NRECA understands that the 

availability of credit in rural America is absolutely critical to our rural electric consumer owners and their communities. NRECA appreciates the Subcommittee’s consideration of our perspective. 

Rural electric cooperatives often serve as the hub for economic development in 

their community. Working with other businesses, local government officials, and 

community leaders, our members seek to constantly improve the quality of lives of 

their members. One way they do this is to invest in upgrading their electric infrastructure to create jobs and improve the delivery of affordable, reliable electricity. 

Key to this investment is the availability of capital for the cooperatives. 

Electric cooperatives’ unique business model as not-for-profit, member-owned electric utilities have driven their emergence as leaders in developing innovative financial solutions for rural America. In 2007 we approached the Congress with a unique 

concept that would allow rural electric cooperative borrowers to benefit from the secondary market activities of the Federal Agricultural Mortgage Corporation, also 

known as Farmer Mac. The idea was to allow Farmer Mac to use its established 

access to the capital markets to lower interest costs on rural electric cooperative 

loans similar to the way it already did for agricultural real estate loans. By lowering 

interest costs on rural electric loans, the rural electric cooperatives were able to pass 

those savings on to your constituents and thereby make available more dollars in 

the local economies. Congress acted on our request in the 2008 Farm Bill and expanded Farmer Mac’s charter to allow authorized secondary market activities for 

electric cooperative loans made by lenders organized as cooperatives such as our sister cooperative, the National Rural Utilities Cooperative Finance Corporation (CFC). 

We are pleased to report that this action by Congress had a profound effect. Since 

Farmer Mac first began participating in the rural electric lending sector, Farmer 

Mac has worked to provide more than $5 billion of capital to rural America through 

secondary market purchases of electric co-op loans and securities. Through our relationship with Farmer Mac, NRECA member cooperatives have been able to diversify 

their funding sources and add an important liquidity management tool, as Farmer 

Mac provides CFC with access to external financing beyond CFC’s own offerings of 

securities in the capital markets. As not-for-profit cooperatives, the rural electric cooperatives pass these savings on directly to their consumer owners, allowing your 

constituents to continue to receive affordable and reliable electric power along with 

upgraded facilities. 

Rural electric systems currently serve approximately 42 million Americans or 12 

percent of all consumers of electricity in the United States and its territories. The 

provision in the 2008 Farm Bill that expanded Farmer Mac’s authorities has directly benefitted these rural communities that you and we serve. The resulting innovative partnership between Farmer Mac and the rural electric cooperatives allows 

NRECA to better meet the financial needs of its members and allows Farmer Mac 

to further support rural communities in fulfillment of its mission. Farmer Mac’s 

ability to provide electric cooperatives with a stable and reliable source of credit, as 

well as liquidity and lending capacity that will help stimulate economic growth and 

job creation in the rural communities is extremely helpful and appreciated. 

Sincerely, 

JO ANN EMERSON, CEO, NRECA. 

SUBMITTED LETTER BY SHELDON C. PETERSEN, CHIEF EXECUTIVE OFFICER, 

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION (CFC) 

July 8, 2014 

Hon. ERIC A. ‘‘RICK’’ CRAWFORD, 

Chairman, 

Subcommittee on Livestock, Rural Development, and Credit, 


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House Committee on Agriculture, 

Washington, D.C. 

Chairman Crawford, Ranking Member Costa, and Members of the Subcommittee: 

On behalf of the National Rural Utilities Cooperative Finance Corporation (CFC), 

thank you for the opportunity to comment following your Subcommittee’s June 25, 

2014, hearing on credit availability in rural America. As the only lender created and 

owned by America’s electric cooperative network, CFC plays an important role in 

providing credit to rural America, and we appreciate the Subcommittee’s consideration of our perspective. 

CFC, a nonprofit finance cooperative, was organized by local, consumer-owned and 

controlled electric cooperatives in 1969 in response to their growing need for capital. 

Initially, rural electric cooperatives formed CFC as a source of available financing 

to supplement loan programs administered by the Rural Utilities Service of the 

United States Department of Agriculture. Today, CFC is owned by more than 1,000 

electric cooperative organizations in 48 states and continues providing members 

with flexible financial products and services. 

Since its creation 45 years ago, CFC has provided billions in direct funding to the 

nation’s rural electric cooperatives, and we continue to work to bring them low-cost 

private capital so they can acquire, construct, and operate electric distribution, generation, transmission and related facilities. The ultimate beneficiaries of CFC’s lending activities are rural electric consumers, the communities served by rural electric 

cooperatives, and the nation as a whole. 

In CFC’s role as a lender to rural electric cooperatives, we are continually looking 

for new opportunities to serve our member-owners’ evolving needs. By providing a 

secondary market for loans to rural electric cooperatives, the Federal Agricultural 

Mortgage Corporation (Farmer Mac) is helping us fulfill this mission. 

In the 2008 Farm Bill, Congress acted on the request of our national trade association, the National Rural Electric Cooperative Association (NRECA), to provide 

clear authority for Farmer Mac to invest in rural utility loans in much the same 

manner as they already did for agricultural real estate loans. Specifically, Congress 

revised Farmer Mac’s charter to authorize secondary market activities loans to electric cooperatives made by lenders organized as cooperatives, such as CFC. The rationale for this proposal was that Farmer Mac could use its established access to 

the capital markets to provide additional liquidity to rural utility lenders and also 

potentially lower interest costs on rural electric cooperative loans with the resulting 

savings ultimately passed through to rural electric consumers. 

We are pleased to report that this action by Congress and the relationship with 

Farmer Mac has produced an important liquidity management tool and has helped 

CFC diversify its funding sources. This allows CFC to offer additional capital for 

lower-cost financing in many cases, directly benefiting the nation’s electric cooperatives by ensuring they can deliver safe, reliable and affordable electric power to 

folks no matter where they may live. 

Today, electric cooperatives currently serve approximately 42 million Americans, 

or 12 percent of all consumers in the United States and its territories. The changes 

Congress enacted in the 2008 Farm Bill that expanded Farmer Mac’s authority directly benefit rural communities that you represent. The resulting innovative partnership with Farmer Mac enables CFC to better meet the financial needs of its 

members and allows Farmer Mac to further support rural communities. 

Together, Farmer Mac and CFC provide electric cooperatives with a stable and 

reliable source of credit, as well as liquidity and lending capacity that stimulates 

economic growth and job creation across rural America. 

Sincerely, 

SHELDON C. PETERSEN, 

CEO. 

SUBMITTED LETTER BY BRAD THALER, VICE PRESIDENT OF LEGISLATIVE AFFAIRS, 

NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS

June 24, 2014 

Hon. ERIC A. ‘‘RICK’’ CRAWFORD, Hon. Jim Costa, 

Chairman, Ranking Minority Member, 


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Subcommitte on Livestock, Rural Development, and Credit, Subcommittee on Livestock, Rural Development, and Credit, 

House Committee on Agriculture, House Committee on Agriculture, 

Washington D.C.; Washington D.C. 

Re: Credit Availability in Rural America 

Dear Chairman Crawford and Ranking Member Costa: 

On behalf of the National Association of Federal Credit Unions (NAFCU), the only 

trade association that exclusively represents the interests of our nation’s Federal 

credit unions, I write today in conjunction with tomorrow’s hearing entitled ‘‘A review of credit availability in rural America.’’ As you are aware, in many rural areas 

of the country, there are a limited number of financial institutions providing agricultural lending. Credit unions are proud that they have been making safe and affordable agricultural loans for a number of years, including through the economic crisis. 

As the Subcommittee considers the issue of credit availability in rural America, 

we urge you not to overlook the potential that currently exists to do more with our 

nation’s credit unions. Our nation’s credit unions have money to loan to small businesses; however, an outdated and arbitrary business lending cap stands in their 

way. Representatives Ed Royce and Carolyn McCarthy have introduced the Small 

Business Lending Enhancement Act (H.R. 688), a bill that would raise the member 

business lending cap in a sound way for eligible credit unions and help extend credit 

to the small businesses that drive our economy without spending a dime of taxpayer 

funds. We urge you to support this effort. 

Additionally, while the National Credit Union Administration (NCUA) took action 

in 2012 to help credit unions do more to serve low-income and rural areas, recent 

actions by the agency could hamper that availability of credit. In January of this 

year, the NCUA issued a proposed risk-based capital rule for credit unions. If implemented as proposed, the new rule could have a chilling effect of reducing lending 

in rural areas as the agency’s proposed ‘‘risk-weights’’ for member business loans 

may negatively impact the ability of credit unions to provide agricultural loans to 

their members. Several Members of Congress have already weighed in with their 

concerns about the proposal’s potential negative impact on agricultural and rural 

lending. We would urge the Subcommittee to follow developments on this issue as 

well. 

We would welcome the opportunity to discuss these issues further. If my colleagues and I can be of assistance to you, or if you have any questions regarding 

this issue, please feel free to contact myself or NAFCU’s Director of Legislative Affairs, Jillian Pevo, at [Redacted]. 

Sincereley, 

BRAD THALER, 

Vice President of Legislative Affairs. 

CC: Members of the Subcommittee on Livestock, Rural Development, and Credit. 

SUBMITTED STATEMENT BY NATIONAL ASSOCIATION OF REALTORS®

Introduction 

The National Association of REALTORS® (NAR) offers this statement on the importance of access to credit in rural areas. NAR represents a wide variety of housing 

industry professionals committed to the development and preservation of the nation’s housing stock and making it available to the widest range of potential American households. The Association has a long tradition of support for innovative and 

effective Federal housing programs and has worked diligently with the Congress to 

fashion housing policies that ensure Federal housing programs meet their missions 

responsibly and efficiently. 

Prospective homebuyers nationwide have found significant barriers to obtaining 

mortgage financing. Credit standards remain very tight, and those wishing to purchase a home—especially first-time buyers—are facing many obstacles to finding a 

safe, affordable home loan. The situation is especially difficult in rural areas, where 

rental housing is often lacking and access to mortgage finance is challenging. Nearly 

all of the counties with the highest poverty rates in America are rural. The lack 

of multi-family and other rental units in rural communities means families have few 

options other than to purchase a home. As a result, access to safe, affordable mortVerDate Mar 15 2010 12:31 Aug 28, 2014 Jkt 041481 PO 00000 Frm 00107 Fmt 6621 Sfmt 6621 I:\DOCS\113-15\88547.TXT BRIAN

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1 Income, Poverty, and Health Insurance Coverage in the United States: 2012, Issued September 2013, By Carmen DeNavas-Walt, Bernadette D. Proctor, Jessica C. Smith, p. 60–245. 2 Housing Assistance Council, Taking Stock: Rural People, Poverty And Housing In The 21st 

Century, December 2012. 3Landscapes of Foreclosure: The Foreclosure Crisis in Rural America, Adam Wodka, The Edward M. Gramlich Fellowship in Community Development, November 2009. 4 At least 40 percent of appropriated Section 502 direct loan funds must be used to assist families with incomes less than 50 percent of area median income (AMI). 

gage financing is important in these areas. NAR thanks you for holding this hearing 

to discuss these issues. 

Housing in Rural Communities 

Nearly 20 percent of the U.S. population lives in rural areas or small towns. Many 

jobs in these communities are low-wage, and incomes in rural areas are often lower 

than national averages. According to the U.S. Census, the number of rural citizens 

living in poverty increased to 8.5 million in 2012, from 8.0 million in 2011. Overall, 

in 2012, rural median household incomes ($41,198) were about 20 percent lower 

than national median household incomes ($51,017) and 22 percent less than median 

urban household incomes ($52,988).1

Housing conditions in rural areas can be inferior to homes in urban or suburban 

neighborhoods. Housing choices can be limited due to differences in infrastructure 

requirements, lack of public transit, and access to other amenities. The availability 

of rental housing is often scarce. The approximately 7.1 million renter-occupied 

units in rural communities comprise only 28.4 percent of the rural and small town 

housing stock.2

The lack of rental housing means homeownership is frequently the only option for 

rural families. Although homeownership rates are higher in rural areas than the national average, many rural families face significant obstacles in finding safe, affordable, decent housing. According to a report by NeighborWorks, in rural areas, ‘‘the 

housing stock itself varies as greatly as the character of rural areas, but two common trends are that (1) it is overwhelmingly comprised of single-family homes; and 

(2) a higher percentage of the stock is in substandard condition compared to metropolitan areas.’’ 3

These findings make it even more important to help rural families find quality 

housing. 

Federal Housing Programs 

Federal housing programs are instrumental in providing affordable housing opportunities to low- and moderate-income rural homebuyers. The National Association 

of REALTORS® strongly supports Federal housing programs that target rural communities and provide sufficient Federal assistance needed to meet the housing needs 

of rural communities. 

The Rural Housing Service (RHS) 502 loan program provides opportunities for 

homeownership for these families. In FY 2013, the RHS helped nearly 170,000 rural 

American families become homeowners, nearly 80 percent of whom were first-time 

homebuyers. The program includes guaranteed and direct loans. Section 502 loans 

can be used to build, repair, renovate or relocate a home, or to purchase and prepare 

sites, including providing water and sewage facilities. The guaranteed loans are 

funded by private lenders and insured by the RHS. 

In many rural communities, the Section 502 direct loan program is the only housing assistance available. Section 502 homeownership direct loan program loans are 

used primarily to help low-income households purchase homes. These loans may 

also be used to refinance debts when necessary to avoid foreclosure, or when required to make necessary house repairs affordable. NAR strongly supports the availability of sufficient Federal resources to ensure the Section 502 direct loan program 

responsibly addresses the housing needs of low- and moderate-income 4 rural families. 

In recent years, the Section 502 program has been in jeopardy of depleted funding 

or commitment authority before the end of the fiscal year. NAR would encourage 

Congress to provide adequate funding and commitment authority to meet the needs 

of rural communities. 

It also should be noted that FHA is also a very valuable program for families living in rural areas. Some homes, due to their rural nature, do not meet FHA standards and are more appropriately suited to the programs of the RHS. But for others, 

FHA has been a very important option for home buying families. FHA provided the 

majority of mortgage financing options during the housing crisis, and continues to 

be a critical tool for affordable, safe housing. FHA’s countercyclical role allowed 

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more than four million families to purchase a home during the height of the economic crisis. 

Suggestions To Expand Access 

Update Definition 

NAR was pleased that Congress approved language as part of the farm bill to 

grandfather existing communities currently participating in the RHS programs as 

eligible for continued participation. Without that language, more than 900 communities would have lost access to these valuable housing programs. The definition of 

‘‘rural’’ used by RHS has not been changed since 1974, despite the rapidly changing 

demographics of our country. The existing definition requires communities to: (1) be 

outside of a metropolitan statistical area (MSA), (2) be ‘‘rural in character’’, (3) have 

a serious lack of mortgage credit, and (4) have a population under 20,000. Communities and populations have changed dramatically in the last 80 years. Relying on 

a decades old definition is unrealistic and won’t meet the needs of rural communities. NAR urges Congress to look at ways to update this definition, and ensure 

that our rural communities have access to the programs they need. 

Direct Endorsement for 502 Guaranteed Loans 

RHS has proposed language to make the Section 502 Guaranteed loan program 

a direct endorsement program. Today, every loan must be approved by staff of the 

Rural Housing Service. In recent years, staffing has been dramatically reduced, and 

borrowers are now experiencing significant delays in loan approval. Both the Veterans Affairs loan guaranty and the FHA mortgage insurance program utilize private landers for direct endorsement. Adding RHS to this list would create great efficiencies for the Service and for homebuyers. RHS, in turn, would have additional 

staff time to focus on a strengthened lender monitoring process and risk management. We strongly urge Congress to provide RHS with direct endorsement authority 

to ease burdens on the agency and accelerate processing for borrowers. 

Resist Calls To Limit Access 

Since the beginning of the economic recovery, there have been calls to restrict the 

role of the Federal Government in housing programs. Both RHS and FHA have been 

shown to provide great benefits to American families, and our economy as a whole. 

Since its inception in 1949, RHS has provided more than 3.69 million families with 

the ability to obtain the dream of homeownership. FHA was a driving force pulling 

our nation out of the economic recession. Moody’s has estimated that without FHA’s 

role during the housing crisis, housing prices would have dropped an additional 25 

percent, and American families would have lost more than $3 trillion of home 

wealth. 

These programs offer significant benefits to American families, with little cost to 

the taxpayer. Changes to these programs should only be made to enhance access 

for more qualified buyers. NAR strongly opposes any changes that further constrain 

mortgage financing. 

Conclusion 

Rural families face unique challenges in accessing mortgage credit. NAR encourages you to consider changes to programs that will make it easier for these families 

to obtain safe, affordable, decent homes in the communities in which they chose to 

live, and looks forward to working with you to achieve that goal. 

SUBMITTED QUESTIONS

Response from Hon. Jill Long Thompson, Ph.D., Board Chair and Chief Executive Officer, Farm Credit Administration 

Questions Submitted by Hon. Collin C. Peterson, a Representative in Congress from 

Minnesota 

Question 1. You mentioned the Farm Credit System Insurance Fund currently 

holds more than $3.6 billion. Can you walk me through the structure of the Insurance Fund and provide more detail on its creation during the credit crisis of the late 

1980s? Is it part of the Farm Credit Administration or a separate entity? 

Answer. In the Agricultural Credit Act of 1987, Congress established the Farm 

Credit Insurance Fund to provide insurance for the timely payment of principal and 

interest on obligations issued on behalf of Farm Credit System (System) banks. 

In the 1987 Act, Congress also established the Farm Credit System Insurance 

Corporation (FCSIC), which administers the Fund. FCSIC sets and assesses the premiums that System banks must pay into the Fund. Money in the Fund that is not 

106 

being used must be invested in obligations of the United States or in obligations 

guaranteed as to principal and interest by the United States. 

In addition to using the Fund to insure timely payment of principal and interest 

on System-wide and consolidated debt, FCSIC must use the Fund to ensure the retirement of protected borrower stock at par value. 

FCSIC may also use the Fund to cover its operating costs and provide assistance 

to troubled System banks and associations. In addition, if the Farm Credit Administration (FCA) places a System bank or association in conservatorship or receivership, FCSIC must act as the conservator or receiver. 

As a former Member of the U.S. House of Representatives, having served on the 

Agriculture Subcommittee with jurisdiction over credit from 1989 to 1995, I believe 

the statute implies the Farm Credit System Insurance Corporation is part of the 

Farm Credit Administration. More significantly, the language of the statute makes 

it clear that FCSIC as an entity was not intended to be an additional cost for the 

Farm Credit System and the farmers and ranchers it serves. The Farm Credit Act 

directs FCSIC to carry out its role using the staff, examination information, and 

other resources of FCA whenever possible. 

By statute, FCSIC is a U.S. Government-controlled corporation ‘‘managed by a 

Board of Directors that shall consist of the members of the Farm Credit Administration Board . . . chaired by any Board member other than the Chairman of the Farm 

Credit Administration Board.’’ In addition, ‘‘to the extent practicable, the Corporation shall use the personnel and resources of the Farm Credit Administration to 

minimize duplication of effort and to reduce costs.’’ 

Question 2. Testimony from the second panel mentions a $10 billion line of credit 

that was requested through the Treasury Department’s Federal Financing Bank for 

the Farm Credit System Insurance Fund (FCSIC). Can you tell us more about the 

situation with the Insurance Fund and the letter of credit? 

Answer. It is FCA’s understanding that FCSIC entered into the agreement with 

the Federal Financing Bank to ensure ‘‘back-up’’ liquidity, up to $10 billion, for System banks in the event of a general market disruption. An advance from the Federal Financing Bank would not be available for deteriorating credit conditions in the 

Farm Credit System. Any advance from the Federal Financing Bank would be fully 

collateralized by the System. The agreement must be renewed annually. 

Question 3. Were you aware of the Brookings Institution report commissioned by 

the Insurance Fund? This report goes into detail regarding the FCSIC discussions 

with the Federal Financing Bank. Were you aware whether this report was officially 

shared with the Committees of jurisdiction? Has the FCA taken a position on 

whether to ask Congress to reconsider if the structure set up in 1987 is adequate 

to handle extraordinary circumstances? 

Answer. Yes, FCA was aware that FCSIC contracted with the Brookings Institution for the report, and we informed staff of the House Committee on Agriculture 

and the Senate Committee on Agriculture, Nutrition, and Forestry about the report, 

which was published on the Brookings website. 

FCA has not taken a position on whether to ask Congress to reconsider the FCA/ 

FCSIC structure as provided by Congress. The structure allowed for the agreement 

with the Federal Financing Bank, and this agreement should be adequate to handle 

the extraordinary circumstances of a liquidity crisis. Nevertheless, projecting the effects of the next crisis is very difficult. 

In the wake of the volatile market conditions that began in 2008, FCA took a close 

look at whether the System could continue to fund borrowers under adverse market 

conditions unrelated to the agriculture economy. The System is the only federally 

chartered set of financial institutions that did not have a designated source of emergency funding in the event of a market shutdown. 

Question 4. The issue of ‘‘cherry-picking’’ customers is raised in testimony from 

the second panel. Is there anything that a commercial bank can do if they feel that 

one of their customers has been enticed away by a lower interest rate? Is there anything in the Farm Credit Act or your regulations that prohibits this? 

Answer. FCA is charged with ensuring the safety and soundness of the System. 

Part of this responsibility is to examine whether the System is appropriately pricing 

its loans. Our examiners regularly review loan pricing practices during examinations. We also review inquiries received from the public, including commercial 

banks. 

Congress established the System for serving agriculture and rural America. Providing a stable and reliable funding source for that industry, in a safe and sound 

manner, and at competitive rates, helps ensure that the System fulfills that mission. 

Three sections of the Farm Credit Act address loan pricing by the System under 

typical market conditions. Those sections are 1.8(b), 2.4(c)(2), and 3.10(a). Section 

107 

1.8(b) states, ‘‘. . . it shall be the objective to provide . . . credit . . . at the lowest 

reasonable costs on a sound business basis taking into consideration the cost of 

money to the bank, necessary reserve and expenses of the bank and associations, 

and providing services to members.’’ Sections 2.4(c)(2) and 3.10(a) are consistent 

with section 1.8(b). Therefore, just as a money center bank or a medium-sized or 

community bank considers these factors in determining its rates, so must a System 

institution. 

Contrary to some misunderstanding, section 1.1(c) of the Farm Credit Act does 

not prohibit System lenders from charging interest rates below other lenders. That 

provision was added to the Farm Credit Act in 1986 to prohibit System institutions 

from using special regulatory accounting practices to charge rates below the competitive market. The legislative history of the provision indicates that Congress did 

not intend the language in section 1.1(c) to be a provision of positive law or to constitute a formula for determining interest rates. (See the 1994 General Accounting 

Office report, ‘‘Farm Credit System Repayment of Federal Assistance and Competitive Position.’’) When this provision was added to the Farm Credit Act, it applied 

to those System institutions that were temporarily using regulatory accounting 

practices. Therefore, section 1.1(c) did not override sections 1.8(b), 2.4(c)(2), and 

3.10(a) of the Farm Credit Act. 

Question 5. There is a question of whether CoBank’s loan to Verizon to buy-out 

Vodaphone’s interest in Verizon Wireless was an eligible loan under the Farm Credit Act. Can you share with us the FCA’s position on this? 

Answer. CoBank, ACB, has authority to lend to entities providing telephone services in rural areas. Section 3.8 of the Farm Credit Act specifically provides CoBank 

with this authority, which includes rural wireless carriers. Over the past 25 years, 

CoBank was an early and active lender for many of the communications companies 

providing wireless telephone services in rural areas. With the evolution of the wireless industry, there has been continued consolidation, with smaller ventures, many 

financed by CoBank, being acquired by Verizon or other communications companies. 

Further, under section 3.1 of the Farm Credit Act, Congress granted banks for 

cooperatives authority to participate in loans to ‘‘similar entities’’ for risk management purposes. A similar-entity is a party that is ineligible for a loan from the System but has operations that are functionally similar to the activities of eligible borrowers. To be considered a similar-entity, a party must derive a majority of its income from, or invest a majority of its assets in, the conduct of activities that are 

performed by eligible borrowers. Verizon Wireless has operations functionally similar to those of directly eligible rural wireless carriers. 

The statute limits the System’s similar-entity lending in a couple of ways. The 

Farm Credit Act requires non-System lenders to hold 50 percent or more of the principal amount of all similar-entity loans and restricts the cumulative amount of any 

System institution’s similar-entity participations to 15 percent of its total assets. In 

addition, participations to a single credit risk cannot exceed ten percent of the institution’s total capital. The System’s involvement in the syndicated credit was well 

below the statutory limitations. 

Loans to similar entities are multi-lender transactions often involving large companies. Before purchasing a similar-entity credit, the System institution must determine that the credit is within its similar-entity authorities and satisfies its credit 

underwriting standards. We review the System’s participation in similar-entity credits. 

Question 6. Can you explain to the Committee what the role is of the Farm Credit 

System institutions which are participating in loans, such as the Verizon Wireless 

buy-out, or in building a local hospital, another example raised in testimony? 

Answer. System institutions participate in loans, as authorized by the Farm Credit Act, to diversify their loan portfolios and earnings. This enables them to meet 

their mission of providing a stable source of credit through good times and bad for 

farmers and ranchers, their cooperatives, and other agribusinesses and rural service 

organizations. The legislative history is clear that Congress expanded the System’s 

lending authority to include similar entities as a means to provide the System with 

increased portfolio diversification. 

Likewise, on a very limited basis, as authorized by FCA under pilot programs or 

case-by-case approvals, System institutions have used their investment authorities 

to make investments in rural communities. These investments include bonds that 

finance improvements to deteriorating rural hospitals, rural medical clinics, assisted-living facilities, and other rural infrastructure projects that are critical to the 

well-being of farmers and ranchers and their communities. They constitute less than 

two percent of the System’s total assets. 

108 

These loan participations and rural investments are most often not completed in 

isolation, or in competition with local lending institutions, but rather in partnership 

with other local lending institutions, and many times in coordination with the 

USDA’s Rural Development Agency. 

Response from Chris Beyerhelm, Deputy Administrator for Farm Loan Programs, Farm Service Agency, U.S. Department of Agriculture 

Question Submitted by Hon. Joe Courtney, a Representative in Congress from Connecticut 

Question. The USDA Farm Service Agency guaranteed loan program is a very important program in my district. The program is used extensively by lenders in my 

District and across Connecticut. During the 2012 Farm Bill deliberations, I worked 

with Congressman Owens, then a Member of this Committee, to encourage language 

to be included in the farm bill that provides more flexibility for the types of business 

structures eligible for FSA loans and loan guarantees. Chairman Lucas and Ranking Member Peterson included this increased flexibility when drafting the farm bill 

this Congress. 

We have had situations where family farms that are structured as family trusts 

and Limited Liability Companies were not eligible for FSA guarantees. Could you 

check on the status of implementation of these farm bill provisions and report back 

to my office? 

Answer. The provisions you mentioned are included in sections 5001, 5002, 5101, 

and 5201 of the 2014 Farm Bill. To implement these sections as quickly as possible, 

FSA is using an expedited rule making process and plans to publish an interim rule 

that will become effective upon publication. The Federal Register document has been 

drafted and is currently in clearance. FSA anticipates publication of the interim rule 

this fall. In the meantime, FSA is developing training materials and other guidance 

for employees and customers to help ensure effective implementation. 

Æ