Remarks by

The Honorable Kenneth A. Spearman

Board Chairman and CEO, Farm Credit Administration

AgFirst Farm Credit Bank, Annual Meeting

Hot Springs, Virginia

June 29, 2015

I am pleased to report that the condition of the Farm Credit System is strong. Its net income was 

$4.72 billion in 2014, up 1.8 percent from 2013. The System also maintained a strong capital 

position in 2014, with total capital at $45.7 billion at the end of 2014, up more than $3 billion

from the year before.

In general, the quality of System loans remains very good. Credit quality for livestock, dairy, and 

poultry producers improved in 2014 because lower feed costs and favorable pricing led to 

strong profits. 

And the AgFirst district is an important part of the overall System’s success. Your total loan 

volume increased 5 percent in 2014. 

Since your portfolio of loans to protein producers is generally higher than the overall System, 

your district benefited from the higher prices and lower feed costs that protein producers 

enjoyed in 2014. This has contributed to the improvement in your credit quality.

At year-end 2014, almost 94 percent of the combined association district portfolio was classified 

as acceptable, compared with 92 percent last year, and up substantially from several years ago.

So I would like to congratulate you on the success of this past year.

As a regulator, we work very hard to anticipate challenges that the System may face in the 

years ahead, so I’d like to spend a few moments sharing with you the five greatest risks that we 

foresee for the System as a whole. 

The first risk I’ll mention is the possibility of a substantial correction in farm real estate values. 

Real estate mortgage loans accounted for about 45 percent of the System’s total loan portfolio 

on December 31, 2014, and farm real estate serves as the primary collateral for these loans. 

As we’re all aware, farmland values have risen dramatically over the past few years. When land 

values are high and demand for credit is great, credit risks may not be as apparent. I am 

pleased to note that System institutions have generally been restrained in their farm real estate 

lending during this period of rising land values, and this conservatism will help mitigate any 

financial fallout from a drop in land prices. I encourage you to continue to pay close attention to 

collateral risk in the loans you make.

The second risk I’ll mention is the risk of a protracted period of low grain and soybean prices. 

As a result of more plentiful world supplies and weaker demand, many analysts are now 

projecting an extended period of lower grain and soybean prices. Although many producers are 

well positioned to survive a few lean years, some are not. And cash grain farms account for 

about 18 percent of the System’s total loan portfolio, making it the largest commodity risk for the 

System.
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In general, the AgFirst district is well diversified, but a few associations have higher

concentrations of loans to grain producers. These associations may need to monitor this risk 

closely.

The third risk is the rapid rise in interest rates. The Federal Reserve appears likely to raise 

short-term rates before the end of the year, and higher long-term rates are likely as the 

economy strengthens and expectations for inflation rise. 

A steep, rapid rise in interest rates could cause assets, such as farmland or housing, to lose 

value quickly. The dollar would also strengthen against other currencies, putting U.S. farm 

exports at a disadvantage. A rapid rise in interest rates could produce a spike in credit problems 

because of falling collateral values and higher debt servicing costs. It could also lead to slower 

economic growth, choking off the demand for higher-valued farm products.

We recognize that interest rates will eventually rise, and as your regulator, we will continue to 

monitor developments in the Fed’s interest rate policy and its impact on the System.

The fourth risk to the System as a whole is a continuation of California’s drought for several 

more years. The drought is already in its fourth year, and it is likely to go into a fifth year. Some 

experts suggest that the state’s drought could extend for many more years. 

If that happens, many current borrowers may be deemed uncreditworthy because of limited 

water access. This would likely lead to loan losses for the System. Nearly 10 percent of the 

System’s total loan portfolio consists of loans made in California.

And the fifth risk to the System is a weakening in export demand. The value of U.S. agricultural 

trade has more than doubled since the mid-2000s, making trade very important to our farm 

economy. And last year was a record year for U.S. farm exports. So a drop in demand could be 

a real challenge to farmers and therefore to farm lenders. 

Economists do, in fact, expect to see a decline in exports in 2015—for several reasons. First, 

some of the fast-growing economies to which U.S. producers sell farm products are slowing 

down. They’re still growing, just not as fast. Second, the dollar has gotten stronger, which 

makes our products less competitive. Another factor that can drive down exports is a change in 

government trade policy. Take Russia, for example. In response to international sanctions 

levied against it, Russia has banned products from the countries imposing the sanctions. All of 

these factors can weaken export demand, reducing farm income and the ability of farmers to 

repay their loans. 

Those are the top five risks that we see facing the System. There are many other risks, 

including crop and livestock diseases. Your district has been dealing with the effects of citrus 

greening for several years now, and I am aware that the industry is searching for solutions. 

Fortunately, the porcine epidemic diarrhea virus, which affected some of the swine operations in 

your district, is now under control, but the avian flu could take its place. The most recent 

outbreak of this virus was detected in Oregon seven months ago. Since then, it has spread to 

14 more states. So far, the virus has not appeared in the AgFirst district. But since your district 

portfolio includes a sizeable poultry segment, I do encourage you to take measures to mitigate 

this risk.

Over the past several years, FCA has emphasized the importance of sound loan portfolio 

management. I would like to commend your district for your responsiveness to the guidance 
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we’ve provided in this area. In late 2012, you established a Collateral Risk Focus Group, with 

representatives from all district associations. This group has focused on data enhancements, 

policy and procedure recommendations, collateral evaluations, and land trend analysis. These 

efforts have significantly strengthened your district’s collateral risk management.

I would also like to recognize your district’s leadership in serving young, beginning, small, and 

minority farmers. Six years ago you sponsored Ag Biz Planner, a curriculum designed to teach 

members of these groups how to successfully manage and grow their operations. Already, the 

curriculum has had 500 enrollments, and this number is likely to grow substantially as more 

System institutions take advantage of it. 

I am aware that the AgFirst Farm Credit Bank continues to review its operating expenses, and I 

commend you for doing this. As I understand, AgFirst associations may be able to achieve 

greater efficiency by utilizing existing information technologies more fully. I encourage you to 

take advantage of these opportunities to improve efficiency across the district.

FCA is also working hard to leverage technology for greater efficiency. In May we created a 

separate Agency-level division called the Office of Technology, and we are currently recruiting 

for the right person to lead this office. 

In the few remaining minutes, I’d like to share some thoughts about the work we are doing at 

FCA. I just mentioned our efforts to use technology to improve efficiency. We are also using it to 

improve our effectiveness. The Farm Credit System Loans database project is a good example. 

With this new database, we can obtain more timely, comprehensive information about the loans 

that System institutions are making and how these loans are interrelated. That will enable us to 

detect risks earlier and to see their effects not only on individual institutions but the System as a 

whole. 

Of course, technology comes with risks, as well as opportunities. I’m sure you’ve all heard about 

the cyber security breach at the Office of Personnel Management. Incidents like this are a threat 

to every organization, public or private, and we are constantly on guard against this threat. 

As the System regulator, we are also concerned with cyber security threats to your institutions. I 

was recently asked to join the Financial and Banking Information Infrastructure Committee. 

Chartered under the President’s Working Group on Financial Markets, this committee is 

charged with improving coordination and communication among financial regulators. As a 

member, I will work with others from regulatory agencies to coordinate efforts to improve 

network reliability and information security.

On the regulatory front, we recently reopened the comment period on the proposed capital rule. 

This will give the two new Board members additional time to consider this complex rule. Since 

the end of the original comment period, we have been reviewing the input we received, and we 

will carefully consider these additional comments as well. This rule is very important because it 

will update the System’s foundation for safety and soundness, and it will help ensure that the 

System remains well-capitalized. 

On the examination front, we are stressing the importance of strong internal controls. Our Office 

of Examination has developed new draft guidance for our examiners to use in evaluating 

institutions’ internal controls. In the near future, we plan to provide guidance on best practices 

that we want you to consider. We may also develop other guidance, including a proposed rule,

to strengthen this area. 
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But you don’t have to wait for this guidance. I encourage you to take the initiative now to 

perform a self-assessment. What are your weaknesses? And what business practices could you 

adopt to address them? You know best where your weaknesses may lie and how to address 

them. I understand the value that strong internal controls can bring to an organization. Having 

them in place can save many headaches down the road. So I urge you and your audit 

committees to make sure your institution’s internal controls are functioning effectively. 

I’d also like to share a few thoughts on diversity. In 2012, I was proud to support a new rule 

requiring System institutions to increase their outreach to minority groups in their territories. The 

purpose of the rule is to increase diversity—both in the customer base and the workforce of 

System institutions. I would like to commend your district for your responsiveness to this rule. I 

understand that you have reworked your YBS policy and procedures to include minority farmers. 

I also hear that you have supported events focused on nontraditional audiences, such as 

organic farmers and women farmers. And I understand that you have expanded your efforts 

through your farmers market program. These are exactly the kinds of initiatives that we had in 

mind when we issued the diversity rule.

Diversity is especially important in the Farm Credit System because it’s a Governmentsponsored enterprise. It has a public mission to serve all eligible, creditworthy individuals. 

We’re focusing on diversity at FCA as well. In our recruiting for new employees, we are making 

concerted efforts to attract qualified individuals from diverse backgrounds. I support diversity 

because I believe it’s the right thing to do. At FCA, we expect ethical behavior of every individual

in every activity—from hiring, to conducting exams, to writing regulations. We have a strong 

ethics program, which includes mandatory annual training for every employee. I believe that 

integrity is critical to the success of any organization. 

In addition to emphasizing diversity and ethics at FCA, we are also looking for ways to make the 

working environment more positive for all employees. When morale is high, employees are 

more efficient and effective.

Now I’ll leave you with a few final thoughts. In my early career as an accountant in private 

industry, my focus was on the numbers and how they affected my organization.

But when I entered the agriculture industry about 30 years ago as an accountant in an ag

cooperative, my perspective broadened. I am proud to be part of an industry that meets one of 

humanity’s basic needs. 

I am also proud today to play a role in ensuring the safety, soundness, and mission 

achievement of the Farm Credit System because I am keenly aware of the role the System has 

played over the past century to create the vibrant farm economy we have here in the United 

States. And although I am bound by ethical standards to maintain an arm’s length distance from 

the System, I understand that we cannot be an effective regulator without open communication 

with the institutions that we regulate.

The System truly is the best-kept secret to the success of the American farm economy. For the 

System to continue to play this important role, however, it can’t stay a secret, not in today’s 

political environment. The System needs to tell its story—to Congress, to the public, and to its 

detractors. —Don’t let others define you.—
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Another crucial factor in the System’s continued success is its focus on mission. The System 

must stick close to its congressional mandate to serve agriculture and rural America. And we, as 

the regulator, will do our job to ensure the System’s safety and soundness so that you may fulfill 

your mission to provide credit for farmers and ranchers for generations to come.

Thank you.