Testimony of 

The Honorable Nancy C. Pellett 

Chairman and Chief Executive Officer 

Farm Credit Administration 

Before the 

House Agriculture Subcommittee on 

Conservation, Credit, Rural Development, and Research 

United States House of Representatives 

September 29, 2004 

 Mr. Chairman, members of the Subcommittee, I am Nancy Pellett, Chairman and 

Chief Executive Officer of the Farm Credit Administration (FCA or Agency). On behalf 

of my colleagues on the FCA Board, Doug Flory and Michael Reyna, I am pleased to be 

here this afternoon to discuss the current and future state of the Farm Credit System (FCS 

or System). 

 The FCA is the independent Federal agency responsible for regulating and examining 

the FCS and the Federal Agricultural Mortgage Corporation (Farmer Mac), governmentsponsored enterprises (GSEs) designed to serve agriculture and rural America. 

 The FCS is a nationwide network of borrower-owned cooperative financial 

institutions and affiliated service organizations that serve all 50 states and the 

Commonwealth of Puerto Rico. The FCS is the oldest of the financial GSEs. Congress 

created the FCS in 1916 as a means to achieve affordable and dependable credit for 

farmers and ranchers. 

 The mission of the System is to serve agriculture and rural America through good 

times and bad. In establishing the Farm Credit Act, Congress set out its objectives by 

stating, 

 It is declared to be the policy of the Congress, recognizing that a 

prosperous, productive agriculture is essential to a free nation and 

recognizing the growing need for credit in rural areas, that the 

farmer-owned cooperative FCS be designed to accomplish the 

objective of improving the income and well-being of American farmers 

and ranchers by furnishing sound, adequate, and constructive credit 

and closely related services to them, their cooperatives, and to 

selected farm-related businesses necessary for efficient farm 

operations. 
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 The FCS currently provides approximately $100 billion in loans to farmers, ranchers, 

producers and harvesters of aquatic products, rural homeowners, agricultural 

cooperatives, rural utility systems, and agribusinesses. This includes loans for production 

agriculture, operating needs and capital purchases; rural housing needs; farm-related 

businesses; rural utilities, including water and sewer systems; and money to ensure that 

rural Americans have access to the latest communications technology. Almost a half 

million borrowers and several million rural residents benefit from System funding. 

 Overall, the FCS has about a 30 percent market share of total agricultural credit. FCA 

derives its authority and responsibilities from the Farm Credit Act of 1971, as amended 

(Act). The Act authorizes the FCA to “exercise the powers conferred on it [under the 

enforcement provisions of the Act] for the purpose of ensuring the safety and soundness 

of System institutions.” 

 The mission of the Agency is to ensure the FCS, including Farmer Mac, remain a safe, 

sound, and dependable source of credit and related services for agriculture and rural 

America. To achieve our mission, we examine, regulate and supervise the banks and 

associations of the System and Farmer Mac. In our regulatory oversight role, we also 

have enforcement powers that are similar to those of other federal financial regulators 

that can be exercised should the need arise. At the same time, we are dedicated to 

maintaining a flexible regulatory environment that meets current and future rural credit 

needs while ensuring safety and soundness. 

 I am pleased to report that the System is sound in all material respects. Earnings and 

capital levels have continued to strengthen and asset quality remains high. Without the 

FCS, we believe the soundness of agriculture and the quality of life in rural America 

would be greatly diminished. American consumers have benefited enormously from 

American agriculture’s high productivity and efficiency as reflected in the declining 

share of income that Americans spend on food....from 21 percent in the 1970s to around 

14 percent today. 

 While the System is presently sound, there are many challenges facing agriculture and 

rural America today that raise the question of whether there should be modifications to 

the System’s chartering legislation in order to enhance agricultural and rural economies 

of the future. 

 In the early 1990s, the General Accounting Office (GAO), at the request of Congress, 

conducted a comprehensive study of the cost and availability of credit in rural America. 

Congress requested GAO to address, among other things, whether the FCS should be 

granted new authorities to serve other credit markets in rural America. The GAO Report, 

released in March 1994, concluded that the System did not need new statutory authorities 

in the near term, but that ongoing structural changes in agriculture and rural America 

could justify such changes in the longer term (emphasis added). GAO noted that over 

time, as agriculture and rural America continued to change, the System’s charter might 

need to be updated to ensure that the System is not hampered by outdated restrictions in 

serving its existing customer base. 
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 Mr. Chairman, the changes in agriculture and rural America alluded to in the GAO 

Report have arrived. Such changes are borne out by the national statistics, which are 

staggering. In 1970, 26 percent of the American population was considered rural. By 

2000, Americans living in rural areas had dropped a fifth to only 21 percent of the 

population. Over the same period, the total American labor force exploded by 70 

percent, while agricultural employment actually dropped by 5 percent. Additionally, the 

number of farms in operation declined from 3 million in 1970 to around 2 million in 

2000, a decrease of one-third. Agriculture has been transitioning to a bi-modal industry 

during the last decade, resulting in fewer traditional family farms as we knew them in the 

1960s, 70s and 80s. 

 Farm real estate has undergone some dramatic changes since 1970 as well, 

dramatically increasing the need for readily available credit, particularly for young, 

beginning and small farmers. U.S. farm real estate values (all land and buildings on 

farms) have increased from $196 per acre to $1,360 per acre in 2004, a 594 percent 

increase, or equivalent to an average increase of around 17.5 percent a year in nominal 

dollar terms. This year represents the 17th consecutive year U.S. farm real estate values 

have increased. 

 The challenges of financing agriculture in a safe and sound manner remain great. This 

is particularly true given uncertain weather and commodity prices, changing world 

competition and public policy, continued concentration and integration in agriculture, and 

concerns regarding safety and security of the food system, transition to the next 

generation of farmers and ranchers, and improving producer’s income through valueadded agriculture. 

 In responding to these changes and their effect on agriculture, the FCA Board adopted 

a 5-year Strategic Plan after holding a series of planning sessions that obtained input from 

farmers and ranchers; the Farm Credit Council and other System representatives; 

economists and finance specialists; the American Bankers Association; the Independent 

Community Bankers of America; former FCA Board Chairmen; and FCA Senior 

Management. 

 What we learned is that we must maintain a flexible and responsive regulatory 

environment. And where appropriate, we should eliminate or revise regulations that 

unnecessarily impair the System’s activities. 

 However, the limits of that flexibility are currently being tested as the changes in 

agriculture and rural America have eclipsed the legislative parameters initially granted to 

the System. The mission-driven desire and sometime financially-driven need of the 

System to expand its operations, not only within agriculture but also to rural America 

presents some challenges within existing authorities. 
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 The FCA Board considers the Agency’s 5-year Strategic Plan to be a dynamic 

document, requiring modification as conditions and circumstances change. Three 

strategic goals were adopted this year reflecting the changes taking place in agriculture 

and rural America. The goals are as follows: 

Goal 1: Ensure the Farm Credit System and Farmer Mac fulfill their public mission 

for agriculture and rural areas.

Under this goal, FCA will continue to emphasize the public purpose and mission-related 

responsibilities of FCS and Farmer Mac. As a part of fulfilling its mission, we will 

encourage System institutions to develop both public and private partnerships and 

alliances with other financial service providers to further advance their service to 

agriculture and America. 

Goal 2: Evaluate risk and provide timely and proactive oversight to ensure the 

safety and soundness of the Farm Credit System and Farmer Mac.

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

and effective results. Goal 2 focuses on preserving and enhancing the integrity of FCA’s 

examination and supervisory programs by making improvements to address changing 

risks in the institutions we oversee. We will stay abreast of changing market needs and 

customer forces, we will have a cost effective examination process that makes full use of 

available technologies, and we will take the necessary supervisory action to proactively 

ensure safety and soundness of the System and Farmer Mac. 

Goal 3: Implement the President’s Management Agenda.

We will implement to the fullest extent the five government-wide initiatives that 

comprise the President’s Management Agenda, which include: strategic management of 

human capital; improved financial performance; expanded electronic government; budget 

and performance integration; competitive sourcing. 

In developing the 5-year Strategic Plan, the FCA Board identified a number of factors 

that could affect achievement of one or more of the Agency’s goals. Among the external 

factors identified, some relate to the structural changes taking place in agriculture that 

could pose challenges for the System and FCA, and also demonstrate the need to reassess 

current authorities in the Farm Credit Act. For example, 

• Structural changes in agriculture and rural areas. The farm sector is 

increasingly reliant on off-farm income and government payments. In addition, 

many rural counties in traditional farming communities are losing population and 

their rural infrastructure is declining. Many producers are part-time farmers and 

rely on additional business opportunities to improve their economic welfare. 

• Lack of investment equity in many rural areas. Some rural areas are suffering 

from a loss of critical infrastructure, population, and business investment 
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necessary to support opportunities. Furthermore, much of the capital in rural 

areas is held in the form of fixed assets and is not easily converted for investment 

purposes. Therefore, there is a need for more flexible, innovative forms of capital 

that will help rural areas reach their economic potential. 

• Importance of GSE status. GSE status of the System and Farmer Mac helps 

maintain a safe, sound, and dependable source of credit and related services for 

agriculture and rural America. This is because GSE status facilitates a 

competitive source of credit for eligible and creditworthy borrowers in good times 

and bad. Furthermore, it results in a capital structure that is vital to the borrowers 

themselves and to the safety and soundness of the System and Farmer Mac. 

 As the System comes under increasing pressure, in the face of these emerging 

changes, to provide the same level of accessible and affordable credit to agriculture and 

rural America that it has in the past, Congress may want to consider whether the Act is 

responsive to such demands or whether changes are warranted. Among some of the areas 

FCA has pondered that Congress may wish to consider are: 

1. Change rural home lending authorities that restrict such lending to towns 

 of 2,500 in population so that such loans can be made in larger rural 

 communities. 

2. Provide more flexibility for System institutions to engage in syndication 

 lending. In addition, authorize banks to engage in syndication lending. 

 These are just a few examples of changes that could be made to the Act that would 

make it more relevant and responsive to the needs of rural America. 

 I would hope that today’s hearing sets the stage for Congress to enlist the aid of FCA, 

the System, and representatives from agriculture and rural America in seeking legislative 

solutions that will result in an updated Act responsive to meeting the economic, social 

and cultural needs of today’s farmers, ranchers and rural Americans. Although we are 

not in the middle of a farm credit crisis, as we have been before, we recognize that the 

Act was Congress’ way of acknowledging that protecting and sustaining American 

agriculture, providing for national security, and those living and working in our Nation’s 

rural areas, was and is crucial to our country’s economic and social well being. 

 At FCA we would welcome the opportunity to work with you to help bring the Farm 

Credit Act into the 21st century while maintaining its original mission, which is as valid 

today as it was when it was formulated. 

 Let me now turn to a matter that has spawned much attention and has raised questions 

about the applicability of the Act and the purpose of the Farm Credit System. In early 

August, a System institution, the Farm Credit Services of America, ACA (association), 

notified us of its intent to terminate its status as a System institution. Such an action is 
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permissible under the Act and we have regulations implementing these provisions of the 

Act that allow for the orderly exit of an institution from the System. 

 Since my colleagues and I would sit as the deciding authority on any termination 

application submitted to us, it would be inappropriate for me or anyone at FCA to 

comment on the particulars of the association’s announced intention to terminate its 

System status. Therefore, I hope you will appreciate that I will not be able to respond to 

questions relating to this specific association’s intended termination at this time. 

 What I can share with you is a brief summary of the key elements involved in the 

termination process. Within the Act and our regulations we have two very important 

decisions to make. First, we must approve or disapprove any termination application 

from a broad perspective, including whether a proposed termination will have a material 

adverse effect on the remaining System institutions in fulfilling their statutory mission. 

 Second, if we provide preliminary approval to a termination application, we must 

ensure that the termination plan, including the disclosure material describing the intended 

action that is provided to stockholders for a vote is complete and accurate. This is critical 

so that the stockholders can make an informed decision. 

 Concurrent with any termination of System status by an institution, FCA would take 

steps to ensure that FCS service to the terminating institution’s territory is maintained. 

We believe that making credit available to all eligible borrowers regardless of location is 

necessary to carry out the purposes of the Act. The Board of the Farm Credit 

Administration has complete confidence in the Agency’s ability to carry out all of its 

regulatory responsibilities as it relates to the oversight of System activities, including our 

ability to reach an informed decision on any termination requested by a System 

institution. 

 In conclusion, Mr. Chairman, FCA is committed to ensuring that the Farm Credit 

System remains financially sound and operationally equipped to fulfill its statutory 

mission to serve agriculture and rural America well into the future. 

 Thank you for the opportunity to appear before you today and I stand ready to answer 

questions you or members of the Subcommittee might have.