management. Flexibility is needed so that lending capacity remains available and risk
exposures stay within the Farm Credit System’s risk-bearing capacity. Examples
include raising capital through third-party sources, managing loan exposures through
participations within the Farm Credit System and with other lenders, increasing
Systemwide coordination efforts, and working with agricultural producers as they adjust
their risk management strategies.

In conclusion, competition in agricultural lending markets remains robust with the Farm
Credit System, commercial banks, and other lenders providing liquidity to the
agricultural industry. As a significant financier of the agricultural industry, the Farm
Credit System has met, and we believe will continue to meet, the increased credit
demand resulting from higher commodity prices, input prices, and farmland values.
From our perspective, the Farm Credit System has the financial strength, industry
expertise, and mission focus to play a significant role in meeting the agricultural
industry’s credit needs going forward.

Thank you for the opportunity to address the Commodity Futures Trading Commission’s
Agricultural Forum.


Comments by Andrew D. Jacob
Director of the Office of Regulatory Policy
Farm Credit Administration
at the
Commodity Futures Trading Commission’s Agricultural Forum

April 22, 2008

| am Andrew D. Jacob, the Director of the Office of Regulatory Policy, at the Farm
Credit Administration. | want to thank Acting Chairman Walter Lukken for inviting me to
speak with you today on the topic of agricultural credit from a financial regulator’s
perspective. Today, | will briefly provide comments about the Farm Credit
Administration, the Farm Credit System, and agricultural credit conditions.

Farm Credit Administration

The Farm Credit Administration is the independent safety and soundness regulatory
agency for the Farm Credit System and the Federal Agricultural Mortgage Corporation,
also known as Farmer Mac. The Farm Credit System and Farmer Mac are Government
Sponsored Enterprises. The Farm Credit Administration has broad regulatory and
enforcement authorities under the Farm Credit Act of 1971, as amended. The
Agency’s examination and policy development programs are directed by a full-time,
three-person Board. Board Members are appointed by the President of the United
States with the advice and consent of the Senate.

As the safety and soundness regulator of the Farm Credit System, we strive to be
proactive in our examination and regulatory actions considering trends in the agricultural
credit marketplace. _We understand that the current environment of high commodity
price volatility and input costs includes risks that must be appropriately and prudently
identified, monitored, and managed. As a result, we are closely watching the changing
dynamics in the commodity markets and the potential attendant risks to lenders that
provide credit to the agricultural industry.

We also continue to monitor the general agricultural economy. The agricultural
economy has experienced several favorable years with strong net earnings at the
producer level. Earnings were supported, in part, by high commodity prices and strong
exports. Exports, in turn, were helped by a declining U.S. dollar and strong foreign
demand. However, a weakening general economy, growing bio-fuels industry, rising



input costs, increasing feed costs, changing farmland values, and evolving Government
farm and trade policies are contributing to potential future uncertainties in the
agricultural economy. These uncertainties have been noted with agricultural producers
across the board experiencing increases in operating costs. Increases have been
particularly significant for livestock producers.

Farm Credit System

The Farm Credit System is a network of 103 borrower-owned cooperative financial
institutions and affiliated service organizations serving all 50 States and the
Commonwealth of Puerto Rico. It is established under the authority of the Farm Credit
Act to provide credit and financially related services to farmers, ranchers, residents of
rural communities, and agricultural and rural utility cooperatives. Entities that can
borrow from the Farm Credit System include creditworthy grain elevators and other
processing and marketing entities that meet statutory and regulatory eligibility
requirements.

The Farm Credit System is a $186 billion lender to U.S. agriculture and rural America.
At year-end, it had total loans outstanding of $143 billion. Lending to cooperatives and
processing and marketing entities totaled about $26 billion, which was diversified
among various types of entities. While the Farm Credit System is a significant lender to
the grain industry, loan portfolio concentration in all grains and cotton was only around
13 percent of the total lending portfolio due to commodity diversification.

The Farm Credit System is fundamentally safe and sound with adequate capital, strong
credit quality, good agricultural loan portfolio diversification, proven and seasoned
management and governance structure, strong earnings, and good liquidity provided
through access to the Agency debt market. For 2007, the Farm Credit System again
posted strong operating performance. As a result, it has the ability and willingness,
given its statutory mission, to meet the financing needs of creditworthy and eligible
customers.

General Agricultural Credit Conditions

As a financial regulator, the Farm Credit Administration considers the current
commodity markets and agricultural economic situation from the perspective of its
safety and soundness oversight responsibilities for the Farm Credit System. Looking
back over the first quarter of 2008, we have seen a significant increase in credit
provided to elevators and other processing and marketing entities. They have drawn
down existing loan commitments or expanded credit lines to cover the margin
requirements from using commodity futures to hedge their positions.


As you know, margin requirements have increased significantly as a result of higher
commodity prices and changes imposed by the commodity exchanges. The Farm
Credit System has met the increased credit demand of eligible elevators and other
processing and marketing entities. It did so by obtaining funds through the sale of
securities in the Agency debt markets. Debt securities outstanding increased by about
$10 billion over the first quarter of 2008, or 6 percent. Debt outstanding fluctuates
based on seasonal credit demand factors. This year we are seeing seasonal credit
demand increasing to a new level in light of higher commodity and input prices. Along
with increased credit demand, we observed that the Farm Credit System did not
materially change its underwriting standards. It has prudently stepped up risk
management and credit controls to closely monitor and perform due diligence on
borrowers’ assets that collateralize their loans. As part of their underwriting and credit
practices, we expect the Farm Credit System to carefully evaluate the risk management
capabilities of customers, particularly in light of recent commodity price volatility.

Looking forward, we expect that the Farm Credit System will continue to see strong
credit demand. From the regulator's perspective, we presently believe that the System
is well-positioned to continue to meet the credit needs of elevators and other processing
and marketing customers. However, given the dynamic commodity market situation,
customers are closely evaluating their future borrowing needs. Faced with significant
demand on working capital, we have heard that some elevators and other processing
and marketing entities may be modifying their marketing options offered to agricultural
producers. It appears that the entities making changes are doing so to manage
financial risks, borrowing costs, counterparty exposures, and leverage given their
specific circumstances and management objectives. Therefore, some entities may not
be offering producers the same longer-term forward sales and hedge-to-arrive
contracts. As a result, this situation may lead them to make changes in risk
management and marketing practices. These changes might include, among others,
using option-based hedging, requiring revenue crop insurance, and increased equity
capitalization. These changes may further result in risk transference to individual
agricultural producers, who may increasingly need to manage the risks of commodity
price volatility by hedging directly in the futures markets and obtaining funding for this
activity. We further recognize the importance of risk management practice at the
producer level and the importance of the industry responding to the dynamic
marketplace environment.

The Farm Credit Administration continues to ensure that the Farm Credit System
appropriately maintains internal controls, financial capacity, expertise, and underwriting
requirements. We have stepped up our examination and systemic risk analysis
activities to remain proactive in our oversight of the Farm Credit System. We also
continue to provide the Farm Credit System the flexibility for balance sheet and capital