Farm Credit Administration

Fiscal Years 1998-2003

Strategic Plan

Contents

Message from the Chairman.................................................................................... 1

Mission........................................................................................................................ 2

 Legislative Mandate.......................................................................................... 2

 Constituencies and Guiding Principles ......................................................... 3

Vision Statement and

Strategic Goals and Objectives................................................................................ 4

 Vision Statement .............................................................................................. 4

 Strategic Goals and Objectives ...................................................................... 4

Strategies to Achieve Goals and Objectives .......................................................... 6

 Resource Needs................................................................................................ 8

Relationship Between Strategic Goals and

Objectives and the Annual

Performance Goals .................................................................................................... 9

Key External Factors Affecting Strategic Goal Achievement ............................. 13

Program Evaluations ............................................................................................... 15

FCA Board and Leadership

Team Concurrence .................................................................................................. 17

Appendix

Environmental Assessment ......................................................................... A-1

Planning Assumptions ................................................................................ A-4

Internal Assumptions .................................................................................. A-7

Management Focus Areas .......................................................................... A-9

The need to ensure agriculture’s future economic well-being and increased competitiveness of the Farm Credit System (System) dictates significant strategic change

ahead for all of us as we move toward the 21st century.

With my fellow Board Members, Doyle Cook and Ann Jorgensen, we focused on

this change as we planned strategically. This Strategic Plan reflects our belief that

the System will continue to play an important role for agriculture and rural America

in the new millenium. This plan reflects our belief that our responsibility is to

provide a flexible regulatory environment that enables the System to meet rural

America’s changing demands for credit and other financial services within the

authorities established by Congress. Our primary focus will always remain on

safety and soundness, but our rules and policies will respect market forces.

This Strategic Plan is an extension of the FCA Board’s vision of being the premier

regulator. We all are working hard to make this vision a reality. I believe our goals

and objectives provide a firm foundation for FCA’s future success and the success of

those we regulate.

I am proud of our employees and the Agency for having improved customer service

through less burdensome rulemaking and for having enhanced communications

with System institutions through our examination process. This Strategic Plan is a

product of the FCA Board and staff working together and reflects an Agency serious

about, and dedicated to, the job to be done.

Marsha Pyle Martin

Chairman and Chief Executive Officer

October 1, 1998

Message from the Chairman

1
LEGISLATIVE MANDATE

A healthy America requires a strong agriculture, and a strong agriculture requires a financially viable Farm Credit System (FCS or System). The Farm

Credit Act of 1971, as amended (Farm Credit Act), states that Congress established the FCS because it believed that an effective credit delivery system

dedicated to financing rural America would further the public interest. The

FCS was established to:

• Ensure that an adequate supply of credit is available to all creditworthy

producers and their cooperatives in both good times and bad.

• Provide reasonably priced credit to eligible borrowers by fostering and maintaining competitive markets in rural America.

As the independent regulator of the System, the FCA is responsible for protecting and balancing the public interest. The FCA’s regulations and policies must

be sound and constructive, use an approach that is proactive, manage risks

within reasonable costs, and reflect the continuing changes in, and the needs

of, agriculture.

FCA performs two basic functions to fulfill its mission:

• Identifying risk and taking corrective actions.

• Promulgating regulations and public policy.

Identifying Risk and Taking Corrective Action: FCA has statutory authority

to examine all FCS institutions, including the Federal Agricultural Mortgage

Corporation (Farmer Mac), as well as the National Consumer Cooperative Bank

and the NCB Development Corporation, which are non-System entities. At

October 1, 1998, the FCS was comprised of eight Farm Credit banks, 193

associations, and seven service organizations. The Agency issues written

examination reports that contain an evaluation of the overall condition and

performance of these institutions. The Agency’s examination program is riskbased, concentrating resources on institutions having the greatest risk exposure.

FCA continually identifies, evaluates, and proactively addresses risks faced by

the institutions it examines.

The FCA also has authority to initiate an enforcement action against an FCS

institution and its officers, directors, and employees who violate statutory or

regulatory requirements or engage in unsafe or unsound practices. Enforcement actions include agreements, orders to cease and desist, civil money

penalties, and orders of removal or prohibition.

Promulgating Regulations and Public Policy: The FCA has statutory authority to establish regulations and policies and interpret the Farm Credit Act and

Mission

The Farm Credit Administration will promote a safe and sound, competitive Farm

Credit System to finance agriculture and rural America as authorized by Congress.

2
other laws applicable to the FCS. The Agency promulgates regulations and

policy statements to ensure that the FCS complies with the law and operates

in a safe and sound manner. The FCA is also the chartering authority for the

FCS and reviews and takes action on corporate applications for mergers, consolidations, liquidation of System entities, and other corporate restructurings.

Agency personnel engage in a variety of activities that support these two basic

functions. These include: long-range planning and budgeting; providing

pertinent information to the Administration, Congress, the FCS, and the general

public; legal counsel; economic and financial analyses; management of information and human resources and training; and administration of the performance,

compensation, and benefits programs.

CONSTITUENCIES AND GUIDING PRINCIPLES

FCA’s constituencies are those who have an interest in, or are potentially

affected by, Agency responsibilities and activities. These include institutions

regulated by the Agency, investors in System securities, the Farm Credit System

Insurance Corporation, the Administration, Congress, and individual borrowers/

shareholders of the FCS.

Confidence in FCA promotes confidence in the FCS. Therefore, FCA must

demonstrate sound and constructive rulemaking that relates directly to its

objective of controlling risk in the FCS. Through our actions, there must be

no doubt that the FCA Board and management are effectively and efficiently

carrying out the Agency’s mission.

In the furtherance of its mission, the Agency will adhere to the following

Guiding Principles:

• We will remain a fair and effective regulator that provides its constituencies

with timely, accurate, and useful communications.

• We will continue to achieve a balance between costs imposed by the Agency

and the benefits which accrue to our constituencies, but in no case will we

compromise safety and soundness.

• We will continue to promote teamwork and a positive, productive, and

family-friendly work environment.

3
Vision Statement and

Strategic Goals and Objectives

VISION STATEMENT

FCA will be the premier regulator of financial institutions, ensuring dependable

credit for agriculture and rural America.

STRATEGIC GOALS AND OBJECTIVES

The environmental assessment of internal and external factors affecting the

Agency and the FCS was updated in fiscal year (FY) 1998 and the strategic

goals and objectives were revised. Several meetings dedicated to refining the

Strategic Plan were enhanced by customer meetings with FCS directors and

chief executive officers. These System leaders were asked to identify the

greatest challenges facing their institutions. These discussions added still more

detail to the information provided last year when staff from key congressional

committees were interviewed and asked not only to assess the environment,

but also to offer ideas for strengthening FCA. Issues and trends influencing

FCA’s future operating environment were identified using this information. A

supplemental document, “FCA’s Vision 2002,” provided more detail of likely

internal and external trends that may have significant implications for the

Agency during the next 5 years. The environmental assessment, including the

underlying planning assumptions, is presented in the Appendix to this Plan.

FCA’s strategic goals and objectives are:

Goal 1: Supervise risk in the Farm Credit System for the benefit of

stakeholders.

Objectives

• Enhance the value and effectiveness of FCA’s risk-based examination, oversight, and correction of problems in FCS institutions.

• Ensure that information systems of the FCS and FCA are effective in delivering appropriate data and analytical tools in the year 2000 and beyond.

• Enhance operations in regulated institutions through appropriate guidance.

• Ensure that FCA has the appropriate tools to address emerging risk in the

FCS.

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Goal 2: Maximize opportunities for the Farm Credit System to provide

competitive and dependable services for agriculture and rural

America.

Objectives

• Encourage new initiatives that help FCS institutions serve the evolving needs

of agriculture and rural America.

• Promote better customer service at lowest cost through support of healthy

competition.

• Ensure that the FCS has the ability to compete in global markets.

• Support the continuance of the FCS as a Government-sponsored enterprise

(GSE) for agriculture.

5
Strategies to Achieve Goals and Objectives

The strategic goals reflect our focus for future action. Objectives were developed for each goal. Strategic initiatives further identify activities for the

Agency during the next 5 years. Action plans for the strategic initiatives will

link this Strategic Plan and shorter-term operational plans of the Agency offices. Initiatives, dynamic in nature, must be adjusted to fit a changing environment. Timely assignment of personnel, budgeting, and reporting are key

ingredients of each initiative’s success. The Agency’s success will be captured

by the performance measures delineated in the section entitled Relationship

Between Strategic Goals and Objectives and the Annual Performance Goals. An

overview of our approach to achieve each goal and its objectives follows.

Goal 1: Supervise risk in the Farm Credit System for the benefit of

stakeholders.

FCA’s examination and supervisory programs have been recognized for their

high quality and effective results. This goal and its objectives focus on maintaining this high quality, as well as making still more improvements.

Areas of emphasis include the following strategic initiatives, which are designed to enable the Agency to achieve this goal and its objectives:

• Ensure that FCS institutions establish, maintain, and apply loan-underwriting

standards commensurate with institutions’ risk-bearing capacity and in accordance with sound lending practices.

• Implement a dynamic financial institution rating system that will identify

changes in institutional risk characteristics and alert FCA to potential problems.

• Develop stress-modeling and analytical capabilities for FCA to anticipate the

effects that changes in the operating environment may have on FCS institutions.

• Evaluate the adequacy and accuracy of data furnished by FCS institutions to

support FCA’s development of regulations and policy.

• Update and revalidate the Examiner Commissioning Program to train and

develop new examiners.

• Evaluate potential risk of legislative proposals in light of safety and soundness issues.

• Communicate FCA’s expectations for current events and emerging issues

affecting the FCS and FCA.

• Evaluate the effectiveness of the FCS financial disclosure program.

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Goal 2: Maximize opportunities for the Farm Credit System to provide

competitive and dependable services for agriculture and rural

America.

A major focus of the Agency’s regulatory and policy development in the 1990s

was the reduction of regulatory burden. In 1993, the FCA identified regulations and policies for elimination that were outdated or imposed undue burden

on FCS institutions. Consistent with that effort, the FCA Board established a

framework for the development of regulations with the adoption, in 1994, of

its Policy Statement on Regulatory Philosophy (modified in 1995). These FCA

Board actions ensure that regulations are written to implement the law, promote safety and soundness, and support the System’s continued competitiveness

in the marketplace, but do not impose undue burden on the System.

In addition, the Agency will focus on timely and user-friendly rulemaking and

policy development processes. For example, the Agency plans to take advantage of the new technology available to make the regulatory process more

interactive, efficient, and cost-effective. Near-term rulemaking projects include

investments, borrower rights, and termination regulations for banks and large

associations. The FCA Board recently approved the solicitation of comments

from the public on regulations that may be outdated, ineffective, or duplicative

of other requirements. Based on the comments received, the FCA Board will

propose rulemaking or policy initiatives to address these concerns.

Several of the more important initiatives that will be undertaken to satisfy the

objectives supporting this goal are to:

• Promote the FCS’s delivery of services to young, beginning, small, and minority producers.

• Promote strategic alliances among FCS institutions and with third parties in

order to benefit eligible borrowers.

• Enhance FCA’s intra-Governmental coordination on issues of significance to

the FCS.

• Ensure that regulatory activities do not pose roadblocks to international

agricultural commerce.

• Establish conditions governing bank or association termination and continued

service to the designated territory.

7
RESOURCE NEEDS

FCA’s direct obligations budget for FY 1998 was $34.4 million, down $1.5

million from FY 1997. The FCA is revising its financial management system to

account for costs by goals in FY 1999. Since more than 80 percent of total

costs are salaries and benefits, staff costs supporting each goal are the primary

costs of obtaining the desired outcomes.

Since FY 1995, actual costs have declined primarily because of reductions in

personnel. Staff levels have declined 43 percent from their peak in FY 1988.

The budget for FY 1999 projects a 4 percent increase. The human resource

forecast is for relatively stable staff numbers over the Strategic Plan period, but

new skills and a redirection of efforts will be required to achieve the goals

and objectives in this Plan. Expected increases in the cost of labor will be

partially offset by investments in technology and by reengineering processes to

produce better results at less cost. The strategic goals and objectives reflect

our commitment that FCA will continue to be a cost-effective regulator. The

Agency is exploring options to use our resources and systems at higher efficiency to permit reimbursable activities. So long as the FCS remains healthy,

FCA’s resource needs should not increase significantly over the planning horizon.

In 1995, the Agency conducted a long-range staffing study. This strategic effort

positioned the Agency to move into the next century. Efforts continue to

refine this study, improve productivity, align staff with strategic needs, and

develop the critical skills to accomplish the FCA’s mission, strategic goals, and

objectives. Since implementation of the Five-Year Staffing and Structure Plan

(Staffing Plan) in April 1996, 72 staff positions and two management layers

have been eliminated. In FY 1997, the number of field offices located outside

headquarters was reduced to 4, down from 11 in 1991.

The cost to the users of the FCS, when measured in terms of FCA’s expenditures compared to the System’s average earning assets, has been reduced

substantially. Since FY 1992, the peak cost year, FCA’s cost has been reduced

by approximately one-third, from 6.4 basis points to a projected 4.4 basis

points for FY 1998.

8
Relationship Between Strategic Goals

and Objectives and the Annual Performance Goals

The Strategic Plan was refined in FY 1998 by the FCA Board working with the

Leadership Team. Two goals were revised to reflect the mission of the FCA

serving its public in a rapidly changing environment for agriculture and the

financial services industry. The third goal, which focused on internal efficiency

and effectiveness, has been recast as Management Focus Areas in the Strategic

Plan (Appendix A-8). The results achieved by the Agency through the Goals,

Objectives, and Initiatives identified in the Strategic Plan will be reported

through an integrated performance measurement system. This system is predicated on four desired outcomes, or results, for the Agency’s operations which

are closely linked to the Agency’s strategic goals. Agency-level performance

measures have been developed for each outcome. The performance measures

identified below will be influenced by the initiatives associated with each goal.

Many measures are also indirectly linked to initiatives in the goals and will be

influenced by this relationship as well. For instance, a regulation or policyrelated initiative in Goal 2 will often relate to the safety and soundness of the

FCS, which would affect measures listed under Goal 1.

In addition to the Agency-level measures, each FCA operating unit has developed performance measures for its functional responsibilities. These measures

are linked to the Agency-level measures and will be included in staff’s individual performance standards as appropriate. By linking the Agency’s goals to

performance measures and then linking those measures to staff performance

standards, every employee in the Agency is working toward achieving FCA’s

goals and objectives.

The Agency’s performance measures are a “balanced” set of measures. That is,

while achieving the desired outcome or goal is important, consideration must

be given to the cost (inputs) and the accuracy and integrity of the products

(outputs such as examination reports, regulations, etc.) used to achieve the

outcome. Otherwise, the desired result may be obtained, but in a cost-prohibitive, or possibly inappropriate, manner. A balanced group of measures allows

management to assess the totality of the Agency’s operations and provides the

needed information from which future strategic decisions will be made. Development of performance measures was accomplished with input from the FCA

Board Members, the Leadership Team, and all Agency offices.

FCA will include the measures, along with the accompanying performance

goals, in its revised FY 1999 Annual Performance Plan. That plan will be

submitted to the Office of Management and Budget (OMB) along with the FY

2000 budget request. The following list depicts the linkage between the

Agency’s goals and outcomes, and highlights the measures developed to monitor FCA’s performance.

9
Goal 1: Supervise risk in the Farm Credit System for the benefit of

stakeholders.

Desired Outcome: Effective Risk Identification and Corrective Action

Performance Measures to Be Employed:

1. The health of the FCS, as depicted by the percentage of FCS institution

assets assigned to each of the composite numeric FIRS ratings, i.e., 1

through 5, with 5 representing the poorest rating (FIRS stands for Financial

Institution Rating System, which is a system for rating institutions on their

capital, assets, management, earnings, liquidity, and sensitivity to market

risk).

2. The number of direct-lender institutions with adversely classified assets to

risk funds less than 100 percent divided by the total number of directlender institutions.

3. The total assets of direct-lender institutions with adversely classified assets

to risk funds less than 100 percent divided by the total assets of directlender institutions.

4. The total assets of direct-lender institutions complying with all minimum

capital ratios (permanent capital ratio, total surplus ratio, core surplus ratio,

net collateral ratio) divided by the total assets of direct-lender institutions.

5. The 3-year average return on average assets of FCS institutions.

6. The percentage of FCA examinations of FCS institutions meeting statutory

examination frequency requirements.

7. Customer acceptance of FCA’s examination and supervisory programs

through the average of the ratings received on the following survey questions (1 to 5, with 1 being the highest):

• The board and management believe the findings of the examination will

assist (or have assisted) the institution in correcting identified weaknesses.

• The board and management believe the actions required by the enforcement document will assist (or have assisted) the institution in correcting

identified weaknesses.

8. The number of direct-lender institutions with adversely classified assets to

risk funds greater than 100 percent with corrective action plans that mitigate the excessive risk.

10
9. The percentage of FCS institutions and FCA that develop programs to meet

established time lines to achieve year 2000 compliance in all mission-critical

systems by 12/31/99.

10. The percentage of FCS institutions and FCA having contingency plans in

place when mission-critical systems have not been certified to be year 2000

compliant by 12/31/98.

Goal 2: Maximize opportunities for the Farm Credit System to provide

competitive and dependable services for agriculture and rural

America.

Desired Outcome: Effective Regulation and Public Policy

Performance Measures to Be Employed:

1. The percentage of regulatory projects completed compared with projects

included in the Board-approved annual Regulatory Performance Plan.

2. The percentage of regulations completed that utilized “special” customer

service focus or features.1

3. The percentage of regulations that customers believe meet the regulations’

original objectives.

In addition to these two goals, the FCA Board and Leadership Team have

determined that two other outcomes relating to the Agency’s administrative

operations and external relationships should also be measured to accurately

assess the effectiveness and efficiency of the Agency. To that end, we include

below these desired outcomes and their performance measures. As with the

measures for the two strategic goals, these measures will also be carefully

monitored.

Desired Outcome: Effective and Efficient Agency Administration

Performance Measures to Be Employed:

1. An unqualified opinion received on FCA’s financial statements.

2. The number of material weaknesses noted in the Federal Managers’ Financial Integrity Act letter from the Agency Chairman/CEO to the President.

3. The cost of FCA to FCS borrowers (FCA’s actual expenses divided by

average total System assets expressed as basis points).

1. Special customer service focus or features include “fast-track,” interim, and “direct” final rules, Advance

Notice of Proposed Rulemaking actions, meetings with or use of customer “focus groups” prior to proposing new rules, town meetings, hearings, negotiated rulemakings (Reg-Neg), etc.

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Desired Outcome: Effective External Relationships

Performance Measures to Be Employed:

1. The percentage of inquiries and complaints from Congress and the general

public that:

• Are answered within a specified time frame, and

• Do not require supplemental responses due to inaccurate or incomplete

information.

2. Congressional rejection of final FCA regulations and proposed legislative

initiatives, or requests for delay in FCA Board action on regulations.

3. The percentage of the Agency’s annual budget request approved by Congress without conditions.

4. The percentage of external reports issued on time, as specified in the

Publication Schedule.

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Key External Factors Affecting

Strategic Goal Achievement

Planning is partially based on a limited base of knowledge about key factors

that can determine success or failure. Therefore, business strategies rely, in

part, on predictions and probabilities. Success is a function of controlling

those factors that are within an organization’s power and wisely managing

around those that are not.

In developing this Strategic Plan, FCA identified several external factors that

could significantly affect achievement of strategic goals. These factors are

categorized into two areas—legislative and economic.

Legislative

• Financial Modernization — Proposals to repeal the Glass-Steagall Act, which

for more than 60 years has separated banking from commerce, combined

with other reform measures, would consolidate the financial services industry

and reduce the number of niche service providers. Without counterbalancing

measures for the FCS to maintain a level playing field, its viability and, thus,

its safety and soundness could be threatened.

• Change in the bank regulatory structure is expected to move from prohibited

activities to risk-management requirements to protect the public interest.

• New Funding Sources — Commercial banks’ greater access to funding

through the Federal Home Loan Bank System and Farmer Mac, as new

sources of long-term funds, could diminish the competitive position of the

FCS.

• Eliminating GSE status for the FCS — Within the context of financial reform,

a move to eliminate the System’s GSE status without significant reform measures for the System and other GSEs, while extending new powers to commercial banks, could seriously erode the System’s competitive position in

rural credit markets and increase the cost to farmers and ranchers who need

competitive alternatives.

• The focus on year 2000 will require a change in priorities and an increase in

reporting and testing to ensure that mission-critical systems of the FCA and

the FCS institutions are year 2000 compliant.

• The U.S. Department of Agriculture report on credit availability to young,

beginning, small, and minority producers, entitled “National Commission on

Small Farms,” will cause review and, possibly, new legislative efforts to

improve opportunities for underserved sectors of agriculture, which will have

both operational and public policy impacts on the FCS.

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Economic

• Globalization Trends — Traditional boundaries for the world’s commodity and

financial markets are disappearing rapidly due to technological breakthroughs

in the communication and production areas, as well as new and enhanced

trade agreements. The new market environment for U.S. producers will be

characterized by greater price and income volatility and likely changes in the

comparative advantage for some commodities. These developments portend

greater risk for agricultural producers and lenders.

• Agriculture — Accelerating consolidation, use of biotechnology, and the

vertical integration of agribusinesses are reshaping rural America, along with

the financial and infrastructure needs in the marketplace, at a revolutionary

pace.

• Fiscal and Monetary Policy — Large swings in Federal spending for farm

support programs—or their elimination—coupled with significant changes in

the money supply can affect income levels and interest rates, leading to

financial hardships for farmers and lenders.

• Recession — A major economic recession, especially one that is worldwide,

would be very damaging to agriculture, as falling demand decreases price

and income levels. Trouble for agriculture may again demonstrate the importance of the FCS as the only lender willing, and with a mandate, to finance

creditworthy agricultural producers through good times and bad.

• Natural Forces — Because weather is uncontrollable, world agricultural production levels are subject to wide swings, leading to occasional gluts and

shortages, with closely associated valleys and peaks in prices. Boom-andbust economics can be a precursor for land price surges. Thus, the health

of agriculture and the FCS is inextricably connected to the environment and

the earth’s natural resources.

14
Program Evaluations

Information gathering is an important part of the planning process. In gathering the information necessary to develop FCA’s Strategic Plan, we relied on

numerous sources of information, both internal and external. These sources

included staff studies on systemic risk issues, outreach programs with System

institutions, and Government reports on the agricultural economy. Agency

performance measures are supported by performance and cost data produced

by several office-specific systems. These systems will be refined and more will

be developed as needs are identified in this initial year of implementing performance measures.

Three types of audits are the primary sources of evaluative information used to

assess performance under the Strategic Plan: Agency self-assessments, audits

by the Agency’s Inspector General, and audits by external parties, such as the

General Accounting Office or the Agency’s external auditor. OMB guidance is

used to periodically review and report on the Agency’s systems for internal

controls, financial management, information resources management, and budgeting control. Corrective actions designed to overcome problems identified by

these audits may be integrated into the strategic planning process, as appropriate.

The FCA Inspector General routinely evaluates significant programs within the

Agency and makes recommendations for improvements. The Agency’s audit

follow-up program ensures that timely decisions are made relative to these

recommendations and that corrective actions are taken as needed. The Inspector General is a member of the Leadership Team and uses that forum to keep

program evaluation issues before Agency management. Further, the Inspector

General’s Semiannual Reports to the Congress (March 31 and September 30)

provide a vehicle to communicate any issue, disagreement, or other problem

identified by program evaluations. The Inspector General’s recommendations

have influenced numerous improvements in Agency operations. Recently

completed and planned program evaluations by the Inspector General include:

• Year 2000 — This evaluation will assess FCA’s preparation for transitioning

the Agency’s internal computer systems to the new millennium and testing

the compliance of existing systems.

• Development of performance measures by Agency offices — This evaluation

will focus on whether measures have been developed for all significant

internal functions, whether standards have been developed for measurements,

and whether reliable information systems exist to support application of those

metrics.

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• Effectiveness of FCA’s enforcement activities.

• Effectiveness of FCA’s rulemaking processes.

• Effectiveness of the Agency’s small purchases program.

• Effectiveness of FCA’s development of subject matter specialists.

Finally, the Agency has an extensive set of internal controls by which it monitors its operations. Findings from all of these operational assessments are

considered in the development of the Strategic Plan.

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FCA Board and Leadership

Team Concurrence

FCA management and policy making is vested in a three-member board.

Members of the Leadership Team are charged by the CEO to carry out the

Board’s mandate and implement programs as provided for in the Farm Credit

Act and this Strategic Plan.

The FCA Board and Leadership Team are committed to working with our

employees and with our constituents to make this an effective Strategic Plan.

The FCA Board: The Leadership Team:

Marsha Pyle Martin Donald P. Clark, Director

Chairman and Chief Executive Officer Office of Resources Management

Doyle L. Cook, Member Thomas G. McKenzie, Director

Office of Policy and Analysis

Ann Jorgensen, Member Eileen M. McMahon, Director

Office of Congressional and Public

Affairs

Jean Noonan, General Counsel

Office of General Counsel

Roland E. Smith, Chief Examiner

Office of Examination

Eldon W. Stoehr, Inspector General

Office of Inspector General

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A-1

Appendix

ENVIRONMENTAL ASSESSMENT

The most significant environmental trends affecting FCA’s mission are discussed

below. These trends and the assumptions that follow were the foundation for

formulating the goals and objectives in this Strategic Plan.

Financial Industry and Marketplace

During the planning period, agricultural lenders will face a changed lending

environment and a new set of risks. Some risks will emerge because of the

increased reliance of farm income on world market conditions and greater

volatility in commodity prices as a result of the Federal Agriculture Improvement and Reform Act of 1996 (1996 Farm Act) and resulting planting adjustments. Other risks will arise from increasingly aggressive competition among

traditional and nontraditional lenders for good loans. The condition of financial institutions lending in the agricultural arena may undergo significant

change as the dynamics of agricultural economics and production advances

cause shifts in the profitability of various agricultural sectors.

Historic changes in U.S. farm policy in 1996 will continue to cause a gradual

increase in the dependence of agricultural income on world market conditions.

Export of agricultural products is vital to the economic well-being of the U.S.

farm sector and, accordingly, surpluses and shortages in world commodity

supplies will significantly affect the profitability of farmers and ranchers and

their cooperatives. The value of farm exports is volatile and subject to forces

that are both diverse and unpredictable. These forces include U.S. foreign

policy, monetary policy, trade policy, national and international economic

conditions, and weather. Risk is increased when growth in mortgage lending

on farmland purchases is fueled by factors other than the income-generating

capacity of real estate, such as speculative purchases of real estate or

unsustainably high commodity prices. Risk in operating credits can also

change significantly from initial estimates as changes occur in national and

international supplies, interest rates, or as countries announce their trade needs.

The agricultural customer base for financial institutions is shrinking in number

and changing rapidly in size of operation. The number of small, part-time

farmers will continue to increase, but they will be less dependent on farming

for their livelihood. The trend toward fewer but larger farms will continue,

and the demand by lenders to serve this profitable market niche will become

increasingly competitive. This competitive market may fuel a trend toward

pricing loans to retain market share of this segment rather than pricing for risk
A-2

inherent in loans. The demographics of farmers and ranchers will also cause

changes in the lending programs of FCS institutions. The trend for moderate

and small size farmers and ranchers to seek off-farm employment to supplement agricultural income will continue. As their funding needs change, additional pressure will be placed on FCS institutions to change to meet their

requirements.

Farm Credit System

Tax law interpretations, new technology, competitive forces, and other developments in the financial services industry will prompt additional mergers and

consolidations in the FCS. In 1983, there were 932 FCS institutions, but by

October 1, 1998, that number had declined over 78 percent to 201. Although

consolidations and mergers are expected to continue and will result in fewer

FCS institutions at both the wholesale and retail levels, the workload for FCA

will not decrease proportionately over the planning period because larger, more

complex institutions will likely require closer supervision. System consolidation

is a key issue for FCA, as risk becomes concentrated into fewer, larger, and

more complex institutions at the bank and association level. Risk identification

and risk management programs are key to successfully managing these

changes.

Most FCS institutions will continue to operate as single purpose lenders with

significant concentrations in few industries. Because of the limitations of their

charters, and without selling off portions of the loan portfolios or participating

in other industry loans, they will continue to struggle to diversify their portfolios to escape the risks in their industry concentrations. To mitigate concentration risk, they will need to find innovative ways to continue to safely lend to

agricultural producers, processors, and marketers. Such new programs will

change the operations of FCS institutions and open new opportunities and

challenges. FCA must continue to be at the forefront of these changes and

ensure that it develops the expertise to examine complex programs as they

evolve.

Technological Changes

Two customer groups are emerging—those who want services delivered

through a personal computer (high tech) and those who demand a relationship

with a banker who knows them personally (high touch). The increased demand for electronic banking through the use of worldwide communication

networks and sophisticated data management capabilities will make possible a
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whole new array of services and products from financial vendors. This technology will enable lenders to steadily increase the business handled over

communication lines, thereby changing the way they conduct business. Similar

technology will enable FCA to regulate the FCS with less paper flow and more

off-site examinations. Opportunities also exist to use technology to electronically transmit data and/or communicate between System institutions and the

FCA.

FCA will need to continue to address the risk issues associated with the year

2000 date change, both internally and with the FCS. FCA has a plan in place

to correct the date change for FCA mission-critical and other significant information systems prior to the year 2000. The FCS is dealing with the problem;

however, many other forward-looking organizations that recognized the problem

earlier have found that the year 2000 problem is more massive and costly than

predicted. The early recognition of the problem by the System offers reasonable assurance that corrective actions will be implemented.

Major breakthroughs in genetic research and new production methods will not

only affect the varieties of agricultural products grown but where and how

they are produced. Biochemical engineering, modern cultivation practices, and

environmental concerns will contribute to new developments in production

capacity and economics. These developments will alter the risk characteristics

of some lending programs and may change the risk profile of System institutions and pose new challenges for FCA examiners.

Legislative and Regulatory Initiatives

The 1996 Farm Act introduced an entirely new price and income support

structure for agriculture by offering fixed payments to producers for 7 years,

regardless of current market prices. This legislation eliminated all deficiency

payments and set-aside acreage requirements, giving producers the flexibility to

grow whatever they want with few restrictions. The result of this is potential

additional risk to those institutions for which FCA has oversight responsibility.

FCA must continue its vigilance in monitoring risk and assessing risk management in the FCS.

Changes in the agricultural economy, the financial industry, and FCS structure

will continue to drive FCA’s regulatory and policy-making agenda during the

planning period. In addition to safety and soundness, emphasis will continue

to be placed on client and customer satisfaction, reducing regulatory burden,

and the increased use of electronic communications technology to encourage

public participation in the rulemaking process. The FCA Board will promote

innovative approaches to emphasize rules that are user-friendly and explain
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complex issues in layman’s terms. Emphasis will also be placed on developing

comprehensive educational tools after the adoption of significant regulations.

These materials will include key topic summaries for Congress, congressional

staff members, and other audiences.

Budget and Staffing Issues

FCA will continue to consider cost containment measures and respond to the

Government’s streamlining initiatives under the National Performance Review

(NPR). In 1996, FCA implemented the Staffing Plan, which is responsive to

the NPR report Creating a Government that Works Better and Costs Less. The

Staffing Plan contained many recommended changes that since implemented

have enabled the Agency to function more efficiently. Several offices were

restructured, and 72 positions and two management layers have been eliminated. The Agency will continue to be challenged to align available staff

resources to emerging skills requirements.

FCA, however, must always be able to carry out its financial and regulatory

responsibilities. A deep economic recession, a major financial crisis, or widespread distress in the agricultural sector could place an acute burden on the

Agency’s available resources. Therefore, FCA must remain alert to any threat

to its ability to carry out its mission and be prepared to adjust resources as

the need arises.

Improving Agency productivity by maintaining and enhancing employee satisfaction is a priority. FCA will utilize its talent base to the maximum advantage. Cross-training, rotational assignments, and new applications of information and communication technology will allow the Agency to address changes

in the FCS in a timely and effective manner.

PLANNING ASSUMPTIONS

FCA used the information in the environmental assessment to conduct an

analysis of the Agency’s internal strengths and weaknesses, as well as external

opportunities and threats. This analysis formed the foundation for the planning

assumptions listed below. It also helped define the Agency’s goals for the

future.

External Assumptions

Legislative and Regulatory Changes

• The FCS will explore expanded authorities to create new business opportunities.
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• Competitors will resist any perceived expanded authorities by the System.

• The role of GSEs will continue to be evaluated by Congress and the Administration.

• There will be a need for clear and persuasive explanations of FCA’s regulatory and policy actions and rationales, and ongoing communication with the

FCS, Congress, and the public.

• Commercial banks will seek greater access to GSE funding—a proposal that

would pose new risks, management challenges, opportunities for the FCS,

and regulatory demands on FCA.

• There will be continued pressure on the System to advance social purpose

programs.

• Expansion of the Federal Home Loan Bank charter will intensify competition

for the System, presenting challenges to the System.

• The direction and future of the Farm Services Agency will continue to be

debated, raising the possibility of FCS and FCA involvement.

Financial and Agricultural Industries

• Overall net farm income, after adjustments for inflation, will stay at a relatively flat level during the planning period, but with significant shifts in

profitability among commodity types and geographic areas due to the 1996

Farm Act.

• The riskier environment brought about by a reduced Government role will

lead to greater year-to-year price and income volatility, making debt repayment capacity more uncertain. This environment will lead to increased use

of risk-management tools, some of which will be new and will require both

farmers and lenders to acquire new skills.

• Trade barriers and reduced growth in foreign markets will challenge globalization of, and limit new and expanded markets for, American agriculture.

• Economic uncertainties in Pacific Rim countries pose increased risk, challenges, and opportunities for American agriculture.

• Portfolio concentrations in the FCS that are sensitive to export market or

foreign currency fluctuations contain inherent risk exposure.

• The agricultural industry will see moderate growth in loan demand, reduced

repayment capacity margins, and gains in real farmland values (i.e., adjusted

for inflation).
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• Interest rates will be marked more by short-term volatility than by significant

upward or downward trends.

• The traditional customer base of the FCS, the mid-sized family farm, will

continue to migrate toward a bimodal distribution of large agribusinesses and

small part-time operators, significantly changing the way the System conducts

its business.

• Increasing use of new and complex financial instruments will continue to

present challenges and risks.

Farm Credit System

Structure

• Merger and consolidation activity in the FCS will concentrate risk in fewer

and larger institutions.

• Associations will become more independent of Farm Credit banks, pursue

strategic alliances with each other, and increasingly become the focal point

for risk in the FCS.

• Farm Credit banks will focus on wholesale lending and forming strategic

alliances with non-System organizations to provide new financial services to

customers.

Competition

• FCS institutions will face intense competitive pressures from both traditional

and nontraditional agricultural lenders, resulting in innovative System responses and corresponding regulatory challenges.

• New lending initiatives and related service programs, combined with increasing emphasis on growth, will magnify intra-System competition.

Market Share

• The FCS’s balanced marketing efforts will be crucial to its long-term success.

During a stable agricultural economy, competition for good loans will increase significantly for the FCS. Maintaining market share will be difficult.

• Consolidation in the commercial banking industry will continue, and large

national banks may become more competitive in the agricultural arena.

• Small community banks lacking operating efficiencies will find it increasingly

difficult to compete with large banks and consolidated FCS institutions.
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• Desire for growth and market share within the FCS may cause it to relax

lending standards and use inappropriate loan-pricing practices.

Public Information

• An effective, well-rounded education and information program will enhance

public and constituent understanding of FCA’s role and value as an independent regulator.

• FCA will continue to provide accurate information about System authorities

and Agency actions.

Technological Changes

• Technology will continue to develop at a fast pace with significant advancements in hardware, software, and telecommunication capabilities.

• Secure electronic commerce on the Internet will change the way financial

products and services are delivered and money is exchanged.

• Year 2000 compliance will require significant remedial expenses or mergers

for some institutions.

• The FCS will aggressively pursue technology-based, streamlined lending

practices, many of which will challenge existing business lending practices

and require regulatory adjustments.

INTERNAL ASSUMPTIONS

Regulatory and Examination Issues

• The Agency will continue its commitment to effective regulations and policies.

• The Agency will continue to emphasize ongoing, risk-based examinations and

updated practices to ensure timely identification of risks and efficient use of

resources.

• The dynamic FIRS and quarterly adjustments to FIRS ratings will enhance the

Agency’s ability to measure and supervise risk in System institutions.

• FIRS guidelines provided to System institutions will enhance understanding of

performance expectations for FIRS ratings.
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• The Agency will continue to emphasize reliable, meaningful disclosure as a

means of increasing the accountability of management and boards of directors to stockholders, and to ensure that investors are provided the necessary

information to keep appropriately informed.

Management Systems and Operations

• Reliable financial management records and information systems will provide

an opportunity for improving management decision making.

• Reengineering of Agency processes will continue to increase efficiency and

effectiveness.

• Meaningful performance measures will improve Agency results and allow

accurate and appropriate evaluation of the FCA’s performance under the

Strategic Plan.

• The effectiveness of the Agency will improve as all employees are involved

and better understand their roles in implementing the Strategic Plan.

• The Agency will pursue alliances with other regulators to enhance efficiency,

increase revenue, and reduce operating costs.

• Public scrutiny of the Agency’s budget will continue.

Technological Changes

• The Agency’s client/server computer network environment will continue to

provide opportunities for increased efficiency and effectiveness; costs and

security risks will be continuing challenges.

• New technology will provide an opportunity for alternative work environments and cultures.

• Enhanced computer skills will allow improved use of new technology.

• Technological capabilities will be updated to meet business needs.

• Electronic access to FCS information will enhance the examination process.

• FCA will meet its year 2000 readiness plan.
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Human Resources Management

• FCA staff will continue to be skilled, experienced, talented, and highly regarded.

• Staff skills will need to keep pace with emerging issues and changing priorities.

• Contingency planning will position FCA to respond to changing conditions.

• A competitive compensation level will enable FCA to attract and retain high

quality employees.

• Striking a balance between the Agency’s commitment to a family-friendly

workplace and Agency needs will present challenges and opportunities.

• Employees who are committed to making FCA the premier regulator will

continue to be rewarded.

• Recommendations from employee task forces and resulting decisions will be

vital to ongoing management planning.

MANAGEMENT FOCUS AREAS

The costs of the FCA are assessed to the FCS institutions under the Farm

Credit Act. FCA must provide effective and efficient regulation of the FCS for

the benefit of agricultural producers and others designated in the Farm Credit

Act while protecting the investing public from unreasonable risks in FCS securities. The strong correlation between sound, effective regulation and the riskadjusted price of FCS securities ensures competitive interest rates for agriculture

from this GSE source. The cost of regulation is a cost of doing business for

the FCS, and the FCA Board controls the operating costs of FCA through

business planning and formal budgets that are the basis for the assessments.

Management will ensure that FCA meets its mission and that the continuing

benefits of regulation are maintained by operating FCA as a business, weighing

the costs of its actions against the long-term benefits. Management will consider innovation in practices, franchising services, outsourcing and investment

in technology to acquire the skills and services necessary at the best value for

FCA.

Human Resources

FCA must hire, train, motivate, and reward employees appropriately to successfully meet its mission in a cost-effective manner. FCA is committed to maintaining a 5-year human resources plan. The plan will address numbers of

employees, grades, training, and Equal Employment Opportunity and skills
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objectives needed for essential operations and to implement the Strategic Plan.

Compensation, benefits, performance measurement, and rewards will be structured to ensure premier performance by FCA.

Financial Plans

The Chief Financial Officer will develop a 5-year financial plan to identify

resource needs and analyze the impact on costs, assessments, and effectiveness.

This plan will consider strategic initiatives, the orderly replacement and upgrades of equipment and systems, and programs required for FCA operations.

FCA will analyze the net changes in resources required over the plan period,

as well as develop contingencies for changes in the operating environment.

The financial plan will provide the FCA Board a resource for approving budgets and approving the Strategic Plan.

Information Technology Plans

The role of IRM in the operations of FCA is to deliver timely and cost-effective

information management services and systems that significantly contribute to

the accomplishment of FCA’s mission. The following three major responsibilities contribute to fulfilling this role:

Policy and Planning includes IRM policy, planning, reviews, quality

assurance, and security.

Information Management includes records management, library

operations, and information collection.

Technology Management includes technology assessment, acquisition management, system and network operations, “helpline”

services, loaning of equipment, systems development, database

administration, technical training development and delivery, and

security implementation.

The Agency will continue to promote the use of technology to help accomplish the FCA mission more efficiently and effectively. Agency technology

investments will be evaluated and chosen through a disciplined process that

weighs the risks against expected returns or results. Cost containment will

remain a high priority, and the most cost-effective means of conducting business will be pursued.

The establishment of information oversight committees and a formal IRM planning process has been instrumental in permitting the FCA to implement an

efficient and effective IRM program. The FCA’s Leadership Team provides

executive direction and oversight to the Agency’s operations, including the IRM

program. The IRM Operations Committee (IRMOC) provides business unit
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input to the Leadership Team as part of its role in recommending a 5-year IRM

plan. The IRMOC also coordinates operational matters and provides a forum

for communication between the Director of the Information Resources Division

(IRD), IRD staff, and the other IRMOC members.

Communication with the Public

The FCA recognizes the importance of communicating information and receiving feedback from its customers to improve service and accomplish its mission.

Programs such as the periodic meetings with FCS institutions, Internet access,

and publications and reports will be reviewed
Copies Available From:

Office of Congressional and Public Affairs

1501 Farm Credit Drive

McLean, VA 22102-5090

E-mail: info-line@fca.gov

http://www.fca.gov