SPEAKERS CONTENTS INSERTS
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REVIEW OF THE AGRICULTURAL CREDIT OUTLOOK
GENERAL FARM COMMODITIES, RESOURCE
CONSERVATION, AND CREDIT
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FEBRUARY, 12 1999
Serial No. 1062
Page 2 PREV PAGE TOP OF DOCPrinted for the use of the Committee on Agriculture
COMMITTEE ON AGRICULTURE
LARRY COMBEST, Texas, Chairman
BILL BARRETT, Nebraska
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, Illinois
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
HELEN CHENOWETH, Idaho
JOHN N. HOSTETTLER, Indiana
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
Page 3 PREV PAGE TOP OF DOCKEN CALVERT, California
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
GREG WALDEN, Oregon
MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GEORGE E. BROWN, Jr., California
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
VIRGIL H. GOODE, Jr., Virginia
Page 4 PREV PAGE TOP OF DOCMIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
LEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
KEN LUCAS, Kentucky
MIKE THOMPSON, California
BARON P. HILL, Indiana
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
Subcommittee on General Farm Commodities, Resource Conservation, and Credit
BILL BARRETT, Nebraska, Chairman
JOHN A. BOEHNER, Ohio
NICK SMITH, Michigan
FRANK D. LUCAS, Oklahoma
SAXBY CHAMBLISS, Georgia
JERRY MORAN, Kansas
JOHN R. THUNE, South Dakota
Page 5 PREV PAGE TOP OF DOCWILLIAM L. JENKINS, Tennessee
DOUG OSE, California
ROBIN HAYES, North Carolina
DAVID MINGE, MN
Ranking Minority Member
BENNIE G. THOMPSON, Mississippi
DAVID D. PHELPS, Illinois
BARON P. HILL, Indiana
EVA M. CLAYTON, North Carolina
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr. Georgia
JOHN ELIAS BALDACCI, Maine
C O N T E N T S
Barrett, Hon. Bill, a Representative in Congress from the State of Nebraska, opening statement
Combest, Hon. Larry, a Representative in Congress from the State of Texas, opening statement
Minge, Hon. David, a Representative in Congress from the State of Minnesota, opening statement
Everson, Dennis, senior vice-president, First Dakota National Bank, representing the American Bankers Association
Page 6 PREV PAGE TOP OF DOCPrepared statement
Leighty, Dale, president, First National Bank of Las Animas, representing the Independent Bankers Association of America
Martin, Marsha Pyle, chairman and chief executive officer, Farm Credit Administration
Schumacher, August, Jr., Under Secretary, Farm and Foreign Agricultural Services, U.S. Department of Agriculture
Answers to submitted questions
Webster, Jack, president and chief executive officer, Farm Credit Services of America, representing the Farm Credit Council
Hawke, John D., Jr., Comptroller of the Currency, statement
Tanoue, Donna, Chairman, Federal Deposit Insurance Corporation, statement
REVIEW OF THE AGRICULTURAL CREDIT OUTLOOK
FRIDAY, FEBRUARY 12, 1999
House of Representatives,
Subcommittee on General Farm Commodities,
Resource Conservation, and Credit,
Committee on Agriculture,
Page 7 PREV PAGE TOP OF DOCWashington, DC.
The subcommittee met, pursuant to call, at 9:00 a.m., in room 1300, Longworth House Office Building, Hon. Bill Barrett (chairman of the subcommittee) presiding.
Present: Representatives Smith, Lucas, Chambliss, Thune, Combest (ex officio), Minge, Hill, Clayton and Stenholm (ex officio).
Staff present: Tom Sell, Mike Neruda; David Ebersole, Alan Mackey, Russell Laird, Callista Bisek and Wanda Worsham, clerks;
Chip Conley, Anne Simmons, Russell Middleton.
Mr. BARRETT. The Subcommittee on General Farm Commodities, Resource Conservation, and Credit will now convene.
OPENING STATEMENT OF HON. BILL BARRETT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEBRASKA
Mr. BARRETT. I am pleased to convene the subcommittee hearing this morning. This is the first hearing to be held by this subcommittee in the 106th Congress. Today we are gathered to hear testimony on the outlook of agricultural credit in 1999 and beyond.
I have been interested in agricultural credit for many years, and I plan to follow in the footsteps of Chairman Combest and Ranking Member Stenholm and make credit a priority in this particular subcommittee. Both of these gentlemen before me have played a very important role in shaping agricultural credit policy over the last several years, and with their continued leadership I believe that we can improve the condition of agricultural credit for our farmers and ranchers.
Many out there in farm country fear that low prices, especially the collapse of the hog market this fall and winter, will cause and has caused a credit crunch. The concern that lenders will place restrictions on borrowing, reassess their customers' financial positions and be forced by the regulators to withdraw credit is real. This will mean foreclosures, decreasing asset values and a recession for agriculture. I feel their pain. I understand their fear.
Page 8 PREV PAGE TOP OF DOC The current credit situation warrants our attention; however, I believe there are some positive signs. Commodity prices have firmed up a bit. They have ticked upward a bit. The lenders are in good shape. The majority of our producers made it through 1998.
With that said, this year, 1999, is going to be the make or break year for a lot of people. For farmers, being able to get a loan may be their only salvation. This subcommittee needs to closely scrutinize the availability of credit, the terms on which it is offered, the condition of lenders, the effectiveness of USDA's credit programs and the availability of the Government to respond to unforeseen credit needs. I look forward to the hearing today and to working with our witnesses to help our producers through this tough time.
I would like to recognize Chairman Combest for an opening statement.
OPENING STATEMENT OF HON. LARRY COMBEST, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
The CHAIRMAN. Thank you, Mr. Chairman. I would like to thank you for holding this hearing. I think it is on an important subject, and it is a very timely hearing.
Agricultural credit is absolutely an essential tool for modern farming and ranching operations, and it is for this reason that I have been so interested in this topic for these many years. You will note the first meeting I had after being elected to Congress over 14 years ago was on agricultural credit. The first hearing I held 2 years ago as a subcommittee chairman in the 105th Congress was on agricultural credit.
I can promise you today that this committee will remain very diligent in our oversight on credit issues. In fact, today could be just the first of many hearings that we will have on this topic.
This hearing today is especially timely, for as I look at the horizon, I fear we will have a real credit crisis in agriculture. Unfortunately after a bad year, farmers and ranchers cannot just easily wipe the slate clean and start over. The hard times that have been experienced lately due to natural disasters and low prices will result in much debt being carried over by many producers.
Page 9 PREV PAGE TOP OF DOC Our main problem this morning must be to determine what the demands for operating credit will be as we come into loan-making season and, more importantly, how the Department of Agriculture is going to do its part in getting farmers in the field this spring.
From where I sit, the current situation with USDA program assistance does not look good. There is a backlog on loan deficiency payments in most States, and in several Corn Belt States the backlog is massive. Furthermore, disaster program applications are just now being taken, and any payment will likely not be made until midspring.
I hope that our witnesses this morning can assure this subcommittee that loan making is going forward right now, this morning in local FSA offices around the country. I hope we can be assured that FSA credit specialists are not waiting to find out what a borrower's cash position is before moving ahead with loan documentation preparation. I hope we can be assured this morning that when the weather is right, the field conditions are ready, that the USDA will not be the one holding up planting a few weeks from now.
Finally, and speaking of holding things up, I would like to discuss the recently published final regulations to implement the Preferred Lender Program. Even after taking so much time to implement this program, which was authorized by Congress over 7 years ago, I have heard concerns that changes made between the proposed rule and the final rule basically emasculate the intent of the program, and I look forward to your comments on that subject.
I would also suggest that the Department witnesses listen very closely to the testimony that the lenders are giving in this subcommittee hearing. I believe this points out some of the deficiencies and problems in a program which we would have assumed would have worked a great deal better. I appreciate the time that our witnesses are giving and look forward to the discussion. And I thank you, Mr. Chairman.
Mr. BARRETT. Thank you.
I would like to recognize the ranking member of the subcommittee, Mr. Minge.
Page 10 PREV PAGE TOP OF DOCOPENING STATEMENT OF HON. DAVID MINGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. MINGE. Thank you, Mr. Barrett. I concur with the opening statements that were offered by yourself and Mr. Combest. I would simply like to quickly emphasize four points that I think are very important for both panels this morning.
First, with respect to FSA and the U.S. Department of Agriculture, we have reports from a variety of organizations that as of the beginning of this month, 15 States had run out of money with respect to one of the loan programs and six States with respect to another. And we are very concerned that there be adequate credit resources, including resources from the Farm Service Agency, to meet the needs of agriculture this spring.
Second, we are concerned about staffing, and I think that has already been alluded to. I would simply emphasize that I know that we have hundreds of Farm Service Agency offices around the country that are staffed with dedicated career personnel, and that many of these offices are under severe stress because of staff shortages. And I hope that we will find ways here in Congress and through the Department this spring to make sure that those offices have adequate staff resources and that the morale of the people working in those agencies is at the level that we need to have for an effective delivery of programs. And I would like to compliment the people in the offices for their dedication and their hard work under very difficult circumstances.
Third, I look forward to learning more about the simplification of the application and approval process for the guaranteed lender program. I am pleased that FSA and the Department and the Office of Management and Budget has completed work on this regulation. I only hope that the statements that Mr. Combest has heard do not turn out to be an accurate characterization of the regulation, and that indeed we can move forward with strong lender support for a very streamlined process here and build on the excellent work that has been done by Ms. Cooksie and others over the last few years in trying to do this, and hopefully have a program that would parallel the Small Business Administration's simplified process.
Page 11 PREV PAGE TOP OF DOC Finally, I would like to say I share the same concern that Mr. Combest alluded to with respect to oversight of the lending process by the bank examiners and others that supervise our credit operations. It certainly would be an untoward and tragic turn of events if the oversight process were to result in a contraction of credit at this critical time to an extent that is not necessarily for sound banking practices. And I hope that it is not necessary for us to have yet another hearing in which we have to have the bank examining agencies in before this committee to review that process. And I am interested in the comments of all of the panelists with respect to these credit evaluation matters. I look forward to the statements of the witnesses.
Mr. BARRETT. Thank you, Mr. Minge.
We are pleased to present our first panel this morning. We welcome you to this hearing. The leadoff, Mr. Gus Schumacher, Under Secretary for Farm and Foreign Agricultural Services at USDA. Mr. Schumacher is accompanied by Mr. Keith Kelly, Administrator, Farm Service Agency. Nice to have you back too, Keith. Ms. Carolyn Cooksie, Deputy Administrator for Farm Loan Programs, FSA; and the Honorable Marsha Pyle Martin, Chairman and CEO of the Farm Credit Administration.
Mr. Schumacher, you may proceed.
STATEMENT OF AUGUST SCHUMACHER, JR., UNDER SECRETARY, FARM AND FOREIGN AGRICULTURAL SERVICES, U.S. DEPARTMENT OF AGRICULTURE
Mr. SCHUMACHER. Mr. Chairman, good to be back. I think it was about 9 months ago we were here before, and that was a very productive hearing then, and I am sure this will be a very productive hearing this morning. I appreciate particularly the focus on the credit conditions and the outlook for the remainder of 1999 and 2000. I am going to try and provide you briefly with an assessment of the current status particularly of our Guaranteed Loan Program during my testimony.
Page 12 PREV PAGE TOP OF DOC I think overall our economy is booming. Under this administration we have the lowest unemployment rate, continuing to go down, low inflation, low interest rates, record home ownership, and a balanced budget.
I met, Mr. Chairman, with some Illinois farmers yesterday, about 25 farmers that came in to visit with us from the Farm Bureau, and they were commenting on this issue of low interest rates and refinancing, and we talked about also the low oil prices which were helping them in their planting. But, but, with the prosperity that is all around us, farmers are not sharing in this prosperity. Prices for many commodities are at a level they were 10 years ago or more.
And I am just noting two articles. Scott Kilman, who I have great respect for, in the Wall Street Journal wrote an article the other day called ''The Outlook for Farm Economy Is Darkening.'' I think we share a lot of that when we go to the Agriculture Outlook Conference, a very sobering article. And then one of my colleagues from Montana sent in a little note from the press of Billings Gazette, ''Loan Fund for Farmers Is Running Dry.'' So I think this, again, is an extremely timing hearing.
I think you mentioned the pork industry and other farm sectors of the economy are doing well. I noticed the price of soybeans now on the futures market is below $5.
These are difficult times. Farmers are frustrated. The Secretary and I share their frustration. I think looking at the credit side, certainly there is financial stress in the industry overall, but data so far show farmers' equity in the agricultural assets is projected to increase for the 10th straight year, totaling more than $900 million by the end of 1999. Maybe Marsha and others can comment on that. There is some borrowing capacity that is expected to remain above 40 percent, and commercial credit, we have been told, in the macro sense is available, but in a micro sense we want to look at that in this hearing today.
We understand the agricultural banks enter 1999 well capitalized and report ample funds to meet the credit needs of qualified farmers. The same is true, we understand, of the Farm Credit System. Additionally, many parts of the country, fertilizer, chemical and feed suppliers offer operating credit at competitive rates to qualified, and I emphasize qualified, cash-flowing borrowers.
Page 13 PREV PAGE TOP OF DOC But, Mr. Chairman, while there is ample funding available for the creditworthy borrowers, the key word is ''creditworthy.'' Conditions in the farm economy are causing an increasing number of farmers to struggle to be considered creditworthy. Many will fall short. Lenders in some regions report that given the commodity price situation, some farm customers otherwise in good standing will be having difficulty repaying 1999 production loans.
If there is a farm crisis, Mr. Chairman, it is an income crisis. Farmers and lenders and USDA, I might add, learned a painful lesson during the 1980's. I think your own Web site has indicated, and it couldn't put it better, you can't substitute debt. You can't substitute debt for income.
As I travel around the country, one statement I hear over and over again is that farmers do not want or need more loans to solve their problems in terms of refinancing. A number of farmers are pushing hard on the income side. As we discuss the current situation and search for solutions, we must keep in mind that credit from the private or Government sources to cover operating expenses is a stopgap measure. It only addresses the symptoms of a larger problem, and it will help some, but not all farmers.
So long as price levels stay low, financial stress and credit demand will remain high. At the same time, most farmers do need credit as a matter of operating their farms. Farming is a capital-intensive industry, and credit to buy equipment, livestock and crop input is critical for most farmers. There is a need for credit as part of the farm safety net.
The Farm Service Agency credit programs are available to help meet that farm safety net need. In fiscal year 1998, last year, we made nearly 16,000 direct loans totaling nearly $800 million and issued nearly 11,000 guarantees totaling $1.4 billion.
On the direct loan demand, that has been strong in 1999. Overall obligations of direct loan funds has increased by 51 percent compared to a year ago for the same time. Our Emergency Loan Program is the problem. There is a substantial need for FSA assistance because we have exhausted, February 9, all available loan funds for 1999. Due to this lack of low-interest emergency loan funds, approved applications of family farms that have been affected by a natural disaster will not be fulfilled. It is projected the shortfall will occur, and the direct operating loan as well, I could go through where the shortfalls are likely to come in the question period.
Page 14 PREV PAGE TOP OF DOC On the important guaranteeand I will conclude in 2 minutes hereas of January 31, guarantee loan applications are up 73 percent over the same period last year. Of that, guaranteed ownership loan volume is up 92 percent, operating volume is up 26 percent, and the Interest Assistance Operating Loan Program has increased an astonishing, an astonishing, 159 percent.
So there is a lot of pressure on the Farm Service Agency to meet these extra demands. There is likely to be not enough guaranteed loan funding this year to meet the increased demand, Mr. Chairman. We are required by law, we are required by law, to target a percentage of funds to beginning and socially disadvantaged farmers. Many States have exhausted their allocation of nontargeted funds, particularly in the Guaranteed Ownership and Interest Assistance Programs, as Mr. Minge has pointed out. Approved applications are waiting for funding. Guaranteed operating nonsubsidized is forecast to last only until August 1 1999, particularly perilous in Texas, California, the Dakotas, Minnesota, and Puerto Rico. We can go into other States as we ask questions.
I believe overall the guaranteed program is working well, Guaranteed Loan Program. We have guaranteed nearly $6.5 billion in loans to 38,000 farmers. Of the balance outstanding, only 2 percent, or $144 million, was delinquent. I think that is an outstanding record. The Guaranteed Program continues to be very fiscally sound with some of the lowest loss rates of any Federal loan guaranteed program.
There is always room for good improvement, and we welcome your questions on where we can further improve this over the next few months.
Our experience is that lenders express three major concerns about the Guaranteed Program: The volume of paperwork, the time required to process the request, and the consistency of implementation between our State offices. We have launched an ambitious initiative to make the changes in the way the guaranteed loan operates. The Vice President announced a simplification of the procedure, and the Federal Register notice, as I understand, was filed today to make those improvements. I am sure there will still be questions on those improvements.
Page 15 PREV PAGE TOP OF DOC Those regulations address three issues. Dramatically reduce the paperwork. As we implement the Preferred Lender Program for high-volume guaranteed lenders with a good track record, we want to implement that. The FSA projects that lenders using the program will save 110,000 hours in staff time as a result of these simplifications. In addition to reducing the burden, the new regulations will reduce the time required for FSA to review and act on applications and reduce variations and requirements between field offices. Most importantly, it will reduce the paperwork burden on farmers and ranchers. We feel these are a major step forward.
And then let me summarize, Mr. Chairman. In your letter that you sent over on January 29, you asked us to look at the possibility of centralizing servicing of guaranteed loans. I think that the shortage of staff to carry our loan programs requires us to consider new ways of doing business. Centralization of loan processing is an option we utilize on a State-by-State basis depending on the need and ability. Centralization offers some efficiencies, especially in regions where there is a shortage of experienced loan officers. Centralized loan processing does yield efficiencies, improved consistency, and speed up processing; however, whether or not centralization makes sense depends on the local situation.
I have some concerns about centralization. Many of the lenders we work with overwhelmingly support a more localized approach to be in touch with local and independent banks. They recognize that there is some significant value in local service. The best decisions are usually made by someone with a good knowledge of lending economic conditions and knowing the family farmer on a day-by-day, week-by-week, month-by-month basis. Certainly that is the way in my family we have dealt with our local bankers over the years, to know our local bankers and know the situation and know when things are difficult and things are good.
The key, I believe, is the size of the coverage area. It must be large enough to encompass sufficient volume for economies of scale and proficiency, and yet small enough to maintain some knowledge of local conditions, provide a personal service for participating borrowers and lenders.
Page 16 PREV PAGE TOP OF DOC Mr. Chairman, in closing, I am looking forward to working with you on these hearings. I too, am very interested in credit. We worked very hard over this last year since that hearing and since I have been sworn in to improve our credit situation. I am looking forward to answering your questions this morning. Thank you very much for allowing me to be here.
[The prepared statement of Mr. Schumacher appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you. With reference to that letter, Mr. Schumacher, you are suggesting that the key is a coverage area. There is a difference of opinion between centralization and localization.
Mr. SCHUMACHER. This is one of the things we have to work on, because if you have local banks that really know the farmers, do we get too centralized so we get too much formal lending and not allow bankers and farmers to meet in the offices and decide hands-on what can be done?
Mr. BARRETT. Where I am going with the question is where are you now? You say that coverage is the key, and you have a difference of opinion. So where do we go from here? What are you doing about it now?
Ms. COOKSIE. We have some States that have done quite a bit of centralizing. Admittedly over the last 2 years, we have asked State directors to look at individual situations and their jobs. We have talked to bankers, and we have had some of the concerns brought up by bankers.
What I think we are going to do now, and what we have done in the last few months, we have talked individually to State directors about situations on centralizing in their State, and State directors have been instructed on more than one occasion to look at it in their State to see whether it makes sense, which areas it makes sense. There is some areas in the country and some States where it is working well and they don't need a centralized because they have enough service area.
Page 17 PREV PAGE TOP OF DOC One of the concerns, as Mr. Schumacher said, is that in order for us to assign loan officers, there has to be sufficient volume. What I am hoping is that we will get more lenders on with the new streamlined Guarantee Program, and that won't be a problem. In some States it has been. So I think we are going to have to look at it on a case-by-case basis, State-by-State basis. Certainly where it makes sense, we urge States to centralize it.
It makes sense for consistency purposes. We have talked to bankers about that. One of the things about anything is that the more you do it, the better you get at it, and the faster you get at it, and that is certainly a reason to centralize. And so no State has been told not to centralize. As a matter of fact, we have urged them to look at their State to try to think about moving in terms of that.
I do know there are several States now, because I have talked to State directors over the last month, who are actually putting together a plan to move towards centralizing in the parts of the State where it makes sense. Some States are going to move totally to centralization in their States. Some of them are only going to do parts of their States where they are having volume problems, so I think we have to take a State-by-State approach and not have a cookie-cutter approach to this.
Mr. BARRETT. You are proceeding then. It is not sitting on a shelf somewhere.
Ms. COOKSIE. That is exactly right.
Mr. BARRETT. Thank you very much.
Mr. Secretary, we get a lot of mail, as you do, and being in our districts nearly every weekend, we talk to a lot of people. I was interested in a letter that I got yesterday, just yesterday, and we have many more like it, from an FSA employee, and perhaps someone else is a better person to answer the question, I don't know, but let me read just a part of that letter. And this is an employee that has been with FSA for 38 years. ''The agricultural credit department is always experiencing more requests for farm operating loans. When producers cannot get their loans approved in a timely fashion, it may mean that they will not be able to farm in 1999. If we do not get additional help, LDPs will have to wait. This is not fair since the requests have been in our offices since November. The stress and the health of all of our staff is also at stake. We seem to be getting further behind every day, and the future looks worse. The morale is not good since we get deeper in work each day with no end in sight.'' And it goes on and on.
Page 18 PREV PAGE TOP OF DOC This situation concerns me greatly, and it concerns all of us on this committee. And, of course, then, the President's budget I noticed has additional cuts for our FSA offices in the fiscal year 2000 budget. So I guess the obvious questions, at least to me, is what is going on at USDA? What are the problems? We have offices that are 90 days behind now in their LDP payments and more. Let's get basic. Tell us, what is going on?
Mr. SCHUMACHER. I think if we look back a bit, and of course I try to get around, in fact visited your State several times and looked at the tremendous backlog, 2 or 3 years ago, Mr. Chairman, we did no LDPs. With the collapse of Asia, the big crops we had last year especially in soybeans and corn and the likely good crops with the moisture we had this year, things are not good in farm country. What is occurring, I think, last year, Keith, we had about 2 million LDPs and we are projecting as many as 4 million individual LDPs. So I have instructed Keith to see how we can certainly simplify a bit the LDP process.
You then take that LDP business we are working on, add in the hog payments which were just completed today, look at the disaster signup that is taking place, look at the CRP and the CREP, and then looking at the credit applications, and we can expand upon it in terms ofas I have said, 179 percent increase, so we have had a huge increase in that. We have the dairy coming down, and then we continuallyand I am continually pressed on the small farms and the civil rights implementation plus the servicing of the loans that we have under way during tight times.
So we are under tremendous pressure. I am seeing those letters not only coming from Nebraska, Minnesota, all over the country. So we are going to have to look at it very, very hard on how we can improve that.
Mr. BARRETT. What can we do then? What do you need? Is it money, personnel? What is the answer?
Mr. SCHUMACHER. We are going to have to come up with additional resources and improving how we work on this together. We have some additional funding we are going to be needing, I suspect, and we are going to be needing additional funds for agricultural credit as well. We will come to that during the question period, where the States are, where the categories are, and where the staffing needs are.
Page 19 PREV PAGE TOP OF DOC We are in trouble, Mr. Chairman, in rural America in helping farmers at the FSA. The pressures on our offices, that letter can be reflected in virtually almost every State.
Mr. BARRETT. Absolutely, and it is.
I will yield to Mr. Minge, but I hope that this general question will be revisited again in this hearing. Thanks, Gus.
Mr. MINGE. Thank you. I would like to start by acknowledging the fact that our colleague Representative Pomeroy could not be with us this morning. He has a deep interest in this, and he has questions that he asked I submit for the record, and, Mr. Chairman, I would ask that these be accepted, and they all apply to FSA, and we will give you a copy of Mr. Pomeroy's questions and ask if you could please get in touch with him.
Mr. BARRETT. Without objection.
Mr. MINGE. I would like to begin by following up on the questions that were just asked by Mr. Barrett about the Farm Service Agency staffing. In the county in which I live, one of the outstanding loan officers of FSA has worked for close to 20 years. Last fall he took a position with a bank, and I expect within a year or two he will be the president of the bank. He had turned down offers of many types over the years from the Agency and from financial institutions outside the Government, and although he has never said to me that morale within FSA was the reason he took the bank job, I can't help but believe based on conversations with others that that was a very significant factor.
And I would like to urge that you give us figures as to what you need in terms of temporary employees so we can go through the appropriations process and provide the Department of Agriculture with that, or shift resources from some other program where you have that discretion in the Secretary's office in order to meet this need, because as I go around my district, and I have approximately 25 FSA offices in my district, a recurring theme when the supervisor takes me aside is morale. And I don't like to have to say we would like to do something in Congress, but we don't even get a request from the Department. And when we have talked to people at the White House and the OMB as to where are these requests, they say they haven't come through the Department yet. So this is a very awkward situation for the Department, and it places the Washington office in, I think, a difficult position when this is the only answer we can give at home.
Page 20 PREV PAGE TOP OF DOC Similarly on the loan authority, earlier this month, about 10 days ago, I received a communication that was signed by representatives of a variety of agricultural organizations indicating that in 15 States we have run out of lending authority in one of the FSA programs, and in six States we have run out of lending authority in another. In checking with the office in Minnesota, I learned that they expect that they will be running out of lending authority today in the Guaranteed Operating Assistance Program, that they have already run out of authority on the Direct Farm Ownership Program, and that the other programs they expect to run out of authority before the end of this month; and that the needs in one case are 350 percent of what has been allocated to the State.
And again, we have contacted the White House. We have contacted Office of Management and Budget. We said, where are these requests? The Appropriations Committee does not want to take up a supplemental for agriculture, especially when it is a program we are operating right within our Department, until the Department has submitted a request, and the White House and OMB tell us they haven't got a request from the Department yet. And I understand the Secretary was before the appropriations subcommittees in the House and the Senate earlier this week, and he had estimates as to what he needs.
We are going to face crunch time here by the end of the month, and I would urge that we have these figures here in Congress when we get back from the President's Day recess so that we can try to push this through the Appropriations Committee and have the money for FSA. We are trying to support you, but we are in a very difficult position, and I don't know, Gus, what you feel you can do within the constraints under which you operate, but the pressure is building on us.
Mr. SCHUMACHER. As the Secretary has indicated in the appropriations testimony, that certainly we needed additional funding in the creditI think he indicated the figure certainly in excess of a billion dollars, and I think thatin terms of authority, would require in excess of $100 million; at least $100 million of additional supplemental.
Page 21 PREV PAGE TOP OF DOC Plus I think the issues that Mr. Barrett and I just exchanged on staffing are very, very important as well. We are working very, very hard on that as we speak, and I certainly will reflect back the sense of this committee to expedite that work in terms of a
Mr. MINGE. Can you give us a commitment that we will have something when we get back from the President's Day recess?
Mr. SCHUMACHER. I am going to work very hard on it within USDA and as we work this next week.
Mr. MINGE. Both on the staffing side and on the lending side, that is, the FSA loans.
One fear that I have heard is that there may be sort of a devious plan at the Department to force the consolidation of offices in the States by having a severe understaffing level and saying, the only way we can solve this within the budget is if we close down 1,000 offices around the country. And Congress doesn't want to do that, but this is where we are.
Well, we haven't even heard that as an answer to the problem, so that this pressure cooker situation within the Agency, I think, is undermining the effectiveness of our programs. When LDPs and so on aren't being processed, and we have retired employees and others that we can bring in on a temporary basis to help out, but there is nothing coming from the Department, it affects the credibility of our ability to run a program.
Mr. SCHUMACHER. Certainly we hear you and the committee loud and clear on this. Let me just reflect how we got into this situation.
I think when we had the farm bill passed in 1996, everyone anticipated a big decline. Prices were good. There was budgetary decline, a lot of discussion on how we won't need these offices anymore. Let's go to computers. The market will resolve this.
Page 22 PREV PAGE TOP OF DOC This, Mr. Chairman, Mr. Minge, did not occur. In fact, the reverse has happened and, as I have outlined, six or seven things, and who knows what additional crises will come up in 1999. Prices do not look good.
So we do not have the adequate staff, I will be very frank about that, to carry out the programs that Congress now has put before us, and certainly we need a little more technology. We are putting more computers out. One of the things I try to do on this hog signup is to make it very simple, one page, and we load it on the Internet so people can download it and send it in. Very simple.
Mr. MINGE. I appreciate that.
My time is up, but let me conclude with two things, if I may, Mr. Chairman. First, it is absolutely imperative that you get the numbers to Congress so we can do something, because until we get that, we are not going anywhere. And we are at the break point, I think, in terms of the programs that you administer; that is, those of you that are up here. So we are depending on you, because we want to help you, but we can't do anything. Our hands are tied.
And the simplification of the program, I think, is great, and I would urge that we do that with LDPs and some other things. Some of the people in the county offices and in Kansas City have suggested things that could be done that would greatly simplify the programs, but what we find is they are encrusted with complex paperwork requirements that at the local level they can't solve. They come from Washington. And until we solve those problems in Washington, they are bound by it.
Finally, I would just say I hope that the new regulation is being published today, is that correct, with respect to the simplified program?
Mr. SCHUMACHER. For the lending program. It is in the Federal Register today, and I believe, Carol, it will be operating on Monday.
Page 23 PREV PAGE TOP OF DOC Ms. COOKSIE. Yes.
Mr. MINGE. Thank you.
Mr. BARRETT. Thank you, Mr. Minge.
Before we proceed any further into the problems with USDA, I would like to recognize the Honorable Marsha Pyle Martin, Chairman and Chief Executive Officer of the Farm Credit Administration, for the purpose of an opening statement.
STATEMENT OF MARSHA PYLE MARTIN, CHAIRMAN AND CEO, FARM CREDIT ADMINISTRATION
Ms. MARTIN. Good morning, Mr. Chairman, members of the subcommittee. What I will do is abbreviate the longer version of the testimony that I believe you are looking at and stay within my 5 minutes.
I appreciate the subcommittee's timely attention to the topic of agriculture and credit. Ann Jorgensen and Michael Reyna are my fellow board members, and we share your interest. Our mission is to ensure a safe and sound, competitive Farm Credit System to finance agriculture and rural America as authorized by Congress. Today I emphasize our role as a safety and soundness regulator because my comments address the financial condition of the Farm Credit System institutions, not America's farmers and ranchers.
I will portray a sound Farm Credit System that is financially prepared to face the downturn in the agricultural economy. I will assure you that we, the regulator, will do our part to maintain the system's safety and soundness so that funds continue to be available for agriculture. I will recognize that American agriculture will encounter substantial stress in the foreseeable future.
The Farm Credit System has improved its financial condition significantly in recent years and is performing well despite the current adversities. Earnings continued strong in 1998 because of capital strength, some loan growth, and low levels of problem assets. Capital levels in the system now exceed 15 percent of total assets.
Page 24 PREV PAGE TOP OF DOC As the System's safety and soundness regulator, we provide an ongoing comprehensive evaluation of each institution's capital, asset quality, management, earnings, liquidity and sensitivity to interest rate risk. A No. 1 rated institution is basically sound in every respect. A No. 5 rated institution is in danger of failure. Today 98 percent of the System is institutions are rated No. 1 or No. 2. There are no 4 or 5 rated institutions, and only four 3 rated institutions. This is a vast improvement from a decade ago when 134 Farm Credit institutions were rated with either 4s or 5s representing 46 percent of all System institutions. At the peak of the agriculture crisis, 80 percent of System assets were under enforcement action by the agency as compared to less than 3 percent today.
While the System is strong financially, we fully expect the effects of the recent downturn to begin to show up in the financial statements for the first quarter of 1999. Last year we anticipated the stress in the agricultural economy. We developed a financial forecasting model to help us identify existing and prospective risk in Farm Credit institutions over the next 12 to 14 months under most likely and worst case scenarios. Based on the results of our analysis, we do not believe current conditions pose a serious threat to the System's financial condition in the next 12 months. Our worst case scenario over a 2-year horizon indicates 16 percent of the System's direct lenders and 12 percent of their total assets hurt significantly, very, very different from the System's condition entering the downturn of the 1980's.
Let me assure you, however, we monitor credit and financial conditions closely. If a Farm Credit System institution hiccups, we know it. And if significant changes in the System's financial condition occur, you will be the first to know. Because of the urging of Congress, the insistence of the regulator, and the actions of Farm Credit boards and management, the System has spent 10 years with its head down, so to speak, working to rebuild its financial strength. With that accomplished, Mr. Chairman, the Farm Credit System is financially ready for the problems in agriculture, and farmers and ranchers and their cooperatives will be the beneficiaries.
Page 25 PREV PAGE TOP OF DOC System institutions are required to charge interest rates that cover costs of operation and capitalize the institution consistent with portfolio risk. Today, because of its financial strength, the Farm Credit System is clearly able to pass the benefit on to farmers, ranchers, and their cooperatives. Recent data on loan rates charged by the Farm Credit System show a savings of more than $350 million annually for its borrowers. This demonstrates the System is doing the job that Congress intended.
As the regulator, we have taken some positive steps of our own, and we are proud of these. We think these will benefit agriculture. We have issued policies that encourage System institutions to work with pork producers having financial difficulties, make contact with borrowers before loans become delinquent, reaffirm their commitment to financing young, beginning, and small farmers, and use Government loan guarantees and farm assistance programs.
We understand that FSA is almost out of funds, as you have indicated. The FCA Board strongly supports more funding for FSA to help address the current adversities in agriculture.
In summary, the Farm Credit System since the last agricultural crisis has strengthened its financial condition significantly. It is our opinion that the System has positioned itself to weather the storm over the next 2 years when we would hope that growing this Nation's food and fiber can return to a profitable business once again.
You have my unqualified assurance that we will remain vigilant in ensuring the continued safety and soundness of the Farm Credit System. There is no doubt that the next few years will present challenges and ample opportunity for the Farm Credit System to meet its mission and serve agriculture in its time of need, as Congress intended. Thank you very much.
[The prepared statement of Ms. Martin appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you, Ms. Martin. We appreciate your testimony.
Page 26 PREV PAGE TOP OF DOC In order to continue questioning of our two witnesses, I would like to recognize the chairman of the committee, Mr. Combest.
The CHAIRMAN. Thank you, Mr. Chairman.
Mr. Schumacher, the President's 2000 budget indicates that FSA has reduced 4,253 employees from fiscal year 1993 through 1998, and in the budget it calls for an additional 752 person reduction. It was, I think, pretty obvious since the disaster discussion of last summer started that we were looking at an income and credit crisis. Who in the Department determined the Agency needed to reduce an additional 752 positions?
Mr. SCHUMACHER. That was done over a period of time. As I said, you know, this is anticipated that we have reduced workloads. In fact, the workloads kept creeping up on us, and this lagged some in terms of this catching up with some of the new workload as it exploded, particularly in the last month or so, and anticipated for the next year.
Keith, do you have any more comments on the workload situation that we are facing and which is going to be difficult?
Mr. KELLY. I thank you, Mr. Chairman.
As a starting point we would really like to thank the Congress last year for the $40 million that helped us do the stopgap, which some perhaps felt we could hold until the disaster signup started. In fact, it left employees that were on staffand of course that really got diverted to using those employment on staffnot the correct word, ''diverted to'' but they were buried with just the LDPs keeping up with that from then on. And so we are sitting here with a workload for all of our programs. We have measured it out. We are approaching four things we started before the holidays on this, trying to see what we can take off the plates for these employees on here.
I appreciate your folks' comments and recognition of how serious it is out there. We are sitting here working with what authorities there are to do any transfers within the agencies, and some of that is very limited to do.
Page 27 PREV PAGE TOP OF DOC Of course, as the Secretary indicated when he testified up here 10 days ago before the Appropriations Committee is we clearly are looking at some supplemental help in this here, in this short-term thing, because the workload is there and continuing to stay there, and it is just a function of the workload that has come in.
The one figure I would use just to point that out, I will take it back to the LDPs was an acronym we didn't even hardly use a couple of years ago. The Under Secretary referred to that, that we were doing $2 million. Take it back a year, we did 1,500. That is a thousandfold increase compared to the loans that were coming in. It is by truckload and truckload, and the market price, the market indicates how farmers are doing that.
So the workload is clearly out there. It is clearly recognized by all, and we have tried every measure we can, and I know, as the Secretary indicated, to revisit this on how we are going to get caught up.
The CHAIRMAN. The request in the budget still holds. It is suggesting an additional 752 person reduction. That came after the President's State of the Union, which he specifically talked about the fact that there is a crisis going on out there. I don't think anybody would be surprised knowing what we have been going through this past summer and the fall. And it concerns me that these problems remain.
I have a copy here of your regulations that are issued today for a Guaranteed Lender Program, the Preferred and Certified Lender Program. In some of the discussions prior to the time that this has come out, I understand initially there had been a request, there would be a criteria that establishes the PLP for 20 loans in the past 5 years. That criteria has been moved up to 30 loans in the last 3 years, is that correct?
Mr. SCHUMACHER. Let me address and ask Carolyn to supplement my comments.
One, we want to assure that the banks in the preferred lending program have a good track record and experience in farm lending. This is in the regulation. The 30 loans in 30 years, it is not on the Federal Register, and we will explain why that has occurred in a minute. It is very, very important because this will give us less Government oversight. The only requirement of the regulation is that a bank make 30 farm programs over 3 years; 30 farm programs over 3 years in the regulation, not in the Federal Register.
Page 28 PREV PAGE TOP OF DOC The CHAIRMAN. So that figure is in there?
Mr. SCHUMACHER. In the regulation.
Ms. COOKSIE. It is in a separate notice.
The CHAIRMAN. So the regulation is there? It states that?
Ms. COOKSIE. Yes.
The CHAIRMAN. Do we have any idea what the estimate is nationally and in Texas how many that is going to be?
Ms. COOKSIE. In Texas I think it is going to be and initiallyI want to put emphasis on initiallyaround 25 nationwide. It will be less than 5 percent of our lenders initially.
The CHAIRMAN. What is that, less than 5 percent?
Ms. COOKSIE. It is less than 250.
The CHAIRMAN. Less than 250 nationwide?
Ms. COOKSIE. Yes. But one of the things I want to point out here is that even with that less than 5 percent, that those preferred lenders in that less than 5 percent category hold about 46 percent of the entire guaranteed portfolio.
The CHAIRMAN. You are guessing around 25 in Texas?
Ms. COOKSIE. Initially, yes, but there are many more lenders in Texas who would probably qualify who have never asked for status before, but they probably will now, hopefully.
The CHAIRMAN. That would be of your current lender portfolio.
Ms. COOKSIE. Yes.
The CHAIRMAN. There would be others that you think would qualify but were never asked.
Ms. COOKSIE. Absolutely.
Page 29 PREV PAGE TOP OF DOC Mr. SCHUMACHER. Just to amplify that one sentence is that with the simplification and the reduction of the paperwork, and as I said in my testimony, the reduction of 110,000 hours because it is regulation now on the books, this should be attractive to additional bankers to participate in this program, and we encourage them to do so.
The CHAIRMAN. Mr. Chairman, my time has expired. Thank you.
Mr. BARRETT. Thank you.
The ranking member of the committee, Mr. Stenholm.
Mr. STENHOLM. On the first round of questioning, I want to get back into the credit. Mr. Schumacher, you stated the best decisions are usually made by someone with good knowledge of local lending and economic conditions. Who could possibly be better than the local banker or PCA loan officer? Who is possibly better in making that local decision than the local banker? Is an FSA employee better capable of making that decision?
Mr. SCHUMACHER. At the local level.
Mr. STENHOLM. I ask Ms. Cooksie, who is better able to make that decision regarding a local loan?
Ms. COOKSIE. Well, I would hope they would be equally qualified to do it.
Mr. STENHOLM. Why is it necessary to have an FSA employee make that decision?
Ms. COOKSIE. In guaranteed loans, the FSA employee only makesthey get the recommendation from the bank, and they make the recommendation on whether the loan is approved, the guaranteed is approved or disapproved after we get the documentation from the lender. So I am not quite following.
Mr. STENHOLM. I am going back to the statement that Mr. Schumacher made, which I happen to agree. The best decisions are usually made by someone with good knowledge of local lending and economic conditions. You know the problem, and I am going to get into that talking to my friends today. We go back to 1992, Mr. Barrett and I, on the subcommittee when we started the USDA reorganization. We held hearings in his district, 1991, 2, or 3, somewhere in there.
Page 30 PREV PAGE TOP OF DOC We all know the problem, and we are going to get around to that a little bit later. But now we have got a problem, and, Mr. Schumacher, you are totally correct when you look at where we were going with Freedom to Farm and where we are today, we have seen an increased workload. Those are facts. And we have a plan for them, and this committee has a plan for it. We have not done near the work we should have done to be helpful in this, but you haven't either.
And one of my frustrations on the Guaranteed Lending Program, we held a hearing in Lubbock 2 years ago in which we had the stack from SBA in which their stack of applications was that tall, and ours was this tall, and that was 2 years ago, and now we have the regs coming out today, but the Preferred Lender Program is still not going to be what it should be, in my opinion, because I believe with the restraints on spending, that the role of FSA should be changed, and I don'tand again, I want to come back to the basic question. Who in the scheme of things, in your responsibility to the taxpayer, who could better make that local decision on whether a guaranteed lending program should be made other than the local banker?
Ms. COOKSIE. The way the program is designed, I think it is designed for the local banker to make the decision, but having said that, the law still requires us to make decisions related to the financial analysis and eligibility, even on guarantees.
But I do agree, Mr. Stenholm, we have got to do business differently, and we are going to have to rely more heavily in partnership with banks now than we ever have before, number one, because of our resource problem that we have.
Mr. STENHOLM. Ms. Martin, speaking now for the PCA and the tremendous story you bring regarding the financial solvency of the PCA, recognizing we are going to have some difficult times now regarding the price problem we have got, but as the regulator of a PCA, where does your concern level rise regarding a PCA making a guaranteed loan?
Ms. MARTIN. We certainly would have no concern. Regulators like guarantees, believe me. We would certainly support also the Preferred Lender Program, and I know one association in your district, Mr. Stenholm, Stephenville, has about 5 percent of its portfolio in guaranteed loans, and they certainly have been encouraging more funds for this program and also have been wanting to be a part of the Preferred Lender Program for a long time. But we see this as a risk management tool, and we would support it.
Page 31 PREV PAGE TOP OF DOC Mr. STENHOLM. Can you help me understand what has been so difficult for us, since we are talking about a quasi-Government agency program, Federal foreign credit lending and you, a Federal regulator, what has been so difficult for us to come up with a lending program that would be so simple that a local banker or PCA, if they are willing to make the loan with a 90 percent guarantee or an 80? I have argued for even different phases, depending on what the local banker determines they need. If the local banker is willing to take a risk, what additional protection do you need in order for a Preferred Lender Program to work simply?
Ms. MARTIN. Are you referring to the regulator?
Mr. STENHOLM. Yes.
Ms. MARTIN. We have the utmost confidence in the institutions we regulate, and certainly we would have no problem whatsoever with blanket approval for all of the associations that we regulate being preferred lenders, and certainly it would increase, I think, the percentage of involvement in the guarantees from the standpoint of the Farm Credit System.
Mr. STENHOLM. Ms. Cooksie, why are you so worried about it?
Ms. COOKSIE. Well, I don't know that I am so worried about it.
Mr. STENHOLM. Well, we haven't done anything for 2 years until today we come up with it because somebody has been concerned about it, and that has to be your responsibility.
Ms. COOKSIE. That is true. You are right, I do have concern about it. I think that what we have done with the Preferred Lender Program is we have moved closerwe are not therecloser where we need to be.
Let me talk just a little bit before I answer that question about why we went back to 30 loans in 3 years, which I think is still very minimal. We are not talking 30 borrowers. We are talking 30 loans. Most borrowers out there in today's world, most farmers, have more than one loan. So to me it is a very minimal requirement even at that. And as I said earlier, it is the initial requirement, and even though it is getting to be about 5 percent today, probably in 30 days it is going to double, and it is going to double as time goes on because more people are going to come into Preferred Lender Program.
Page 32 PREV PAGE TOP OF DOC So I don't want us to lose sight of the fact that we should have done something that we should have done, which, you are right, we should have done 7 years ago. We should have done it earlier than the 2 years I have been in this job, and it is regrettable it took us that long to do it, but that is it.
We had some concerns, we knew bankers and everybody was going to have some concerns about the 30 and the 3. So what we decided to do is kind of give ourselves a little time to see how it worked and make the System easy for us to change the volume numbers. By doing that, that is why you don't see it in the copy that Mr. Combest has at the Federal Register. We did not publish it in that Federal Register notice. We published it in a separate one where it says that we can change it, so when we start to change or decide the next whatever months or years that we need to change the volume numbers to pick up more preferred lenders, we don't need to go back to the proposed rule process. We can just publish a notice and change the volume numbers, because we knew this would be a situation.
But having said that, one of my concerns is that one of the reasons we have been able to have as much money in the Guaranteed Program and spending authority is because of our low loss rate and low delinquency rate, since credit reform delinquency rate and loss rate translates into more spending authority for us. Since this is a complete departure, the right departure, but a complete departure, from what we have done before, and because the preferred lender, even that 5 percent, holds 26 percent of the portfolio, what we wanted to do was to make sure we were going in the right direction; that we didn't have a dramatic change in loss rate, delinquency rate, but also put something in the System that would make it very easy to go in and change the volume rate from 30 and 3 to something else. So I think it was the middle ground for us as we ease into this.
Maybe it was too cautious. You know, we can say it is too cautious today because we have just started into this. A year from now if a delinquency rate has soared and a loss rate has soared, which we don't think it will, and we hope it won't, then I guess hindsight will be 20/20 vision. But this can be easily changed.
Page 33 PREV PAGE TOP OF DOC I think what we need to do is get as many preferred lenders into this program as we can. We need to monitor it very closely over the next months and see where we are, and then if there is no appreciable change in the delinquency rate and the loss rate, we can always go in and change the volume. But, you know, I don't want us to believe that just because we only have the 5 percent they can come in initially, that is going to be it. There are lots of lenders out there who have never asked for status, but it is 5 percent, but it could bein the next month it could be 10 or 15 or more. I think we need to keep that in mind.
Mr. BARRETT. Thanks, Ms. Cooksie.
The gentleman from Oklahoma, Mr. Lucas.
Mr. LUCAS. Thank you, Mr. Chairman. If I could go back to the discussions about the strain on our FSA offices and the requirements, the challenges, that those good folks are trying to meet.
One of the issues when I go home to Oklahoma that is going to be discussed in front of my face all week long is the status of the Livestock Feed Assistance Program, the $200 million which we appropriated last fall, and for the third time we have backed up the dates when the enrollment was supposed to be concluded and the payout periods would come. What do I tell my constituents about that? When will we see that $200 million in much-needed money paid out to people who properly qualify?
Mr. KELLY. Specifically on the Livestock Assistance Program, we have added a one-time 30-day extension to the program. Because there is a finite amount of money there to prorate out, we are probably looking at mid-April to May on that money being available.
Mr. LUCAS. I will give credit from what the constituents have told me during the initial sign-up periods, the flexibility that we gave you when we appropriated the money apparently has been used well. They like the use of the indexes and all of those things, unlike some past efforts, but there is generally some concern from people crunching the numbers that you are right; there won't be enough money there to address all of the needs. Do you have any feel, Mr. Kelly, for what the total requests will be?
Page 34 PREV PAGE TOP OF DOC Mr. KELLY. We update those figures every 2 weeks. Two weeks ago, February 1, for that $200 million pot of money, there were qualified disaster losses of $437 million. It has really escalated the last few weeks when the claims are coming in, and when they are finally processed through, a rough estimate today on the prorated share, maybe somewhere in the neighborhood of 25 to 30 percent of their loss will be covered out of that $200 million.
Mr. LUCAS. What is the likelihood that the Department will come with an additional request of funds to meet that difference between the funds available and the need out in the field? That is a question that I will be asked next week.
Mr. KELLY. You know, the Congress appropriated the $200 million, and we are sharing what the actual losses were. We are bringing that before Congress, and that is it.
Mr. LUCAS. It appears from my interaction with the folks back home in the field, the process by which all of this is worked through has gone fairly smooth. What is the delay? I have been led by some of the comments back home that perhaps it is the way that the final rules have been put together here, so to speak, at the home office.
Mr. KELLY. I guess in putting the program together, we havefor lack of a better wordthe plate has been full on a whole host of things, trying to deal with all of the programs. We have a dairy one that we are going to be kicking in quite soon. We are just finishing up the hog program.
This disaster program is probably going to be one of the more labor-intensive programs to implement between a single year and a multiyear disaster, and that was not an easy process to work out and make sure that it was fair and equitable to all people.
Given the workload resources that we have, somebody can always argue that we could have handed it out sooner. At the same time, we are moving to a major rollout of the $2.3 billion multiyear disaster program, and the same staff resources, headquarters is down along with everyplace else; our employment over those 1993 to 1998 figures are down as well. There are only so many people to do everything in the timely fashion that I would like.
Page 35 PREV PAGE TOP OF DOC Mr. LUCAS. I appreciate the challenges that you face. From what I am led to believe, with each of the State agencies basically uploading by computer to your office their final numbersand I guess we will do it by direct deposit back down, once the switch is flippedit should be relatively quick, I would assume, that April figure?
Mr. KELLY. That is correct. When you get the last figure, then we know to put the prorated formula out. That will be hopefully the quickest part of running the computers.
Mr. LUCAS. If there appears to be a substantial need when the final numbers come in, I would hope that you would report that back to us. Thank you.
Mr. BARRETT. Thank you.
Mrs. CLAYTON. Thank you, Mr. Chairman.
I am going to join also in support of the statement that Mr. Minge said. As soon as you can get us the estimated need of the new dollars for sufficient staff, as well as funds for the loan program, I think it would be helpful.
I would remind all of us that the situation has changed for agriculture and agribusiness and, therefore, what you saw or what you planned for 4 years ago is not the reality this year.
I also remind Members of Congress that the farm bill of 1996 was predicated upon the assumption that the global market was going to be sufficient and that the stability and the vitality that had for the economic prosperity for farming would not need a safety net, would not need to have such large investments from the Federal Government, either in staff or resources. But that picture has changed drastically more for agriculture than any other sector.
I think obviously the Department has a responsibility to recognize we are in a different situation than we were then, but I also think we in this committee have to recognize our responsibility and understand that we are in a different situation. So the constraints that were imposed by that bill and the assumption for staffing and for funds need to be reexamined in the light of our current situation. And I think that means that if we had an assumption that we needed so many staff persons in agriculture generally, and a subset of that is that we needed less FSA persons because we were going to consolidate all these activities, there wouldn't be such an intensive need for staffing, and we just need to look and revise that area.
Page 36 PREV PAGE TOP OF DOC You will not be surprised that I am equally concerned about the availability of all of the monies and all of the guaranteed loans, but I am also concerned about the availability of direct loans. I just want to tell you that I will be introducing again a bill for credit. We did it last time around, and there was some recognition by this committee in the guarantee loans, but there was no recognition whatever about the need for the direct loan. I would just share with this committee, and there are a lot of farmers out there who also need that as well.
But even with the guaranteed loans, we need to find a way where we do it better and more efficiently. And let me just revisit the Preferred Lending Program. We went into that program to do what, Ms. Cooksie, to have a more efficient way of getting a lot of loans to farmers?
Ms. COOKSIE. Yes. Basically we went into the Preferred Lender Program to streamline and get more lenders interested in it; but also to give those elite lenders, which are the preferred lenders, a leg up because they are the high-volume lenders with the lowest delinquency rate and the lowest loss rate.
Mrs. CLAYTON. My understanding is that there are about 5 percent of all of the banks that control 46 percent of the portfolio?
Ms. COOKSIE. Yes. They are preferred lenders initially that are coming on board with the new program who control 46 percent of the portfolio, yes.
Mrs. CLAYTON. So 54 percent is being provided by everybody else out there?
Ms. COOKSIE. Certified lenders, approved lenders and other bankers who don't have status either way.
Mrs. CLAYTON. Is there any less stability or criteria required for those other lenders than there is for the preferred lenders?
Page 37 PREV PAGE TOP OF DOC Ms. COOKSIE. Yes, less paperwork requirements. Preferred lenders have the ability toif they submit an application to us, we have 14 days to approve it or it automatically goes through.
Mrs. CLAYTON. So 54 percent of the package is a slower process because you don't have this expedited way?
Ms. COOKSIE. Even with the streamlined reg, we have greatly reduced the requirements for the certified lenders and approved lenders. We have reduced paperwork in the entire guarantee program. But the preferred lender has less paperwork and a better guaranteed turnaround time than the other lenders, yes.
Mrs. CLAYTON. And I would imagine that those who are preferred lenders are lenders who not only are high volume, but have an affinity for lending to agribusiness?
Ms. COOKSIE. Yes.
Mrs. CLAYTON. And the economic situation is going to drive all lenders to reassess because the economic situation is going to demand what the quality of those loans will be and how you can finance them, but if we don't find ways of also helping the other 54 percent of your portfolio, I think we are going to find that the crunch is going to be created by effort to try to expedite this? Don't misunderstand me. I am delighted we have the preferred lenders, okay.
Ms. COOKSIE. Right.
Mrs. CLAYTON. But if there is one door to go in, and you have 54 percent or everybody else out somewhere else, it doesn't take me long to see that there is going to be a crunch. There needs to be expedited loans and some oversight of that; otherwise we are going to have some problems.
I would be remiss if I didn't have in the testimony, discrimination is still a problem that I have been ever vigilant about. Simply because we have now had a lawsuit that suggests that the Department is acknowledging that and the courts have acknowledged that does not mean that we should not be vigilant to be sure that the added burden of not having access to credit, that there are farmers that are being discriminated in that process.
Page 38 PREV PAGE TOP OF DOC Mr. Kelly, what are you doing to ensure that we don't have continued discrimination in the application and the receipt of those loans?
Mr. KELLY. That is an issue, and since last year since I have taken over the agency, we have gone from four employees in our civil rights unit to 50-some to work through the backlogs on all of these various things. Most of the portfolio of discrimination deals with a lot of the agricultural lending portfolio, 95 percent of it. We have set up training. There will be training on that again this year. We have sent out a notice in light of the consent decree in the last 10 days, and have had several conference calls with our State directors and a notice going to all of our county offices to make sure that business goes on as usual so there is not anything that would reflect or look like discrimination again.
Starting last summer, we did a complete review of all of the agricultural credit regulations and tried to outline or highlight in statute or regulation all that which could be perceived or an opportunity for discrimination to occur, and we are trying to address, piece by piece, everything that could leave the perception of discrimination and work extensively with the training program to ensure that we are not.
As most people are aware, we are monitoring and keeping track of all of the cases that are coming through in a timely fashion. So actually starting last January when the agency received back its civil rights unit, which as you are aware was taken away from the agency prior to that, these are some of the things that we have done in the meantime to ensure that everybody is treated fairly.
Mrs. CLAYTON. Has any employee been dismissed or reprimanded because they have been found to discriminate? You are spending millions of dollars for the acts of employees, but has anybody been held accountable?
Mr. KELLY. Yes. The figures over the past several years are about a dozen employees have either been dismissed or reprimanded or suspended based on the discrimination.
Page 39 PREV PAGE TOP OF DOC Mr. SCHUMACHER. I have a meeting every 2 weeks in my office with all of my administrators and civil rights people and a detailed report and update every 2 weeks. I am accountable. I hold myself accountable for the implementation of the civil rights action team; and particularly, as I said in my testimony, that we want to make sure that part of our crisis that we have at the Farm Service Agency is not just making the loans but working with the lender and servicing our existing loans as the farm crisis deepens. We must get in front and work with our existing borrowers to get ahead so we don't have delinquencies, and that is very important in our socially disadvantaged operating loans.
Mrs. CLAYTON. Thank you, Mr. Chairman.
Mr. BARRETT. Thank you, Mrs. Clayton.
The gentleman from Michigan, Mr. Smith.
Mr. SMITH. I would like to thank the panel for being here. I think it is good to remind ourselves that farm credit is a symptom of a more significant problem, of low commodity prices. And if commodity prices were up and if farmers were able to make the marginal profit that most retailers are able to, or manufacturers, then it would be a simpler issue on existing farm credit, except I wanted to ask the question about the new farmer program.
Ms. COOKSIE. Beginning farmer.
Mr. SMITH. What is the status of those funds in relation to applications?
Ms. COOKSIE. Let me see here. Each of our categories, as you know, in direct farm operating, guaranteed farm operating, there is a subsection under each one of those that is targeted for beginning farmers. Let me just check one thing real quickly.
Mr. SMITH. Chairman Martin, do you have a program for young farmers specifically and is it difficult for those new beginning farmers to get a loan through the Farm Service Agency?
Page 40 PREV PAGE TOP OF DOC Ms. MARTIN. From the standpoint of the Farm Credit System, of course it wouldn't be more difficult for a young farmer, based on the criteria that the association uses, than it would be for an older farmer. But something that we have done well. In fact, we are required by Congress to report on an annual basis as to what the Farm Credit System is doing for young, beginning, and small farmers. We have done that for many, many years.
Just last year the Farm Credit Administration Board adopted a new policy that emphasized the Young, Beginning, and Small Farmer Programs and put some requirements on the associations to do a better job in reporting.
Mr. SMITH. What percentage of your farm lending would be beginning farmers, 5 percent, 10 percent?
Ms. MARTIN. Our credit officer is here. Let me ask that question.
Mr. SMITH. Administrator Cooksie?
Ms. COOKSIE. We are not completely out of money in our Beginning Farmer targeted programs, but it is getting very, very low. We normally have the ability to pool those, I think on April 1, and we probably will, but there won't be much to pool.
Mr. SMITH. And the interest consideration for those beginning farmers is what kind of reduction in interest? Do they get that at 1 percent?
Ms. COOKSIE. No. They are at the regular 5 percent, I think.
Mr. KELLY. Yes.
Mr. SMITH. Excuse me for jumping back and forth. You were going to finish, Chairman Martin.
Ms. MARTIN. One thing that I was going to mention, our concern as a regulator has been what we call the junior partner in an operation, for example, where the dad signs the loan form and consequently the operation may be supporting three or four young farmers, and so it is difficult for us to pin down. And the reason that we adopted this policy was because we want to report better to Congress. Personally I believe the Farm Credit System is financing that next generation of farmers. And we hope within the next 2 years, because our policy will become fully operational, to be able to report that better.
Page 41 PREV PAGE TOP OF DOC Mr. SMITH. Mr. Schumacher and Mr. Kelly, just following up a little bit on the fact that the estimate is that your 1,800 below-workforce needs, the President's budget has come in as we talked about with some 750 reductions in the Farm Service Agency. Do I understand that you have now made a commitment to come back to this committee next week or the week after next with a revised recommendation of the staffing for Farm Service Agencies?
Mr. SCHUMACHER. I think in my earlier comments with Mr. Minge, we indicated that the Secretary has indicated in testimony before the appropriations committees that we probably need at least another $100 million to meet the demand for additional farm lending. That is being worked on as we speak and with great energy in our Department. We are looking also at the staffing needs and a few other needs. We are pushing that forward very hard internally.
Mr. SMITH. Are you going to review those staffing needs in light of the 750 additional staff reduction, FTE reduction, that at least is my interpretation of the budget that came over from OMB?
Mr. SCHUMACHER. We have pressure in our FSA offices, so we will be looking at staffing.
Mr. SMITH. Did that reduced staffing recommendation come from the Department or did it come independently from OMB?
Mr. SCHUMACHER. That is administration in the budget.
Mr. SMITH. I don't know what that means.
Mr. SCHUMACHER. The administration put that forward.
Mr. SMITH. Are you comfortable and willing to reevaluate the extra demands on FSA, Farm Service Agency offices, and come back with a recommendation in the next 2 or 3 weeks to this committee?
Mr. SCHUMACHER. We are certainly looking at that very hard and looking at lending, staffing, and some additional needs as well.
Page 42 PREV PAGE TOP OF DOC Just for the record, I did not mention this, Mr. Smith, just to summarize where we are on the lending, by April 15 we will be out of direct operating loans.
By August 1 we will be out of guaranteed operating unsubsidized lending authorities.
By March 1 we will be out of guaranteed operating interest assistance.
By March 1 we will be out of guaranteed farm ownership.
And by February 9, just passed, last week, we stopped lending for emergency loans, particularly difficult for Texas and California and some other States.
I wanted to get that on the record to illustrate how perilous we are in getting lending for the record, and we need it for staffing as well to carry out the other programs that Congress has given us. So we are a little concerned in addition that Congress did not fund the technology investments. As I indicated to Mr. Minge, we put a one-page application up for the hog program and we loaded that on the Internet, and that has been very well received. We are going to try to make efficiencies, and we will still be short of lending authority and short of staff.
Mr. SMITH. Thank you.
Mr. BARRETT. The gentleman from Georgia, Mr. Chambliss.
Mr. CHAMBLISS. Thank you. I appreciate you folks coming here today to talk to us about something that is critical in every one of our districts and outside our districts across agriculture country.
Gus, I notice in your written statement you talk about the number of direct versus guaranteed loans that were made in 1998. You had 15,600 direct loans totaling $749 million. And 10,500 guaranteed loans totaling $1.44 billion. Now, that $1.44 billion, is that the 80 percent or 90 percent, or is that 100 percent of those loans?
Mr. SCHUMACHER. I believe that is the guarantee. The $1.4 billion is our portion.
Page 43 PREV PAGE TOP OF DOC Ms. COOKSIE. That is the spending authority for the guarantee.
Mr. CHAMBLISS. What percent of those 15,600 direct loans are currently in default?
Ms. COOKSIE. We have a delinquency rate nationally a little over 14 percent overall.
Mr. CHAMBLISS. How about the guaranteed loans?
Ms. COOKSIE. At the end of December I think it was 2.4 percent.
Mr. CHAMBLISS. There is a pretty significant difference in the default rate between direct and guaranteed, and we have had a discussion before that we as the Federal Government do one of the worst jobs of determining who we ought to loan money to of anyone in the world. Mr. Stenholm was alluding to this earlier, and I don't understand why we don't move in this direction and move quickly to let the local folks at the local level who run the banks decide who is capable of repaying the money back. I don't care if we have to go to 100 percent guaranteed loan programs for certain individuals, and Mrs. Clayton and I have a real concern about some category of folks who need direct loans, but we ought to let the banks determine who is capable of repaying those loans. And if it is a category that somebody falls into where they are a minority farmer or a first-time farmer-owner, or whatever it may be, we ought to be in a position to guarantee 100 percent of that loan, but let the banks make the decision on that.
It really does bother me that you seem to be moving away from that instead of moving towards it, because based on what Mr. Stenholm says, I don't think that there has been any movement in that direction over the last couple of years.
Back in October we approved some $6 billion in disaster payments, loans, to go to farmers all across the country. How much of that money has gotten into the farmers' hands as of today?
Page 44 PREV PAGE TOP OF DOC Mr. SCHUMACHER. About half. I was able to commend the staff because when the bill was signed, I think it was about 12 days, Keith, after the President signed the bill that you put up, there were checks in farmers' hands. By Veterans Day most of the farmers who qualified for the first half of that received it. The staff did a terrific job in getting that out. Now we are working very hard, sign-up started February 1 and ends March 12 for the remaining $2.3 billion, and those checks should be going out in April or May. Is that correct, Keith?
Mr. KELLY. April or May, depending when the prorata is done and on the impact of the disaster, the amount of the disaster, yes.
Mr. CHAMBLISS. Is that $2.3 billion in the form of direct payments?
Mr. KELLY. Those are direct payments for the losses.
Mr. SCHUMACHER. That is particularly important for Georgia. We are working with your commissioner and others and Carter.
Mr. CHAMBLISS. That $2.3 billion, Keith, is the money that the regulations just went out on recently, within the last 2 weeks?
Mr. KELLY. That is correct. February 1 for the $2.3 billion. That has two components. It is a single year and the multiyear, $875 million in the multiyear, and the balance of that equals 2.375 totaled up for that disaster. That went out on February 1 and we just started the sign-up on that, yes.
Mr. CHAMBLISS. When do you anticipate the sign-up concluding and the people who qualify being determined?
Mr. KELLY. With the workload that we are dealing with, this week we have, with some vacancies we have in our agency because of morale problems and other things, we are trying to pick up some more temporary help and assign in some difficult spots. We know Texas, California, at the very end of the year has slowed us up considerably when the freeze hit the last week of December out there.
Page 45 PREV PAGE TOP OF DOC As diligently as we are working trying to get the sign-up, the full 2 months is there and then after that, that is where we are looking at mid-April before we can roll up all of the impacts that are prorated out. That is assuming that we don't have to have an extension. We just did an extension on the livestock one to make sure that we included all of those people.
Mr. CHAMBLISS. I really am concerned about why we are not moving quicker towards preferred lenders; and, second, putting more decisionmaking power in the hands of local folks with the Government being involved in guaranteeing the loans rather than making direct loans.
I would hope that we would move very quickly to try to reduce the paperwork required to have a lender declared a preferred lender. I think it is very obvious why you are having trouble recruiting those folks. They don't like dealing with all of the paperwork. Gus, if I were in your position, I believe I could take a 3 by 5 index card and I could have a bank sign that, with certain stipulations on it, that would allow me to be able to determine whether that bank fell into the category of a preferred lender. The ABA or the Independent Bankers Association have rigid guidelines for the banks, and I would sure hope that we would move quickly in that direction.
If we moved more into a Guaranteed Loan Program versus a Direct Lending Program, you are going to have a lot more people signing up for guaranteed loans. There would be much more money available to the farmers out there, particularly those farmers who are having difficulty this year, and we ought to move in the direction of getting out of the direct loan business and into the guaranteed loan business, particularly when Ms. Cooksie tells me that there is some 12 percent difference in the delinquency rate, and we are talking about $1.4 billion and $749 million, and even in Washington, we are talking about real money there. And I would certainly hope that we would move in a much quicker fashion towards the direction of getting those folks declared preferred lenders.
Page 46 PREV PAGE TOP OF DOC Mr. SCHUMACHER. Let me make one short comment, Mr. Chambliss. I think one of the benefits of this new Federal Register that is out today, and bankers will be able to do it, we are moving strongly to simplify the paperwork under this new preferred guarantee regulation that went out in the Federal Register today. The paperwork will be much, much simpler under this PLP regulation.
Mr. CHAMBLISS. I am serious when I say that you ought to be able to do that on a 3 by 5 index card. The Federal Government has various ways of determining whether or not banks ought to be in business, and for the USDA to be another bureaucracy for that bank to have to come to to get approval is ridiculous. As we said earlier, you haven't done anything in 2 years. I suspect that we will be back here in another 2 years. I hope we make some progress, but I wouldn't be surprised if we didn't. You need to move quickly. Thank you, Mr. Chairman.
Mr. BARRETT. Thank you. The gentleman from South Dakota, Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman. I would like to thank the panel for your testimony today as well.
I would like to associate myself with the comments of my friend from Georgia, and I don't think that we can emphasize enough how important it is that we streamline this agency.
Mr. Everson from First Dakota National Bank in Yankton is going to testify later, and they are a very successful user of this program, that in some cases he has to deal with nine different FSA county offices, and I think that acts as a real disincentive for folks to get into this program. So I hope that we can continue to make it more workable because it is a program that has had, I think, exceptional success, particularly with those lenders who really work it well.
Page 47 PREV PAGE TOP OF DOC Mr. Schumacher, you noted in your testimony and in my conversations with Mr. Webster who will be testifying later as well from the Farm Credit Services, that there are a number of fertilizer, chemical, and feed suppliers that are offering credit out there today. Do you know if practices by these types of suppliers are regulated?
Mr. SCHUMACHER. I don't know.
Ms. MARTIN. My understanding is that they are not.
Mr. THUNE. Do you know what percentage?
Mr. SCHUMACHER. The interest rates are very high. Again, that is a very rapidly expanding part of operating. Machinery, fertilizers and now seeds, I understand, are being offered on credit. I think I will defer to Marsha on that on the regulatory side.
Ms. MARTIN. My understanding is that they are not regulated. As far as interest rates, our analyses shows them competitive with bankers and with Farm Credit. So it certainly is a growing part of the agricultural credit market.
Mr. THUNE. Do you have any idea as a percentage what that constitutes of total agricultural credit?
Ms. MARTIN. Across the Nation, no, I do not know. We don't get those figures. They are not reported as far as I know.
Mr. THUNE. Is the fact that to your knowledge those types of lenders are not regulated, should that be a concern to us?
Ms. MARTIN. Certainly from the standpoint of credit performance and safety and soundness issues for those who would own those organizations, yes, I would think that it should be a concern for Congress.
Mr. THUNE. Mr. Schumacher, you indicated in your testimony that farmers' equity and agricultural assets are projected to increase for the 10th straight year. And if there is a silver lining in what is happening out there, I think it is the fact that we have learned some lessons from the eighties, and lenders are in a much better position in terms of their capital ratios. But how much of this increase in equity is attributable to land, to the real estate?
Page 48 PREV PAGE TOP OF DOC Mr. SCHUMACHER. I will have to come back on that. Land prices are now softening, especially in the 10 States in the St. Paul Farm Credit System. I think they are down 1 percent on land. Let me come back to you, Mr. Thune, on that issue, if I could.
Mr. THUNE. My follow-up to that, if it is the land values that are holding those equity levels where they are, and I wonder what that means for long-term producer viability, if it becomes increasing expensive to operate, will the debt level begin at some point to get to be too much for our producers to handle? You probably don't have a specific answer on that, given the fact that you don't know what that constitutes in terms of the total increase in equity levels
Mr. SCHUMACHER. At least twice a year I try to visit St. Paul and have a meeting with the St. Paul Farm Credit System and other banks in that area because I am concerned, especially in the Northern Plains, how this is working through. They are getting nervous when you see soybeans below $5, and corn, wheat, and some of the disaster payments.
What Congress and the administration did this past year has been very helpful. What occurred in 1998, a lot of the farmers rolled forward some of the good prices in 1997 and many of those farmers hedged. That is not possible this year. The cash is not there to roll forward and you cannot get a good hedge, and prices out into the future are not very good, either.
As I said earlier, as Scott Kilman said, the outlook for the farm economy is darkening. That was in the Wall Street Journal the other day. I think we share that thought, and are concerned about that.
Mr. THUNE. In light of that, and to some degree I don't know what level, what degree you have in terms of flexibility in some of your requirements, but again Mr. Everson will testify later about those preferred lenders who utilize this program extensively; for example, the 110 percent cash flow requirement. And might there not be some flexibility, particularly for those lenders who have established reputations of handling this program? What can you do to provide that type of flexibility?
Page 49 PREV PAGE TOP OF DOC Mr. SCHUMACHER. I appreciate that question and Carolyn has thought about that a lot.
Ms. COOKSIE. We know that there is a problem with the 110 percent. I don't know if you recall or not, but last year in our legislative package we asked for that to be fixed because the Cohen Act, which is the statute that governs farm loan programs, it requires the agency consider replacement of capital assets; so that is what that 10 percent represents, an allowance for replacement of capital assets. Until the statute changes, there is not much that we can do about that. We can change the margin, but that still has to be changed in the statute in order for us to take that out.
We asked for language to do that last year in our legislative package, and it did not get done. I am hoping that if the Department puts forward another legislative package, we can include that again and hopefully it will get done this year.
Mr. THUNE. Short of legislation.
Ms. COOKSIE. Short of legislation, there is not much we can do about it, no.
Mr. MINGE. Would you yield one moment on that?
Mr. THUNE. Sure.
Mr. MINGE. I understand that there are several drafts of legislation that came from the Department in October which were intended to resolve this 110 to 100 percent coverage requirement, and that some of those drafts were conflicting, and that in the confusion of trying to get that October bill, this mammoth bill completed, this somehow slipped through the cracks in terms of your hindsight as to what happened.
I guess I think it is a tragic situation and it is very difficult to pin down who on the congressional staff screwed up and to what extent the confusion at the Department contributed to that screwup, but it sounds like this is one of the things that slipped through the cracks, not because Congress and the Department did not want it changed, but because somehow there was confusion.
Page 50 PREV PAGE TOP OF DOC Ms. COOKSIE. I agree. There was confusion, obviously, because we have probably a worse problem now with what we have in the appropriations language than what we started with. The language penalizes the farmer worse than if we had done nothing at all as far as when we have to restructure their loan and how we do their writedown.
Mr. MINGE. Can you make sure that we have language by the end of next week which you can assure is adequate to accomplish this? Please indicate what sections need to be amended so we don't amend something and then learn after the fact the Department lawyers concluded it was the wrong thing to amend.
Ms. COOKSIE. We will submit the same language that we submitted last year, which is what we need, the way that it needs to be. I can give that to the Department, yes. I will give it to the Department very early.
Mr. MINGE. Thank you. Thank you, Mr. Thune.
Mr. THUNE. Just to followup on that and I hope that we can get that fixed, and it couldn't have been Members of Congress that messed that up, it had to have been the staff.
The other issue I think which I see looming on the horizon and which I think members of this committee are very concerned about, and that is the whole crop insurance program. And one of the things that we observed of course in the President's State of the Union address mentioned the need to reform the crop insurance program and when the budget came forward there weren't any dollars put in there to do that.
It seems to me if we are going to try to get the situation improved out there where we allow producers to manage their risk better, they don't have a lot of tools at their disposal. The crop insurance program is one that they have. Unfortunately today it doesn't work as it is supposed to work and I suspect that you probably, as you look at your portfolios, would be very happy to see a crop insurance program that would give producers a better opportunity to hedge again future risk.
Page 51 PREV PAGE TOP OF DOC I just would welcome any thoughts or comments that you would have on that, particularly given the fact that it was budgeted for. Is the Department, is the administration, supporting making some changes that are desperately needed in this program?
Mr. SCHUMACHER. First, in the disaster program package, we have a $400 million downpayment. It is a 30 percent reduction and we are asking and making sure that all farmers are aware of that. I think that will be very, very helpful in 1999 to buy downespecially in the Northern Plains to get that started.
Second, we have submitted a number of suggestions as to the rollout of the budget as to where we think crop insurance should go. We put the details of that in the record, and I would be very pleased to do so.
Third, the Secretary and the Deputy and I will be going out into the countryside over the next 2 months to find out from farmers and farm leaders in the country how they would like to see the risk management crop insurance reformed. A number of hearings will be going on, I am sure, over the next 9 months. It is very important that we improve the risk management tools and improve the credit.
One of the things that I appreciate about this hearing, crop insurance and credit are two parts of the safety net. Credit is not a complete solution because we don't want to load farmers up with debt, but it is helpful, as Marsha pointed out, as one of the key safety nets in getting through this difficult time. But we need to improve crop insurance and we need to work closely with you to do that. It is a very important issue for us.
Mr. THUNE. I appreciate that and I hope that we can get to the reforms necessary, but again it is going to taketalk is cheap but as they say in our country, it takes money to buy whiskey, and there wasn't anything put into the budget that would provide for that, and I think we are going to have to come up with a way to see that is funded. It is going to take some dollars to fix that. We look forward to working with you. Thank you and I yield back.
Page 52 PREV PAGE TOP OF DOC Mr. BARRETT. Thank you, Mr. Thune.
We have had a request for a few follow-up questions, and the Chair is going to agree to that in the hope that the questions will be brief, succinct, and to the point. I will exercise the gavel on this second round. But I believe there are a couple of questions that still need to be asked. There has been excellent testimony. We could keep you here all day, you know that.
Exercising the privilege of the Chair, I want to get something on the record regarding FSA payments and LDPs. At the present time a lot of our agriculture people, our fertilizer people, et cetera, have loans on the 1998 crops and it is my understanding that the lien holders' names are included with the checks that are paid to the producers ultimately.
My question goes directly to the LDP payments. It is my understanding that lien holders' names are not added at that point to the LDP payments. What is the background on that? Can it be changed? Does it need to be changed? Please advise.
Mr. KELLY. Mr. Chairman, to respond to that specific question, when a farmer takes out a loan, the crop is used as a collateral. The LDP payment is not a collateralized issue. The LDP payment is to get him up to the minimum loan rates. There is no lien when the LDP is done because in lieu of taking out a loan and in lieu of collateralizing their crop, they will take the LDP payment and that is the end of it as far as any future opportunity to even go to the loan program. So it is not collateralized and those payments do go directly to farmers.
It probably points out, that is why we have the thousand-fold increase this year of the top agricultural economy. That is why even 2 or 3 or 4 or 5 cents is something that they will do, truckload by truckload, to make sure that they get their LDP. They need that money everywhere.
Mr. BARRETT. I understand, and thank you for helping me get that on the record. Mr. Minge.
Page 53 PREV PAGE TOP OF DOC Mr. MINGE. I pass.
Mr. BARRETT. Mr. Stenholm.
Mr. STENHOLM. Will the regulations on the Guaranteed Loan Program, which are supposed to be published today, address the issue of the 110 percent debt service ratio, also called the borrower cash flow requirement?
Ms. COOKSIE. No, because we need statutory change in order to address it.
Mr. STENHOLM. So the confusion in reading this, it will take statutory control, in response to Mr. Minge's question?
Ms. COOKSIE. Yes.
Mr. SCHUMACHER. And we will send that legislation that we submitted before. That was the correct legislation that we sent up last fall. We will work this out with you and we will get this up right away.
Mr. STENHOLM. There is a tremendous amount of frustration in the country for the valid reasons that we have talked about, but lest this committee and this Congress get too critical of the administration's lack of progress, which I expressed my own a moment ago, I accept my share of the responsibility and I hope my colleagues on this committee will be ready to lead by example soon, as we will get the opportunity very soon to address these questions of why we have not achieved the kind of efficiency in the delivery of services.
Part of it has to do when the administration requested for the first time that we close some county offices, that we consolidate those who are serving, that we answer the question of what is it that our farmers want USDA to do for us, with us and to us, and how can we most efficiently deliver that service, there was a hue and cry from this committee and this Congress in every State and every district, saying you can't do that.
So when we start talking about lack of resources, we have to start right here on this committee, the full committee and our colleagues, to understand that we have not helped do that which I rightfully criticize the administration for not doing. And that is something when we get the opportunity now, and we will have this, so to all of the concern about this, we are going to have some interesting discussions, and they are going to be just as politically volatile as they were in 1992 and 1993. And, Mr. Barrett, you remember that we caught a little flak for the recommendations that we made in those days, and we ended up succumbing, and we still have a large numbers of States which have not co-located their State offices. We still have 29 agencies in Washington, DC each with their press, each with their budget, each with their overhead, all of which could be reprogrammed into the money to provide the manpower, so that the FSA offices and our dedicated employees that are out there busting a gut trying to do what we have told them to do without the resourcesif the money is there.
Page 54 PREV PAGE TOP OF DOC So I hope that this frustration and dedication that we all have when we start looking at some of the things that we can do to change the legislation, to do that which you asked us to do, that my colleagues on this committee will be as willing to do as I, and I believe the chairman and the ranking member of this subcommittee and the chairman of the committee, are going to be willing to step up.
If not, we are going to have a heck of a problem because the budget pressure is on us this year with all of the needs, and we don't need to go over that. It should not be any secret to the press writing this today why we have credit problems in this industry. You just have to take a look at the prices that our farmers are receiving and there is nobody that can make it work.
So we are going to have to deal with the credit. We are going to have to do it responsibly, and we are going to have to makes the changes a lot faster than the bureaucrats are willing to do it, and we are going to have to give them the backing from this committee to do it, and I am going to be optimistic and say we are going to do it.
Mr. BARRETT. Thank you, Mr. Stenholm.
Is there follow-up on this side?
Mr. THUNE. No.
Mrs. CLAYTON. Just one brief comment. I also think, Mr. Stenholm, that we are as a committee going to have to understand what the global economy is and how that affects our production and prosperity or lack thereof of agriculture. Efficiency comes, you understand that.
I want to just revisit, for my understanding, what you are planning to do with the more than 4,500 shared appreciation agreements which were implemented in 1988 when people who were in the process of writing down their loans were given the option of writing down their loans with appreciation, and those will come due this year. And given prices are low and their income is low, if those loans are due, based on their improved valuation or improvement totheir appreciation is up and they have less money, any considerationand many of those people are now in your guaranteed loan portfolio as wellany ideas as to how you respond to what is probably going to be a crisis in that?
Page 55 PREV PAGE TOP OF DOC Mr. SCHUMACHER. Yes, this shared appreciation is a major problem for us. We agree with you and the committee that some relief needs to be granted. We have some administrative authority. We are going to pull out capital improvements over the 50 percent equity. That is an important issue, to take out the capital improvements that have been made. We are going to administer and consider whether we have authority for a 2-year deferral.
Hopefully we will have new agreements that will limit it to 5 years instead of 10, and we are also looking at refinancing in terms of some program loans.
Tom Grau who is our new acting deputy from Iowa was very innovative in helping to solve some of the issues administratively. But I do think that we are going to need some administrative relief to amend the terms of this shared appreciation. We are going to work with you on this legislation, and we recognize this legislation would score and would require an offset.
Mrs. CLAYTON. Can you do it administratively?
Mr. SCHUMACHER. Some of it you can, but to resolve it, we will need to work with this committee and the Congress and get some additional
Mrs. CLAYTON. But your proposal is to take out the improvements?
Mr. SCHUMACHER. Yes.
Mrs. CLAYTON. And to extend it 2 years? Rather than be due in 1999, it would be due in 2001?
Ms. COOKSIE. We have talked about this a great deal in trying to figure out what we can do administratively. We are going to start working on getting that done.
Also, we have been up here talking extensively to some of the staffs about what needs to be done legislatively.
Page 56 PREV PAGE TOP OF DOC What Mr. Schumacher said, the Secretary has agreed that we are going to pull out the capital improvements out of the 50 percent. That means if they put capital improvements, as defined, into the farm and that makes the equity go up, we will pull that out and hopefully that will bring their payment down.
One of the things that we are also looking at, we have a question before the attorneys to see if the Secretary has deferral authority, because we have done 51-T which is deferral authority for some other things, so we are going to see if he has deferral authority for up to a couple of years, which doesn't do away with the problem, it just defers the problem.
Then we are looking at ways administratively for the Secretary in the new agreements to say that they will be due and payable in 5 years instead of 10 so maybe the equity won't be that high.
There are some choices, and we have talked extensively to staffers and everybody on the Hill about that, about whether we just propose legislation to do away with it; or if we amend it, do we say things in the amendment of the legislation like they don't have to pay it until they either sell the farm or move away from the farm.
So we would be more than happyand I am eagerly hoping that somebody is going to take this cause up this year, and we would be happy to work with anybody that is interested on legislation to fix it.
Mrs. CLAYTON. Would you send us recommended legislation? I am interested in it.
Mr. SCHUMACHER. One of the things that I would like to say, I have been coming up 5 years now in my service, and I would just like to mention the staff. I know that we have been criticized, and I am accountable, always hold me accountable and I am working with the staff, but they are really working hard. Carolyn and her team and Keith and his team, they are working hard. We would like to continue to recognize them for all of the enormous work that they have been doing to try to get through this crisis.
Page 57 PREV PAGE TOP OF DOC We just never anticipated a year or two, or even last fall, that we would be in this much of a problem in the countryside in working with our limited authorities to help farmers to get through this. I want to put this on the record. They have done a wonderful job. It is difficult. The staff in the field especially, when I fly out and visit the States, they are really struggling. Some are taking keys and opening the offices on weekends and doing this work on weekends and evening. The stress level is very high. I am just proud of the staff in the countryside and what they are doing.
Mrs. CLAYTON. We thank them for that.
Mr. BARRETT. Mr. Chambliss.
Mr. CHAMBLISS. Thank you. Mr. Kelly, I must tell you as I have been around the country, I have seen a significant level of frustration in FSA offices about not getting the regulations or the information in their hands to be able to talk with these farmers who are beating up on them every day, just like they beat up on us when we go home. I understand that you have finally gotten all of that information to the local level; is that correct?
Mr. KELLY. That is correct. You are talking about the disaster program?
Mr. CHAMBLISS. Yes.
Mr. KELLY. That is correct.
Mr. CHAMBLISS. Some of that information did not get down there until the 10th day of the 29-day sign-up period, and I think that is probably the last information that needed to get there; but that is why that level of frustration is there and frankly I can't blame those folks. But your folks in the field are getting beat up and a lot of it has to do with just not getting the information in their hands.
Second, Gus, you and I have had some conversations over the years about this issue and it doesn't directly relate to this issue that we are talking about today, but it is the key to the long-term viability of agriculture in this country, and that is trade. You folks are in a position to have some influence in putting some pressure on the folks that are directly involved in that every day.
Page 58 PREV PAGE TOP OF DOC Gus, I know you are doing this to a certain extent, but we have got to do a better job of raising the priority level of agriculture in our trade negotiations, and I hope that you will make a real effort to ensure that is done, particularly as we go into this next round of GATT.
Thank you, Mr. Chairman.
Mr. BARRETT. Thank you. Mr. Minge.
Mr. MINGE. I would like to ask if there is anything in the regulation that is being published today that clarifies the eligibility of confinement facilities for the loan programs at FSA, and it is particularly confinement facilities where there are contracts for feeding?
I know that we have had inconsistencies from State to State, and it so happens in my district there has been confusion between the county office and the State office and the national office, which has created a lot of unhappiness and extra work for me and my staff. I would hope that has been laid to rest.
Ms. COOKSIE. There is nothing in the new regulation that talks about contracts, loanmaking, which is what I think you are talking about here. The Secretary did a few weeks ago, I am sure you know, issue a notice to the field about the pork contract loans. There is a moratorium on those. But there is nothing else in the reg that I am aware of that speaks to this, Mr. Minge.
Mr. MINGE. I would hope that there would be a consistent national policy. I understand that there is a temporary moratorium, but ultimately we have not it done one way in one State and another way in another State. Getting into the merits of it goes beyond the time this morning.
Ms. COOKSIE. The moratorium is just on pork producers and pork contractors.
Page 59 PREV PAGE TOP OF DOC Mr. MINGE. Thank you.
Mr. BARRETT. Thank you, Mr. Minge.
If there are no further follow-up questions, again, thank you to the panel. We appreciate your being here and sharing tour expertise with the subcommittee. We look forward to seeing you again. Thank you.
We invite our second panel to share with us now.
Mr. Dennis Everson, senior vice-president of the First Dakota National Bank of Yankton, SD Mr. Everson is representing the American Bankers Association.
Mr. Jack Webster who is president and CEO of the Farm Credit Services of America, a transplanted Californian who has now fallen in love with Omaha, NE. He is representing the Farm Credit Council.
Mr. Dale Leighty, First National Bank of Las Animas, Las Animas, CO. He represents the Independent Bankers Association of America.
Mr. BARRETT. Mr. Everson, you may proceed when you are ready.
STATEMENT OF DENNIS EVERSON, SENIOR VICE-PRESIDENT, FIRST DAKOTA NATIONAL BANK, YANKTON, SD, REPRESENTING THE AMERICAN BANKERS ASSOCIATION
Mr. EVERSON. Thank you, Mr. Chairman, and members of the subcommittee. I am pleased to be here today on behalf of the American Bankers Association and to participate in this important hearing to examine the current agricultural credit conditions and discuss USDA's Guaranteed Loan Program. I am Dennis Everson, senior vice-president of the First Dakota National Bank in Yankton, SD. I am also chairman of the ABA's Agricultural and Rural Bankers Committee and chair the ABA's Task Force on 21st Century Agricultural Banking. First Dakota National Bank, a community bank, has more than $300 million in assets and we have $100 million loaned out to farmers and ranchers; approximately 10 percent of that portfolio is indeed in guaranteed loans.
Page 60 PREV PAGE TOP OF DOC First Dakota National Bank also offers a service called Dakota Mac. We work with 42 other banks in 15 State regions to process and service farmer Mac I and II loans. We started Dakota Mac in 1993 and since that time we have sold approximately $65 million through the Farmer Mac program.
I would like to begin my remarks by thanking you, Mr. Chairman, for your interest and work in the area of agricultural credit. The banking industry remains very aware that you and Chairman Combest worked closely with us in 1992 to pass legislation that authorized many improvements to the USDA's Guaranteed Loan Programs. Specifically, you successfully offered an amendment that authorized the Department to create an express application for small loan requests, and with Chairman Combest you created a Preferred Lenders Program. Today the USDA is about to finalize the regs on these and other programs. They could not have come at a better time.
I would like to say first that I and thousands of bankers that I am representing today are very concerned about our farm and ranch customers. I am sorry to say there is nothing in my testimony that will raise the price of corn, wheat, beans, hogs, or cattle. I am frustrated by the fact that I do not have the answers that my customers want. Our industry provides the vital credit that farmers and ranchers need to be successful. We have more at stake in the future of agriculture than any other lender. At the end of 1998 banks had over 70 billion outstanding to farmers and ranchers. This represents more than 40 cents out of every dollar loaned to every farmer and rancher in the country. Despite the important role banks play in the health of American agriculture, the role my bank plays in the economic well-being of Yankton, my customers really want to know when is the price of hogs going to get back to $42. I don't have that answer.
Erosion of the cash flow of my customers has been in some cases severe. Even our most productive, best-managed and best-capitalized customers had a tough time last year and I am worried about the next 12 months. Our concern is great. Agriculture lending is still strongly based on relationships. When I employ every conceivable technology available to determine if the loan I am about to make will pay as agreed, it still comes down to me looking across the kitchen table at that farm family and judging what we are about to enter and whether it makes sense for all parties involved. It has been harder for me to do this year than in some time.
Page 61 PREV PAGE TOP OF DOC I tell you these things not to alarm you but to alert you to the fact that we have a great opportunity this year to honestly examine the future of agriculture and to come together in a proactive manner to find solutions. The American Bankers Association is trying to do just that. As I mentioned earlier, I am chairing a special task force on 21st century agricultural banking. Many of my recommendations to you came from the initial discussions our task force held and will deal with the immediate concerns we have about providing credit to our farm and ranch customers.
As difficult as conditions presently are, we are not in a situation like we were in the early 1980's. In my written statement, I have provided you with background information that provides my belief that we are facing new challenges and to face these challenges, we must prepare for the future, not the past. In my statement I noted that there was only a limited USDA Guaranteed Loan Program available to farmers and ranchers and their lenders in the early 1980's.
Since the 1980's the Guaranteed Loan Program has become a success. Some 48,000 farmers and ranchers have 65,000 loans from banks and others that are guaranteed by the FSA. Each year FSA receives approximately 15,000 new guaranteed loan requests. Past due payments are low. I am pleased to report to you that it is the banking industry that writes the overwhelming majority of USDA guaranteed farm loans, over 80 percent of that total. For my bank and many thousands of banks like mine, the Guaranteed Loan Program is an essential tool we use to help farmers and ranchers get the credit they need.
As you contemplate how the Federal Government will respond to the needs of the agricultural sector during this difficult year and in the future, you must consider the Guaranteed Loan Programs offered by the USDA to be one of the most cost-effective and highest-impact tools that Congress can provide.
Recently, FSA developed many program improvements that the ABA has long advocated. It is our hope that the new regulations will result in a program that will be more efficient and result in greater access to capital by a wider range of agricultural borrowers. Unfortunately, now that the USDA has created a better program, bankers and their customers are being told that there is no more money available. Fifteen States have spent all their guaranteed farm ownership allotment for this year. Interest Assist which allows lenders to lower their rates by 4 percent is exhausted in five States. Many more states will be out of funding very soon.
Page 62 PREV PAGE TOP OF DOC Earlier this month, we joined with many national farm organizations in a letter to Congress, asking you for additional funding.
Our first recommendation is we urge you to make funding for the FSA Guaranteed Loan Programs a priority. We need a supplemental appropriation for the remainder of this fiscal year and we urge you to support funding for the next year at a level that is consistent with the demand the program has experienced this year.
With new regulations, ABA strongly believes the FSA has taken an important step in what we hope is an ongoing process of Guaranteed Loan Program improvements. We believe there is more that can be done immediately to further program efficiency.
I have five additional recommendations which we believe USDA and Congress, where necessary, should act on immediately. Is it possible for this committee working with the FSA to answer once and for all the question about what constitutes adequate cash flow for a borrower to qualify for a guaranteed loan? We continue to be confronted with confused interpretations in different parts of the country on what FSA wants when they require a 110 percent cash flow coverage.
Our second recommendation. FSA should immediately abandon the 110 percent cash flow coverage requirement. This is especially important now when so many farmers are suffering cash flow problems. A cash flow coverage of 100 percent should be sufficient for FSA approval, especially if the bank is willing to make the loan.
Recommendation three. FSA should consider lowering the percentage of guarantee if the cash flow of coverage is less than 100 percent and the bank has indicated that they will approve and fund the loan. Give my bank the option of making a loan if we decide to take the additional risk. By flatly denying the guarantee if the cash flow coverage is less than 100 percent, or when it is less than 110 as presently required, FSA immediately forecloses on every option to that borrower.
Page 63 PREV PAGE TOP OF DOC Congress should revisit the term limits on guaranteed loan eligibility recommendation, for given the fact that the agricultural sector is expected to be under increased financial stress, the current term limits on borrower eligibility for guaranteed loans should be eliminated.
In order to be a certified lender or to be one of the new preferred lenders, banks must demonstrate that they have had low loss experience with FSA guaranteed loans. They must demonstrate this when they first apply for CLP or PLP and when they seek to renew their status. Banks that are in our service area that has been subject to natural disasters should not be penalized for loan losses that are a direct result of these uncontrollable events.
Our fifth recommendation. The FSA National Office should conduct a second review of any bank that is denied CLP or PLP status, to make sure the loan losses were not the result of natural disasters. FSA should do everything possible to include good lenders, not discourage them. FSA's present system of program delivery reflects a time when there are nearly unlimited resources available to USDA. Over the last 40 years, FSA's predecessor agencies deployed a vast delivery network that was highly local, labor intensive, and demanded many skilled workers. FSA does not have the same resources available to them today.
Our sixth recommendation. FSA should consolidate guaranteed loan making and guaranteed loan servicing at State offices or in specialized districts in very large States to ensure consistency and efficiency of the program delivery. Today I deal with nine different FSA county offices when processing and servicing guaranteed loan applications. It is impossible for all nine offices to be consistent when administering the guaranteed loan program. The banking industry has a local infrastructure necessary to deliver credit. FSA's role is to provide the necessary oversight of the private sector lenders. This can be done much more efficiently.
In summary, I want to assure you that bankers are working with their customers to rerestructure debt, provide credit for operating expenses for the coming year, define ways for beginning farmers to get started and to provide the financial stability that healthy rural communities need.
Page 64 PREV PAGE TOP OF DOC Credit, however, cannot be used as a replacement for profits. Agriculture businesses must be profitable in order to successfully manage their debt obligations. The ABA looks forward to working with you as you address the challenges facing our Nation's farmers and ranchers. I would be happy to answer any questions that you may have at this time. Thank you.
[The prepared statement of Mr. Everson appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you, Mr. Everson.
Representing the Farm Credit Counsel, Mr. Webster.
STATEMENT OF JACK WEBSTER, PRESIDENT AND CEO, FARM CREDIT SERVICES OF AMERICA, OMAHA, NE, REPRESENTING THE FARM CREDIT COUNCIL
Mr. WEBSTER. Thank you for the opportunity to appear before the subcommittee, Mr. Chairman. I am Jack Webster, president and CEO of Farm Credit Services of America. Farm Credit Services of America is a jointly managed PCA and FLCA covering the States of Nebraska, South Dakota, Iowa, and Wyoming. We currently have about $4.5 billion in mortgage loans outstanding in operating loans to about 42,000 customers.
I will be sharing an abbreviated portion of my testimony since I can't talk as fast as the banker, I request that you include the full testimony in the record.
Mr. BARRETT. Without objection, so ordered.
Mr. WEBSTER. I am appearing today on behalf of the Farm Credit System. My testimony will focus on three specific areas: current credit conditions, the outlook for the future, and the FSA Guaranteed Loan Program.
The institutions of the Farm Credit System remain focused on meeting the credit needs of our customers. Through the first three-quarters of 1998 Farm Credit's loan volume stood at $66.1 billion, an increase of more than $3 billion over the previous year, and we believe this growth trend will continue through the fourth quarter.
Page 65 PREV PAGE TOP OF DOC Overall, credit quality within the farm system remains strong. At the end of the third quarter of 1998, non-accrual loans stood at 1.3 percent, gross loans up from .9 percent at the end of the second quarter 1998. To put this in perspective, non-accrual loans were 10 percent of the System's gross loans at the end of the very difficult year of 1987.
Neither USDA's projections nor our own indicate a widespread and immediate economic crisis, but many farmers will not generate a positive cash flow from their crops and livestock at either current or forecasted prices. We commend the actions taken by Congress last year to provide assistance to farmers at this difficult time. If those payments had not been made, my testimony likely would be much different today. As we work with borrowers, they continue to express frustration over the availability of effective risk management tools. What is available to producers today is not providing them the protection they want or at a price that makes sense to them.
We stand ready to work with the Agriculture Committee as you review the operation of the existing crop insurance program. What about the future? Well, the prospects are troubling. Twice a year the Farm Credit Council surveys all Farm Credit System leaders regarding credit conditions to identify emerging trends.
One response worth noting is, ''Do you expect farm financial stress to increase, be about the same or decrease over the next 12 months?'' Seventy-two percent said they expect financial stress to increase. A year ago only 38 percent responded that way.
As borrowers come in for loan renewals, we evaluate them based on their financial projections and estimates of whether they will cash flow, and then we make a determination as to whether we can adequately structure a loan.
Given current USDA projections, it is becoming increasingly difficult to develop farm plans that project profitability. Every day we are seeing customers, good customers who are being forced to substitute credit for what income had covered a year ago. Good managers are prepared to do this as part of adjusting the ups and downs of the farm business cycle, but this is a strategy that will sink even good managers if a down cycle is both broad in its impact across commodities and livestock and it lasts for a prolonged period of time.
Page 66 PREV PAGE TOP OF DOC Finally, Mr. Chairman, I want to talk briefly about the FSA Guaranteed Loan Program. Loan guarantees are a risk management tool for lenders. Farm credit institutions have had mixed experience with these programs. Some within the system have found them very useful, while others can tell you nightmare stories about trying to use them. The pattern of usage within farm credit reflects this experience.
The current managers of the guaranteed program are to be commended for recognizing that their customers of this program are the lenders that actually use it. To their credit, they have sought user input and even hosted a 2-day meeting to identify needed changes in their regulations. Unfortunately, that meeting took place in June 1997 and we are just now seeing those needed changes put in place.
Farm credit institutions will continue to make use of the FSA Guaranteed Loan Program when it is necessary and appropriate for managing our risk as we serve individual customers. We urge the Congress to provide needed supplemental funding to keep loan guarantees available. But I stress that we would prefer to see a healthy agricultural economy where loan guarantees and credit would not be a substitute for income.
Again, thank you Mr. Chairman, for the opportunity to be here this morning. We look forward to working with you during 1999 for the betterment of agriculture and rural America.
[The prepared statement of Mr. Webster appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you, Mr. Webster.
STATEMENT OF DALE LEIGHTY, PRESIDENT, FIRST NATIONAL BANK OF LAS ANIMAS, LAS ANIMAS, CO, REPRESENTING THE INDEPENDENT BANKERS ASSOCIATION OF AMERICA
Page 67 PREV PAGE TOP OF DOC Mr. LEIGHTY. Mr. Chairman and committee members, it is a pleasure to be here today. I will submit my written statement.
My name is Dale Leighty and I am president of the First National Bank of Las Animas in Las Animas, CO. My bank is a typical IBAA community bank member. We have roughly $80 million in assets and $60 million in loans. Over 60 percent of these loans are agricultural credits.
I will comment first on the general agricultural credit outlook and then the FSA Guaranteed Loan Program which indeed needs both streamlined regulations and sufficient funding. IBAA has long sought both goals. Mr. Chairman, we do have real financial stress in rural America. In fact, I ask permission to have yesterday's Wall Street Journal article, which has previously been referred to on the farm economy, placed into the hearing record.
Two key words to remember, I believe, are the words ''uncertainty'' and ''duration.'' There is a great uncertainty caused by current low prices, and both farmers and their lenders wonder what the duration of those low prices will be. Low commodity prices naturally pose a threat to farmers' incomes and their ability or inability to repay their loans. For example, within the last week, I reviewed the loan applications of 10 farm customers. Eight of them did not cash flow with current livestock and grain prices, which is the key consideration a lender has when deciding whether to extend credit.
There is also uncertainty as to how regulators will react when they examine bankers' loans and hopefully not overreact. IBAA has encouraged regulators to be flexible in allowing lenders to prudently work with borrowers. Of course, bankers will try to work with borrowers to restructure loans, for example. But restructuring itself doesn't make the loan profitable. Both the borrower and lender need to decide early on if the borrower has a viable operation for the future. This decision becomes more difficult in an era of low farm prices.
Our bank has recently increased its provision for loan loss reserves over 800 percent over 1997 levels for both 1998 and 1999 in response to the concerns that are being mentioned here. We are all aware of the basic problems: large supplies, low prices, weakened export demand particularly in the Asian economies. These problems are not expected to go away anytime soon, meaning low prices could linger for several years.
Page 68 PREV PAGE TOP OF DOC We have both short-term and long-term problems. In the short term, projected prices do not allow lenders to calculate positive cash flows, a requirement for production loans. In the long term, if low prices continue, a significant number of borrowers would need to be restructured or liquidated, as a recent Iowa State study indicated.
IBAA recently sent a letter to Congress and the administration urging cooperation in seeking more funding for agriculture to strengthen the farm safety net and we offered a comprehensive farm safety net plan.
Therefore, Mr. Chairman, we make the following legislative proposals for immediate consideration. Regarding the farm safety net, we propose that the administration and Congress first make a commitment for additional and significant funding early in the budget process to strengthen the safety net and remove the uncertainty in the countryside.
Second, provide a significant down payment on an improved farm safety net in a supplemental appropriations bill this spring. These funds should be used both for increasing funding in FSA guaranteed loans and other elements of the farm safety net such as protecting farm income, providing risk management tools, promoting exports, and alleviating problems faced by hog producers.
Third, agree that the $4 billion in the budget baseline available after the farm bill expires in 2002 will specifically be used for maintaining an adequate farm safety net to ensure agriculture remains healthy early in the 21st century.
Fourth, address growing liquidity problems affecting community banks in rural areas by adopting the Federal Home Loan Bank reform provisions in H.R. 10, the financial services modernization bill. This will allow farmers and their lenders to address the growing liquidity problems of rural America.
Thankfully, last year Congress passed a $6 billion farm aid package which IBAA and bankers supported. The recent government payments helped our producers' balance sheets and likely prevented a much weaker farm income situation. However, there is concern about repayment difficulties should producers have another bad year.
Page 69 PREV PAGE TOP OF DOC In some areas, above average 1998 grain yields provided a cushion against low prices but unless prices improve, many farmers expect to lose money in 1999. Strengthening the farm safety net is an action we need to pursue to help preserve our farms and ranches both now and into the 21st century.
Regarding the FSA loan programs, we propose Congress consider legislation first that would allow agriculture lenders to qualify for the preferred lender category based on the quality of their overall loan portfolio and their historical loan losses rather than on the past number of FSA loans they have made. Requiring 30 loans to become a PLP lender will make it too difficult for many good agriculture bankers to qualify. Many banks have not used the program in the past because of the paperwork, time delays, and lack of consistency in the program. Under the new regulations, they will be penalized based on a loan volume requirement and therefore they will not be able to use their own underwriting criteria, even though they have been very successful in lending to the agricultural community.
It seems to me that only 250 preferred lender banks is an unrealistically small percentage of the banks in existence. In the proposed rule, USDA stated that the preferred lender loss rate will allow PLP status to be granted to only 1 percent of its 2,500 lenders. This seems alarmingly low to us and we are concerned the new rules will be even more stringent. We also suggest that USDA provide an estimation of how many lenders will now be in each category.
Second, reduce the 110 percent cash flow requirement on new loans to 100 percent, the same as for loan servicing options. This has already been mentioned earlier today and we strongly agree. Remember, the FSA program is the lender of last resort and we are having trouble making our good borrowers' cash flows work. I doubt many hog producers have positive cash flows right now.
Third, raise the new loan program above $50,000 to at least $100,000 or even better to match the SBA's new Low-Doc loan amount of $150,000 which would be more reflective of modern day agriculture. The statute does not prohibit FSA from increasing the Low-Doc loan size above $50,000. However, a larger loan size could be made explicit in legislation.
Page 70 PREV PAGE TOP OF DOC Adopting these legislative changes to the FSA Guaranteed Loan Program should be done immediately either as part of the supplemental appropriations bill this spring or other measure that Congress could pass soon. Immediate legislative action would help ensure farmers have an important tool to deal with current financial stress facing American agriculture.
Our bank has worked with the FSA Guaranteed Loan Program on a limited basis. My loan officers would have liked to have used FSA guarantees more but, quite frankly, we backed off from the program because we found it difficult to get a response back to farmers in time to meet their spring credit needs. The time delays and the paperwork were too problematic to be acceptable and the local staff were too overworked. Such frustration is not unique. We appreciate USDA's efforts to streamline these programs and their efforts will be helpful. However, we believe continued ongoing efforts to streamline the program and adequately fund it will be necessary.
Mr. Chairman, there is more specificity in our written comments and our original comment letter which we would be happy to make available to the committee. IBAA and its Agricultural Rural America Committee comprised of agriculture bankers from across the Nation will be reviewing the new FSA regulations released today in detail, and we will be happy to share our views with you and your committee and Congress, but again the legislative changes noted above should be pursued immediately. Thank you.
[The prepared statement of Mr. Leighty appears at the conclusion of the hearing.]
Mr. BARRETT. Thank you, sir. Incidentally, your colleague, Mr. Bill McGillam, extends his best regards.
Mr. LEIGHTY. Thank you.
Mr. BARRETT. You folks have made some excellent recommendations. We appreciate it very much. I want to digress just a moment to a couple of hearings we have had in the last couple of days. On Wednesday, we had a hearing on livestock prices. We had a hearing yesterday on agribusiness consolidation. And some witnesses expressed a lot of concern that lenders were requiring producers to obtain contracts for their crops as, of course, a condition of credit.
Page 71 PREV PAGE TOP OF DOC This led some of them to believe that there was some concern about this fostering consolidation in the business, and I guess my question to all of you is, Can you use that type of contract? Do you require contracts? Is this practice widespread in the industry? I would appreciate your comments. Mr. Everson?
Mr. EVERSON. Thank you, Mr. Chairman. Now that I have got my breath, I will try to respond.
We have put a tremendous emphasis on our customers in my shop to marketing, developing marketing plans. And quite frequently at their option, that would include contracting grain, hogs, or cattle. Consequently, we absolutely say you can't have the loan unless you go that route. What we are really saying is please develop the marketing plan so we can review it at renewal time. And this again doesn't happen with every customer. Instead it happens with those, say, 15 percent of my portfolio. They are probably struggling the hardest right now. And again, I think it is time for us as loan officers to review with our customers what is their marketing plan which could include that.
Mr. BARRETT. Could include, but not necessarily required?
Mr. EVERSON. Not necessarily required. Only in the eventagain, if you have an enhancement like a guaranteed loan, the marketing enhancement may not be as obvious.
Mr. BARRETT. Thank you. Mr. Webster.
Mr. WEBSTER. I believe the Farm Credit System would answer similarly to the banker to my left. Contracts can provide strength to a credit. Particularly we are interested in marketing plans of customers, but I can assure you we make many loans without contracts and often they are not required and not anticipated.
Mr. BARRETT. Case-by-case basis, right?
Mr. WEBSTER. Yes, sir.
Page 72 PREV PAGE TOP OF DOC Mr. BARRETT. Mr. Leighty.
Mr. LEIGHTY. We do not require it. We believe that in general our customers are better marketers than our loan officers and than we are. But we do again encourage the marketing programs, which in many cases do include a good deal of contracting, but it is not mandated by the bank.
Mr. BARRETT. Well then, perhaps as a follow-up, you have all mentioned marketing and your interest in your borrowers becoming better marketers. Many lenders have repeatedly told me, and some economists have said publicly the same thing: that farmers generally are poor marketers. I don't know if you would agree with that, but my question, because you have all mentioned better marketing: What are you doing to help your borrowers become better marketers?
Mr. WEBSTER. Mr. Chairman, at Farm Credit Services of America, we provide seminars. We invite customers to those. We generally bring in outside parties who are experts in marketing. So we try to establish a forum for our customer education and we just finished a round of those in our market territory. And I would say that is probably practiced throughout the Nation, but I don't know that for sure.
Mr. EVERSON. Mr. Chairman, one of the things we have done just 3 weeks ago is establish two different conferences within my lending area. We had over 400 people attend, and what we did that for was a kickoff, if you will, to what we hope would be a further education process for not only our customers but my bankers as well, my loan officers.
I am happy to say that just this past Monday, we had five of our best marketing producers, our customers who did the best job of marketing that we could see in our portfolio, operate as a panel in front of 80-some customers that we had invited in. We invited the public. Eighty people showed up, 80 producers to listen to those farmers talk about how they did their marketing. Never in the 25 years that I have been in lending have I seen that many people want to participate and learn more about risk management. So I am encouraged by that.
Page 73 PREV PAGE TOP OF DOC Mr. BARRETT. You have no idea how encouraging that is to me because some of the small rural banks in my area have expressed disgust inthey have tried to set up similar meetings, and the participation has not been what they had hoped.
Mr. LEIGHTY. In our experience, we have provided educational opportunities. I will say we have customers today that still have their wheat that was harvested in July. They have paid interest in storage since that time, and with the benefit of hindsight, it didn't make sense at the time and it still does not. So it is an ongoing challenge that we face.
Mr. BARRETT. Are you holding marketing sessions?
Mr. LEIGHTY. Yes, on a limited basis. We are a smaller bank so we do it in cooperation with other agriculture banks in our area, yes.
Mr. BARRETT. Thank you very much. I yield to my colleague, Mr. Minge.
Mr. MINGE. Thank you. I appreciate the three of you coming here from flyover country, which is where I live as well, and spending Friday morning with us. I reviewed your testimony and appreciate your comments and I would simply like to ask for any further comments you might have based upon the regulation that was published today.
I am not sure, for example, Mr. Leighty, if the Independent Bankers had actually reviewed the regulation and incorporated some comments hurriedly this morning so that your testimony reflects a reaction to that regulation, or if there is some additional comments that you would make.
So I would just like to open it up for each of you to make any comment that you might be able to make at this time on that proposed regulation, and if you don't feel you can make a comment, I would urge that you file something with this committee that could be included in the record.
Page 74 PREV PAGE TOP OF DOC So maybe, Mr. Everson, if we could start with you and just the three of you in the order in which you appeared, comment on that.
Mr. EVERSON. Certainly. First of all, we have had the opportunity to follow the new regs today for some time, and once again are very pleased to see them come on board. Probably the one thing I am most concerned about is the PLP. Obviously there are tremendous other enhancements to this program that I think all the bankers across the country can utilize. But PLP eligibility concerns me substantially, especially from the standpoint of the 303, 30 loans in 3 years. We stand opposed to that should it come out, even in another notice, understanding that it won't come out in the reg today but another notice. I think in order for this program to be effective, we have to make it available to all the good lenders, as I mentioned in my testimony, all the good eligible lenders that are available, that are out there, and there are a lot of them.
Mr. MINGE. Mr. Webster.
Mr. WEBSTER. We intend to review the regulations, I believe it is about 50 pages in length. We will review those and would like to provide a response to this committee for the record.
Mr. MINGE. Thank you. Mr. Leighty?
Mr. LEIGHTY. Yes. We have reviewed the proposed regulation I would just add, and I think it is somewhat redundant, on the preferred lender status, it is almost a Catch22.
Many of my colleagues, and our bank included, would not qualify for that status simply because we have become so frustrated with the process. We have in our area a very qualified individual who runs the office there but he simply doesn't have enough staff to give timely responses. As a result of that, we have just chosen to not go through the brain damage to work with the system, and so therefore we don't qualify with the 30 loans or even the 20 loans. So I would just say once again that we think that is an impediment to being able to use this fully.
Page 75 PREV PAGE TOP OF DOC Mr. MINGE. I know that in a couple of the banks in the area where I live, former Farmers Home Administration loan officers have been hired as bank officers, and banks smaller than yours, Mr. Leighty, have had a very high number, substantial number of guaranteed loans particularly through the banks, and it has worked quite smoothly.
One thing I would like to also hear based on your experience in the commercial banks is how this operating arrangement with the Preferred Lender Program at FSA compares with the Small Business Administration's Simplified Program, because we have two programs that ought to operate in a fairly parallel fashion and if they don't, I certainly would like to know why, and if we would have to consider having the Small Business Administration come in and review the practice at FSA and make some recommendations as to how we might further improve it. So I would also invite your comparison between these two programs.
Mr. LEIGHTY. I would like to be able to get back with you on that if I could. We do very little SBA lending but would be glad to provide information.
Mr. MINGE. I know there are some bankers who have said that the transformation of SBA is one of the most dramatic things they have seen in terms of government-banking relationship, and they have become very enthusiastic supporters of the Small Business Administration based upon what has happened.
The second thing I would like to ask about is this problem of the volume of loans that are being made and then running out of money here this spring. And again, I think each of you have addressed this one way or the other in your testimony or in your prepared statements, and I am not asking for you to simply repeat what you already said, but urging that you become advocates like I think most of us up here are for adequate funding levels and adequate staffing levels so that these programs are what we have represented that they are supposed to be.
If you have any other comments on that, I would appreciate it. Otherwise I just wanted to make sure it was included in the record here in my comments to you.
Page 76 PREV PAGE TOP OF DOC Mr. EVERSON. Just again the urgency of that appropriations is eminent. We just need it immediately in order to continue to be able to restructure these borrowers in a way I think they need to be restructured, to be proactive for what may happen in the next 12 months.
Mr. MINGE. Thank you.
Mr. BARRETT. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman. Gentlemen, welcome. Thank you for being here. I especially want to say a special welcome to my friend from South Dakota, Mr. Everson, who is also a good friend of the producers in our State. His lending institution has done some very innovative things in terms of trying to provide credit for those who are in the business of trying to make a living in agriculture.
Denny, you had mentioned in your testimony your Dakota Mac program and I just likeand maybe you already have touched on this. Forgive me if I am belaboring the point. But could you elaborate a little bit on that as to whether or not it is a concept that could be used in other parts of the country?
Mr. EVERSON. Yes, I would be happy to, Congressman. Dakota Mac is a program we started in 1993 where we act as a conduit, if you will, between ourselves and other network banks that are of similar size to us, and smaller, providing a conduit of the loans originated by those banks through us and into Farmer Mac. To date we are probably one of the largest of our kind operating with this type of network. And as I mentioned before, we have some 42 banks that we presently work with in 15 States.
I am also happy to announce that we add more States every day, and even happier to announce that in the first month of operations in 1999, we have seen applications total to our entire volume we did in 1998. So I think in answer to your question, if I can, several people are using not only our system but several others, whatever system it may be or trying to access the Farmer Mac network, and successfully.
Page 77 PREV PAGE TOP OF DOC Mr. THUNE. Well, it just seems like something that is really sort of a model program and one that we might be able to draw some applications from elsewhere. But I want to credit you for what you are doing in that area.
You all mentioned that loan servicing could be consolidated at State or regional levels within a State, and it is a common complaintI should say is it a common complaint among bankers, among lenders, that the various county offices inconsistently apply the regulations.
Mr. LEIGHTY. I think caution needs to be the word here on the consolidation. I do think there are some pitfalls as this gets consolidated. I think it was mentioned there are benefits dealing with a lot of different offices. At the same time in rural America, some of these small communities, you have to travel 200 miles to do anything anyway, and to have some local access is of some benefit.
So I don't want to leave the impression that we think that consolidation is the direction to take without some real concerns and cautions to be made.
Mr. THUNE. Mr. Webster.
Mr. WEBSTER. My response would be if the programs are simple, they are quick, and they are well-funded, the location of the offices would not be as critical.
Mr. EVERSON. The streamlining, Congressman, that is taking place with the new regulation offered today, I think that the consolidation becomes an easy thing to do. Yes, we need to use some caution, but again, I have nine offices that my officers have to work with, and at monthly staff meetings we continually talk about the different interpretations, and sometimes it is nine interpretations of the same issue.
Mr. THUNE. I think everybody who has testified, or virtually everybody who has testified today, has mentioned that credit can't replace income or profitability. I guess I am just curious what your thoughts areand this is more of a general questionas to what the Congress could do to increase or improve profitability in agriculture, if anything, what your thoughts might be in that regard.
Page 78 PREV PAGE TOP OF DOC Mr. LEIGHTY. As I mentioned, the export situationand I don't pretend to have the knowledge or the answers of how you do thatbut certainly it is a major concern that we simply are not exporting enough of our product to command higher prices. So in the absence of that, a stronger safety net with adequate price supports just seem to be mandated, it seems to me.
Mr. WEBSTER. I would agree with that and add if we can do a better job of utilizing risk management tools upfront, I think farmers and ranchers can better manage their own operation with good CRC coverage, multiperil coverage, but it has to be affordable and make good sense to them.
Mr. EVERSON. As a lender, we are obviously limited in what we have an effect over, and I think prices is one of those limits that we have, unfortunately. But all my customers would like $42 hogs today. Just again, as I stated in testimony, I can't do anything about that. But as we talked about risk management, that is something that we deal with.
The crop insurance is a tremendous tool, a tremendous tool to our customers, and I am encouraged by all the talk that I hear about improvement of that risk management tool. It has been great, and if it is enhanced even more, that is the kind of thing that our customers can utilize, learning more about marketing, which again I think they are doing a better job of, but we have a long way to go. Our borrowers for the most part aren't good marketers, but I think they are trying to do their best to improve, and I am encouraged.
Mr. THUNE. Just a quick follow-up on that. The crop insurance program we hope to make some changes, make that more workable and to encourage more producers to use it. Do you see that as an extension into livestock? Is that a workable concept? I realize you get into bigger dollars, obviously, when you do that.
Mr. WEBSTER. We believe there should be a way to have it include livestock, yes.
Page 79 PREV PAGE TOP OF DOC Mr. LEIGHTY. I might add relative to the marketing and the hedging, you can't hedge in a profit on most of our commodities today, so the best marketer simply cannot contract their corn for next November at a profit or the wheat that will be cut this summer at a profit. The prices are just simply too low. So there is no marketer that I know of that can make it work at these low commodity prices.
Mr. EVERSON. At First Dakota I would truly like to see, and I know the bank would like to see perhaps, an approach taken from the standpoint of Federal farm income insurance which would be all-encompassing.
Mr. THUNE. I see my time has expired, Mr. Chairman. So I thank you. I thank the panel.
Mr. BARRETT. Thank you, Mr. Thune.
Mrs. CLAYTON. Thank you, Mr. Chairman. I thank the panelists for giving their testimony. I also want to thank them for being willing lenders of agriculture in that area. I am reminded that 3 percent of the population feed 97 percent of us, and are reminded by the last testimony about the preferred lenders, 5 percent of the lenders who are in the preferred area, but I bet if I looked at all the lenders who are really active in an agricultural role, it still would represent a substantial smaller percentage of that. So lenders who are still willing to be engaged in agriculture are to be commended.
Along that line, the underwriting criteria, loans and agriculture, do they take any consideration of different vulnerabilities than they would, say, underwriting of another enterprise?
Mr. EVERSON. I am not sure. Could you repeat the question, please?
Mrs. CLAYTON. The question is the underwriting criteria for an agriculture venture, is it any different than it would be for the other underwriting criteria, any other economic venture?
Page 80 PREV PAGE TOP OF DOC Mr. EVERSON. I would respond by saying basically no, but again, we have to understand the uniqueness of agriculture, and so financing it is indeed unique, and it does have indeed some underwriting standards that would be different or exist for that industry against others, one of them being because of the market volatility that the producers we provide credit to have to face, and that isn't maybe as common in other industries.
Mrs. CLAYTON. Well, I guess where I am going with this is that part of the borrower's ability to have a market plan that is really based on some sense of reality and a feasibility you can depend on is alsoyou have to factor in the uncertainty. And I think in your testimony you had the word ''uncertainty,'' and I think that is the reality of agriculture, an uncertainty of weather, uncertainty of marketers, and now we have a great uncertainty of understanding what the global economy will mean on that.
It seems to me there is a need to begin to anticipate that we are going to be in this cycle, and we need to understand that volatility. Obviously the risk that you take or the risk that the borrowers take also ought to be looked at. And I don't have an answer, but the more I understand it, the more I understand that there are far more things out of individuals' control in this kind ofwith new standards, vertical integration, consolidation.
As Mr. Barrett indicated earlier, we have been hearing testimony all this week that lead us to thewell, the conclusion that it is inevitable that you are going to have consolidation, you are going to have bigger loans, you are going to have bigger farmers, so therefore you will be looking for a risk factor that would favor large, consolidated, vertical integrated projects, because that is less vulnerable and you have less risk. And unless someone is beginning to look at where this trend seems to be going, we are just going to get up to the wall and find that many small family farmers are not going to be able to meet those criteria.
I am not suggestingI know what they should be, but I just want to say to lenders who are willing to be engaged in this that we have to do some thinking together if we want to make sure we are able to finance farmers.
Page 81 PREV PAGE TOP OF DOC One final question. When there is a contract, when there is an agriculture venture where a contract ishadfor instance, with the hog farmers or poultry farmers, do you examine from the farmers' stability how that contract is structured that would allow him to survive if one of those inevitabilities that something goes wrong? I am having poultry farmers and hog farmers come to me to say that they are left with all the risk. Their families get the $500,000 loan or the $1 million loan. Something goes wrong in the market, and their families foreclose, not the big companies they contract with. Do you ever examine that? I know you enhance the market strategy, but do you examine the feasibility for financial stability for the family, either one of you?
Mr. WEBSTER. Let me take a try.
We look at all of that. We look at the customer, the individual farmer, and we look through to who is providing the contract, and we look at the strength in both of those. But they vary significantly from contract to contract, from relationship to relationship. But it typically boils down to relationships and trust, because most of the best contracts can be broken. And it is a practice that started out in the hog industry. It started off on a handshake, and then it grew to some long contracts.
It boils down to a handshake because there are provisions that the integrator can pull out. We don't see much of that occurring because if it does, in fact, the whole industry tends to collapse under that, but we look at both the individual farmer, and we look through to see what those contractual relationships are, and we are looking for strength.
I would like to add one other thing on your comment about the size of the customer. The risk management tools that I think all three of us have advocated are just as available to the small farmer, and sometimes they may be easier for a small customer to use than the large one. So I wouldn't say as a lender we see a differentiation in size with the use of effective risk management tools.
Page 82 PREV PAGE TOP OF DOC Mr. BARRETT. Thank you.
The gentleman from Texas Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman, and thank each of the witnesses for some very excellent testimony.
And one comment about the Y2K2 problem that each of you have mentioned, and that is the income problem, and that is one where there is a lot of attention to Y2K. I am just as interested, if not more, in the Y2K2, and that is where the suggestions of a Federal farm income insurance, Mr. Everson, I am very, interested in that. What we call it is yet, whether it is revenue assurance, crop livestock insurance, what have you, it is a safety net, and it is one of which I think we have to realistically look at coming up with.
And the way I tend to describe what I am talking about is coming up with a policy that will allow me, the borrower, to come to you, my lender, and here is my situation, and we arrive at what kind of protection I need in order that you might be comfortable making me the loan. Whether it is a guaranteed loan or otherwise is immaterial at that point. And it has to be a cost that you and I agree is a reasonable cost based on our cost of operation, just like any other input that goes into a farming operation. That is our goal.
I know Chairman Combest has indicated that is going to be the full committee's main objective this year looking long term as we deal with the short-term problem. And we will really appreciate your continued input and help in that as we begin the difficult task of designing it.
One of the questions that is often asked is when are we going to have this in place, and tomorrow is too late. I have got to have it today. Well, I think realistically we are looking at 2000 at the earliest, 2002 at the latest, and 2001 is a reasonable compromise between the two.
But doing this is going to require us to honestly take a look at our philosophies. Each of you represent your respective organizations. We are going to need your help like we have never had it before in attempting to work through what should be the private industry component, what should be the public, and how can we best meld the two in order to deliver the best quality of service.
Page 83 PREV PAGE TOP OF DOC We are also going to need your help on the previous panel's problems in the delivery of services today. I am not going to get back into my frustrations at this point except to say I hope that you and your associations, your banks, will work with your local producers in the area of determining what is it we want USDA to do for us, with us, and to us, and how can we most efficiently deliver the services to you. Just as you have indicated to Chairman Barrett's question regarding marketing and whether or not you are, in fact, working with your borrowers, and you are, and I know that, and we needyou know, we need to do more of that on the marketing. But we also have to take a realistic look at the structure of USDA's delivery of services, which include one-stop shopping, which include the tremendous controversy about collocation, and having agencies of USDA actually work together instead of having the constant political separation that we have of maintaining separate agencies which have a cost, and those costs end up decreasing the service that we are able to bring to our producers.
So I hope you at every opportunity will encourage through your newsletters and others to work with our farm organizations and certainly with this committee as we get into that question, and it is going to come very soon because the administration is going to be making some very dramatic moves very soon that are going to raise the roof again, and we are going to need your help in coming up with the right answer.
Along that line, I want a comment from each of you as I asked Ms. Martin earlier today. You know, to me the Guaranteed Lending Program should be pretty simple. If you are willing to make the loan, why should anybody other than your current regulator worry about whether or not you are going to make a good loan?
Mr. LEIGHTY. Well, I think we have to realistically recognize that in the past there have been lenders that felt like this was a way for them to dump credits that they wouldn't make, but they could let the Government be behind it. So certainly there still has to be those safeguards, and I think that that is not a hard thing to put in place.
Page 84 PREV PAGE TOP OF DOC But in answer to your question, those institutions that are certainly ethical, and they are by far the majority, will definitely do that for the benefit of themselves and their borrowers and for our industry.
Mr. STENHOLM. A banker that would do what you suggested that maybe some have done in the past or would try to do, you know, a good rope and a tree will take care of that fellow, and that will be an example for the rest of the folks.
Mr. LEIGHTY. Your suggestion sounds good.
Mr. STENHOLM. The last time I checked, most of my banks complained about the examiners when they come in and look at the loans, and those examiners are meaner than a junk yard dog on some of the most nitpicking, cotton-picking, ridiculous things they get into. That is what I hear. Not quoting anybody. Not from Texas. These are neighboring States that bankers complain about that. But you have answered the question.
Mr. EVERSON. Yes, Congressman. I concur with what you are saying. As I mentioned in my testimony, the infrastructure is there. The banks that have proven themselves should indeed be allowed to PLP and in turn be able to utilize the efficiencies that it provides and do it much faster and better than we have done it in the past with the proper appropriation.
Mr. STENHOLM. I recognize, and this is one area, Mr. Chairman, that I think that we are going to have to give some thought, and that is on the policy. When we talk about direct lending, we are going to need your help in coming up with the proper policy of how we deal with the disadvantaged farmer and the young farmer, how we deal with that in this new structure. And that is something that is a policy decision that Congress will have to make, and I want to make that one because I do recognize that it is in our national interest and certainly our rural community interest that we not just succumb to the survival of the fittest and say, unless you meet this rigid criteria this year, you are out of farming. But I think we have got to come up with a better system than what we have got today, and I just have to believe that you can help us with a reorganized thought as to how we deal with those loans which may be direct government loans.
Page 85 PREV PAGE TOP OF DOC And I also have no difficulty with having an entity in our States that perform some kind of a check and balance to the questioner, the problem you mentioned, Mr. Leighty, as far as meeting the criteria of agriculture, which sometimes, rightly so, is different, as Mrs. Clayton was saying, from other business interests and other ventures that go in because of a national policy that is determined by the Congress.
So that is an area that I want to see, but I justjust believe so sincerely that with all of the income problems that we know, that we could have such a simple Guaranteed Lending Program if we could just let go, not have the FSA so worried about whether they are going to have their rubber stamp with their stack of papers, but just let the regulators that are there make that ultimate judgment. I am comfortable with that, Mr. Barrett. I justand I think it would speed up our service to our farmers.
And you are suggesting, Mr. Everson, where our criteriawe are fussing about 110, 100 policy. We are going to change that, but you make an excellent suggestion. If you are willing to go with a borrower that can't cash-flow 100 percent, because you know them and you are willing to make it, and you are willing to take less of a guarantee to go with it, what other reasonable criteria or decision-making process could we ask through any other system that would beat that?
Mr. BARRETT. Any comments? The red light is on.
Mr. WEBSTER. I have one to your original question.
Mr. STENHOLM. You don't have a plane to catch. I don't have a plane to catch. I am going to test you, Mr. Chairman.
Mr. BARRETT. Please respond to Mr. Stenholm's question.
Mr. WEBSTER. I believe our regulator is extremely diligent, and if we had the capacity to improve those loans within our institutions, I am certain that it would be properly regulated, and appropriate reports would come back to the Congress.
Page 86 PREV PAGE TOP OF DOC Mr. LEIGHTY. I would agree.
Mr. BARRETT. Mr. Everson.
Mr. EVERSON. I think the record of guaranteed loans since the mid1980's to date speaks for itself. I think the industry has proven they know how to utilize the guaranteed loans. Now it streamlines them.
Again, if we are willing to take it at a lower percentage, then if we are going to take that risk, and our regulators are comfortable with that on a post basis, fine.
Mr. STENHOLM. You know, I thank you for that comment, and I just think when we are going through a comment period now on the new regs, and I am sure that this committee, this subcommittee, is going to have some legislation in many of these areas, and this is very critical to us, how do we deal with credit. I totally agree that we have got to get the funds available to you and do it yesterday so that we don't run out of money and have that delay on top of the other delays that we are running into.
And you in your testimony, you point out that the proposal of 20 or 30 and how many you have hadif you have had a good, successful Guaranteed Lending Program, and we have got those in different States and different regions, different counties within States. Just like your frustration, Mr. Everson, of dealing with nine and having different rules and regulations, interpretations of the same rules and regulations, we just shouldn't have that. That is just absolutely inexcusable for having that in our farm lending program today, just inexcusable.
But we all know why we are still here, and that is why, Mr. Chairman, we have to deal with the reorganization question, and I want to end my comments twofold, one of saying that I don't know your district, those nine, I don't know how many of those could be consolidated into a better service agency for all of the farmers in the area there, but I suspect it is less than nine. And I suspect that it is that way in all of our districts around the country, and this is where we have got to take a good look. We have got far too many of our dedicated employees burning the midnight oil, doing everything they always do in order to deliver the services, but we don't have a good distribution of the employees in every State, and that is part of our reorganization problem.
Page 87 PREV PAGE TOP OF DOC And finally, I think it is so important for the rest of our colleagues not only on the Agriculture Committee, and not as knowledgeable as you are, and the Wall Street Journal and the Washington Post to focus at every ample opportunity of the financial world that our farmers and ranchers are having to operate in, and that nobody can make a profit with the profit prices that we are looking at and the anticipation that they are going to get lower before they get better.
When net farm income was $44.6 billion in 1990, and it is $44.8 billion in 1999, estimated, that is in current dollarsinflated dollars or deinflated dollars, $35 billion is the net farm income, equivalent to what it was in 1990. That gets overlooked in all of these figures that we are talking about. And you know that with your customers, every single farmer and rancher that is borrowing money today used to be, I would say, unless they are in my district and got a pumping oil well or two, they are the better farmers, but now we have got oil in worse shape than hogs.
That is another story that is going to become a lot more prevalent. When we start looking at energy and costs thereof, we farmers are enjoying the heck out the of 38 cent diesel, the best I have heard lately, wonderful. But we are about to eliminate a big chunk of the independent oil production in this country, and ultimately that is going to be a national security problem, and that is going to be a real problem for the same borrowers we are talking about. But somehow we have got to focus on that, and that is where revenue assurance, Federal farm income insurance, that has to be our number one long-term priority. Short term I am going to depend on the chairman to come up with that.
Mr. BARRETT. Thank you, Charlie. And thanks to our panelists. We really appreciate your being here. We appreciate the excellent testimony, and we hope maybe you can come back again another day and share with us.
The Chair would seek unanimous consent to allow the record of today's hearing to remain open for 10 days to receive additional material and supplemental written responses from witnesses to any question posed by a member of the panel.
Page 88 PREV PAGE TOP OF DOC Without objection, so ordered.
This hearing is adjourned.
[Whereupon, at 12:05 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Testimony of Marsha Pyle Martin
Good morning Mr. Chairman and members of the subcommittee. I am Marsha Martin, chairman and chief executive officer of the Farm Credit Administration. No topic could be more timely than current agricultural credit conditions and the outlook for the remainder of 1999 and into 2000.
We appreciate the subcommittee's timely attention to this issue and compliment you on your foresight in holding this hearing. Ann Jorgensen and Michael Reyna, my fellow board members, and I share your interest because our mission is to ensure a safe and sound, competitive Farm Credit System (System or FCS) to finance agriculture and rural America, as authorized by Congress. I emphasize our role as a safety and soundness regulator as I speak to you today, because my comments address the financial condition of the Farm Credit institutions, not America's farmers and ranchers. I will
Recognize that American agriculture will encounter substantial stress in the foreseeable future.
Portray a sound Farm Credit System that is financially prepared to face the downturn in the agricultural economy.
Assure you that we, the regulator, will do our part to maintain the System's safety and soundness so that funds continue to be available for agriculture.
STRONGER FARM CREDIT SYSTEM
The Farm Credit System has improved its financial condition significantly in recent years and is performing well despite the current adversities. Over the past 4 years, the System grew its capital from 13.5 percent of System assets to more than 15 percent. Earnings continue strong because of capital strength, some loan growth, and low levels of problem assets over the same time horizon. The System's credit quality continued to improve. Nonperforming assets increased slightly from 1.4 percent of total loans and other property owned at yearend 1997 to 1.6percent as of September30, 1998. The System compensated by increasing its allowance for loan losses during this same period.
Page 89 PREV PAGE TOP OF DOC As the System's safety and soundness regulator, we provide a comprehensive evaluation of each institution's capital, asset quality, management, earnings, liquidity, and sensitivity to interest rate risk. A 1-rated institution is basically sound in every respect. A 5-rated institution is in danger of failure. The trend in ratings continues to show steady and marked improvement. Over the past 10 years, the proportion of 1- and 2-rated institutions has increased from 35 percent of all System institutions in 1988 to 98 percent at the end of 1998. Currently, there are no 4- or 5-rated FCS institutions and only four 3-rated institutions. This is a vast improvement from a decade ago when 134 institutions were rated 4 or 5, representing 46 percent of all System institutions. As another comparison, we took 45 enforcement actions in 1988 that covered nearly half of the System's total assets. In 1998, no enforcement actions were required. At the end of 1998, only one FCS institution, representing less than 3 percent of System assets, was under an enforcement action. At the peak of the last crisis, about 80 percent of the System's assets were under some form of enforcement action.
As the regulator also of Farmer Mac, which is part of the FCS, I am pleased to report that it has recently entered into a large guarantee commitment with a System institution under a new ''standby'' loan guarantee structure. This arrangement will allow the FCS institution receiving the guarantee to make more credit available in its territory.
FORECASTING POTENTIAL RISK IN FCS INSTITUTIONS
While the System remains financially strong, we, as its regulator, would be the first to note that its performance does not yet reflect the stress associated with the current adverse conditions. The beginning effects of the recent downturn in agriculture likely will not show up in the financial statements until the first quarter of 1999.
Last year we anticipated the looming stress in the agricultural economy. We developed an Early Warning System and a financial forecasting model to help us identify existing and prospective risk in FCS institutions over the next 12 to 24 months under ''most likely'' and ''worst case'' scenarios.
Page 90 PREV PAGE TOP OF DOC Based on the results of our analysis, we do not believe current conditions pose a serious threat to the System's financial condition in the next 12 months. If the quality of System assets were to deteriorate to the level seen during the crisis of the 1980's, our analysis indicates the System still is financially sound.
We do not want to sound too ''Pollyanna.'' We do know current commodity prices adversely affect many FCS customers. But, even our worst case scenario over a 2-year horizon shows only 16 percent of the System's direct lenders and 12 percent of their total assets hurt significantly. Perhaps, the best news is that the financial condition of Farm Credit System entities today is very different from their condition going into the mid1980's.
Let me assure you, however, we monitor credit conditions and financial statements closelyif a Farm Credit institution hiccups, we know it. And, if significant changes in the System's financial condition occur, you will be the first to know.
BENEFITS TO BORROWERS
Today, because of its financial strength, the Farm Credit System is clearly able to pass the benefit on to farmers, ranchers and their cooperatives. Recent data on loan rates charged by the FCS show a savings of more than $350 million annually for its borrowers. This demonstrates the System is doing the job that Congress intended.
System institutions are required to charge interest rates that cover costs of operation and capitalize the institution consistent with portfolio risk. Today, only 2 of more than 200 FCS lenders do not meet their minimum capital requirements, and most far exceed the minimums.
At the urging of the Congress, the insistence of the regulator, and the astuteness of FCS board members and management, the System has spent 10 years ''with its head down;'' working to rebuild its financial strength. With that accomplished, Mr. Chairman, the Farm Credit System is financially ready for the current downturn in agricultureand farmers, ranchers and their cooperatives will be the beneficiaries.
Page 91 PREV PAGE TOP OF DOCOTHER POSITIVE STEPS
In addition to building financial strength, the System has taken other important steps during the past few years to limit the effect of adverse conditions. For example:
Consolidation and merger of System institutions enhanced capital positions for many institutions and increased critical mass.
Movement from ''collateral-based'' lending to ''repayment-based'' lending.
Improved management controls and information systems.
Sophisticated asset/liability management practices.
A more efficient FCS overall.
We, as the regulator, have also taken positive steps. In response to depressed prices in the pork industry, we issued a policy statement recently encouraging System institutions to work with borrowers having financial difficulties. We reiterated our belief that the FCS has considerable flexibility under existing regulations to provide appropriate relief. Such relief efforts may include, but are not necessarily limited to, extending the terms of loan repayment or restructuring a borrower's debt obligations. A System institution may consider easing some loan documentation or credit-extension terms for new loans to certain borrowers or requesting us to grant relief from specific regulatory requirements. When conducted in a reasonable and prudent manner, we will consider FCS efforts to work with these distressed borrowers as consistent with safe and sound business practices.
We also encourage all institutions to accelerate contacts with borrowers they believe may become distressed due to the unfavorable economic environment. We believe that timely contact, before a borrower's loan becomes delinquent, can provide early resolution of the problems that mutually benefit the borrower and the lender.
SERVING YOUNG, BEGINNING, AND SMALL FARMERS
Page 92 PREV PAGE TOP OF DOC We have also recently increased efforts to promote the availability of credit to young, beginning, and small (YBS) farmers. Each System institution is required to establish programs that respond to the credit and related needs of YBS borrowers.
We believe that the System currently provides credit for many YBS borrowers but that more can be done. Therefore, the FCA Board issued a policy statement last year encouraging each System institution to refocus its commitment as a reliable, consistent, and constructive lender for this next generation of agricultural producers.
We also revised the definitions and reporting practices to better monitor the System's YBS activities. For example, FCS will report special interest rate programs and coordination of YBS credit and related service programs with other Farm Credit institutions, state or Federal Government agencies or programs, farm groups, and others. Under the new definitions, a young farmer is 35 years or younger; a beginning farmer has 10 years or less farming, ranching, or aquatic harvest experience; and a small farmer generates less than $250,000 in annual gross agricultural sales. These new reporting requirements will provide a more complete picture of the System's lending to YBS borrowers.
Unlike during the last agriculture crisis, the FCA is now a true arms-length regulator with a full-time board of directors and enforcement powers similar to other financial regulators. We have taken several regulatory initiatives to improve the strength and performance of the System. One example is the 1997 regulation on capital adequacy that requires substantial capital strength for each institution. In the past few years, we have also required the FCS to adopt appropriate and tailor-made loan underwriting policies and standards and establish prudent credit administration practices.
We recently proposed a regulation that will improve the System's service to its customers. Last November we proposed allowing customers of the Farm Credit System to do business with the FCS lender of their choicean option that had not existed since the System was organized in 1917.
Page 93 PREV PAGE TOP OF DOC As we all know, the agricultural industry is changing significantly. Many producers now operate in several locations and require more diversified financial services. Technology continues to change rapidly, prompting further consolidation in financial services. Such changes are creating new sources and methods for delivery of credit and related services that transcend geographic boundaries. Therefore, existing regulatory geographic restrictions have become burdensome to both borrowers and System institutions.
FSA LOAN GUARANTEES
We also recently reminded all System institutions of government loan guarantees and farm assistance programs to reduce risk in loans to YBS farmers and help meet the needs of the agricultural community in times of stress.
As of September 30, 1998, more than 90 percent of the Farm Credit System's lending institutions participated in the Farm Service Agency's (FSA) guaranteed lending program. The System had $1.02 billion of its loan volume in FSA guaranteed loans, with 55percent in real estate loans and 45 percent in non-real estate loans. Moreover, the volume of System guaranteed loans has been increasing during the 1990's and at a rate faster than growth in overall System lending.
We understand that FSA is nearly out of funds for its guarantee program. The FCA Board strongly encourages more funds be made available to FSA to help address the current adversities in agriculture.
In summary, the Farm Credit System, since the last agricultural crisis, has strengthened its financial condition significantly. It is our opinion that the System has positioned itself to weather the storm over the next 2 years when, we would hope, that growing this nation's food and fiber can return to a profitable business once again. You have my unqualified assurance that the FCA will remain vigilant in ensuring the continued safety and soundness of the Farm Credit System. There is no doubt that the next few years will present challenges and ample opportunity for the Farm Credit System to meet its mission and serve agriculture in its time of need, as Congress intended.
Page 94 PREV PAGE TOP OF DOC Thank you for the opportunity to share our views.
Statement of Dale Leighty
Thank you. Mr. Chairman, it is a pleasure to be here today to present testimony to you and other members of the House Agriculture's Subcommittee on agricultural credit conditions and the outlook for the next couple of years and FSA guaranteed loan regulations.
My name is Dale Leighty and I am president of the First National Bank of Las Animas in Las Animas, Colorado. I serve on IBAA's Agriculture-Rural America Committee and my bank is a typical IBAA community bank member. We have roughly $80 million in assets and $60 million in loans and over 60 percent of these loans are agricultural credits. Our town has 2,500 people and our county has 5,500 residents.
Mr. Chairman, the IBAA, with 75 percent of its member banks located in small communities of under 10,000 population, has a long standing interest in ensuring credit availability to our nation's farmers, small businessmen and women and other credit consumers in our nation's rural communities.
IBAA is the only national trade organization that exclusively represents the interests of our nation's community banks, representing 5,500 institutions at nearly 16,000 locations nationwide. Community banks are independently owned and operated and are characterized by attention to customer service, lower fees and small business, agricultural and consumer lending. IBAA's members hold nearly $445 billion in insured deposits, $524 billion in assets and more than $314 billion in loans for consumers, small businesses and farms in the communities they serve. IBAA's website is at: www.ibaa.org.
Mr. Chairman, I will comment first on the general ag credit outlook and then the FSA guaranteed loan program which indeed needs both streamlined regulations and sufficient funding. IBAA has long sought both goals. We are also making seven legislative policy recommendations today that we believe should receive urgent and immediate attention in the coming weeks. In addition, IBAA has proposed a comprehensive plan to strengthen the farm safety net, a summary of which is attached to this statement. And I ask that an article in yesterday's Wall Street Journal also be included in the hearing record.
Page 95 PREV PAGE TOP OF DOC Let me first list the seven legislative proposals that we recommend Members representing American agriculture and rural states seek immediate action on in the coming weeks.
FOUR PROPOSALS TO STRENGTHEN THE FARM SAFETY NET
1. An early commitment to increase the budget allocation for agriculture to ensure adequate funds will be provided to strengthen the farm safety net. This was proposed in IBAA's recent letter to Congress. Although adequately fixing the farm safety net will be costly, as the Secretary stated in his recent radio address, and as proven by the scope of last year's farm aid package, it is very necessary.
2. Provide a significant ''down payment'' on an improved farm safety net in a supplemental appropriations bill this Spring.
These funds should be used both for increasing funding in FSA guaranteed loans and other elements of the farm safety net such as protecting farm income, strengthening risk management tools, promoting exports and alleviating problems faced by hog producers. Providing significant funds now will also alleviate uncertainty in the countryside. It will also encourage Congress and the Administration to more quickly reach agreement on the most effective, yet cost efficient, solutions for strengthening the farm safety net.
3. Agreement that the $4 billion that will be left in agriculture's budget baseline after the current farm bill expires in 2002 will specifically be used for maintaining an adequate farm safety net. Concurrence on how to use these funds will help provide a solid foundation for the continuation of an adequate farm safety net and will help ensure agriculture remains healthy early in the 21st century.
4. Address the growing liquidity problems affecting community banks in rural areas by adopting the Federal Home Loan Bank (FHLB) modernization provisions contained in HR 10, the Financial Services Modernization legislation.
Page 96 PREV PAGE TOP OF DOC Community banks serving agriculture are facing a growing liquidity problem as the rural population ages and deposits move out of rural communities. Recently the Federal Reserve Bank of Kansas City reported that responses from 316 agricultural banks in the Tenth Federal Reserve District showed the loan to deposit ratio had reached a record level of 68.4 percent, which has been indicative of recent trends in many rural areas.
The FHLB reform legislation would accord automatic membership for community banks of less than $500 million of assets and would increase the types of collateral that these banks could pledge in exchange for receiving funds (advances) which they would use for financing the farms and small businesses that sustain rural America. Agricultural loans could be used as collateral. This legislation is essential to help farmers and their local lenders meet the growing liquidity problems facing American agriculture.
THREE PROPOSALS THAT WOULD IMMEDIATELY IMPROVE THE FSA GUARANTEED LOAN PROGRAMS
1. Allow agricultural lenders to qualify for the Preferred Lender Program (PLP) category based on the quality of their overall loan portfolio and their historical loan losses. This change is important because the new regulations are based on the number of past or current FSA loans that lenders have made. Due to the problems with the program in the past and the small market areas of most rural community banks, very few would qualify based on the requirement of 30 loans.
Many banks have not used the program in the past because of the paperwork, time delays and lack of consistency in the program. Under the new regs they will be penalized based on a loan volume requirement, and therefore they will not be able to use their own underwriting criteria even though they have been very successful in lending to the agricultural community.
The lack of access to the PLP program for many community banks and therefore the inability of these lenders to use their own underwriting criteria, rather than adopt the USDA criteria, could likely cause continued delays in the processing of applications. This will slow down or prevent the extension of credit at a time when farmers, including hog farmers, may need quick relief.
Page 97 PREV PAGE TOP OF DOC In the proposed rule USDA stated that the PLP loss rate will allow PLP status to be granted to only one percent of its 2,500 lenders. This seems alarmingly low to us and we are concerned the new rules will be even more stringent.
When IBAA's Agriculture-Rural America Committee discussed this issue specifically on two separate occasions, our bankers did not feel that using a specific number qualification criteria was beneficial for quality community bank ag lenders. We also suggest that USDA provide an estimation of how many lenders will now be in each category.
2. Reduce the 110 percent cash flow requirement on new loans to 100 percent, the same as for loan servicing options. Otherwise many borrowers will be ineligible for loan guarantees at the outset, during a time of severe financial stress, when the program is needed the most.
We should keep in mind that the FSA program is the ''Lender of Last Resort'' and we are having trouble making our healthy borrowers' cash flows work. I doubt, for example, that many hog producers have positive cash flows right now. Nor do many producers of other commodities.
3. Raise the new low documentation (Low-Doc) loan program above $50,000 to at least $100,000. Even more preferable would be to match the SBA's new Low-Doc loan amount of $150,000, which would be more reflective of modern day agriculture. This would also help speed the delivery of credit to farmers.
The statute does not prohibit FSA from increasing the Low-Doc loan size above $50,000, however, a larger loan size could be made explicit in legislation.
Adopting these legislative changes to the FSA guaranteed loan program should be done immediately, either as part of a supplemental appropriations bill this Spring or other measure that Congress could pass soon.
Immediate legislative action would help ensure farmers have important tools to deal with the current financial stress facing American agriculture.
Page 98 PREV PAGE TOP OF DOCTHE GENERAL CREDIT OUTLOOK
Mr. Chairman, having made these legislative recommendations, let me briefly discuss the general credit outlook as we head into the next couple of years. Unfortunately, we do have real financial stress in rural America. Two key words to remember, I believe, are the words ''uncertainty'' and ''duration''.
There is great uncertainty caused by current low prices and both farmers and their lenders wonder what the duration of these low prices will be. In other words, how long will low prices last?
Low commodity prices naturally pose a threat to farmers' incomes and their abilityor inabilityto repay their loans. For example, a week ago I reviewed the loan applications of 10 farmers. Eight of them did not cash flowwhich is the key consideration a lender has when deciding whether to extend credit.
There is also uncertainty as to how regulators will react when they examine bankers' loansand hopefully not over-react. IBAA has encouraged regulators to be flexible in allowing lenders to prudently work with borrowers. We are pleased that the OCC has released a new agricultural handbook and we have encouraged regulators to meet with bankers in regional meetings around the country to discuss the current financial stress. We have been concerned that many current bank examiners did not experience the agricultural crisis of the 1980's and may swing the pendulum too far in downgrading agricultural credits.
Of course, Bankers will try to work with borrowers to restructure loans, for example. But restructuring itself doesn't make the loan profitable. Both the borrower and lender need to decide early on if the borrower has a viable operation for the future. This decision becomes more difficult in an era of uncertainty caused by low farm prices.
GLOOMY FUNDAMENTALS LIKELY TO CONTINUE
We are all aware of the basic problemslarge supplies, low prices, weakened export demand, particularly in the Asian economies. These problems are not expected to go away anytime soon, meaning low prices could linger for several years.
Page 99 PREV PAGE TOP OF DOC We have both short term and long term problems. In the short term, projected prices do not allow lenders to calculate positive cash flowsa requirement for production loans. In the absence of additional short term aid, a number of family farmers could go out of business this year.
In the long term, continued low prices could lead to the loss of a significant number of additional farmers as a recent Iowa State study showed. The Iowa State University survey, for example, noted that if low prices continue for several years, as many as one-third of Iowa's farmers would face restructuring or liquidation. I would add that this number would not be uncharacteristic of other parts of the country.
Of course livestock producers have been hard hit with weather disasters and hog producers have seen a tremendous loss of equity in only a few months time. Hog producers have seen the lowest prices in inflation adjusted dollars ever in U.S. historyeven lower than the days when the new Roosevelt administration took the drastic step of killing baby pigs to curtail supplies!
In fact, in a recent report, the Minneapolis Fed quoted a major ag lender in Minnesota as saying, ''There is not a single crop enterprise in our area that will produce enough cash flow to pay fixed costs using current prices . . . and five-year average yields. If we had to cut off financing to everyone who cannot project positive cash flows we would close down 80 percent of our customers.'' Again I want to emphasize the importance in the FSA regulations of not requiring 110 percent cash flows. The regulations should at least permit a temporary waiver due to weather related disasters or economic conditions.
THE QUESTION OF FUNDING THE SAFETY NET NEEDS TO BE ANSWERED
Mr. Chairman, we are pleased that Secretary Glickman indicated recently that he will be conducting a series of regional forums to gather advice from farmers, lenders, members of Congress and other on what should be included in a farm safety net and ways to improve crop insurance. As mentioned, the IBAA has already proposed a comprehensive farm safety net plan. In addition, we joined with a number of agricultural and lending groups in proposing reforms to crop insurance and are closely reviewing the USDA's principals set forth in their recently released concept paper.
Page 100 PREV PAGE TOP OF DOC However, the question of funding is still unanswered, which is why we have made the proposal for a down payment for funding an enhanced farm safety net in the supplemental appropriations bill and also an early commitment to increasing the budget baseline for agriculture. Providing such up-front funding will help move the process forward and help Members of Congress and the Administration to reach agreement on the specific elements of what should be in a strengthened farm safety net. If consensus cannot be reached, then there would be money to continue with the types of financial assistance that were provided in the farm aid package last year.
We have seen in some areas a slight decrease in land values for the first time in over a decade. This indicates an expectation that lower incomes will be produced from land. However, we need to keep in mind that loans today are based on the ability to project positive cash flows and not on asset values. Most lenders today are not asset-based lenders since they learned the lesson from the agricultural crisis of the 1980's and how quickly asset values can plummet. With the expectation of low prices continuing into the Fall and perhaps for another year or two, it will be difficult for some family farmers to get credit from lenders unless there is an up-front commitment of money to agriculture.
IBAA supported a bipartisan consensus to developing a farm aid package early last Fall with a number of specific suggestions. We are committed to working on behalf of American agriculture and rural community banks to address these issues in this session of Congress. Strengthening the farm safety net is essential both now and for the future as agriculture moves into the 21st century.
UPDATING AND ADEQUATELY FUNDING THE FSA GUARANTEED LOAN PROGRAMS
Last Fall IBAA urged additional funds be committed to the FSA guaranteed programs during deliberations over a farm aid package and we continue to urge Congress to sufficiently fund the programs, as funding in a number of states either already has or will soon run dry.
Page 101 PREV PAGE TOP OF DOC We are aware that the Department of Agriculture is working on a supplemental appropriations request for additional funds for FSA loan programs and IBAA, various farm groups and others in the lending industry have urged Congress and the Administration to appropriate additional funds. I will comment more specifically on these budget issues in a moment.
Budget problems are not new to the FSA guaranteed loan programs as the Agency often runs out of money. Loan funds are made available each fiscal year by type of loan and then apportioned out to each state. Since the government's fiscal year runs from October 1 through September 30, the programs often run short of funds early in the Spring and state allocations are used up. Then the National office typically has canceled all state allocations and pooled the remaining funds for special approval.
Once appropriated money is gone, there can be no more funding until the next fiscal year. This means that if an application is delayed past the early Spring, a farmer risks not getting funds for that growing season. Since loans are funded in order of application, farmers would still be eligible for the new funding at the beginning of the new fiscal year, but this reduces availability in subsequent years to subsequent borrowers. These situations are exacerbated due to the ''set-aside'' programs that are targeted to special groups such as beginning or minority farmers. Funds set-aside for targeting cannot be used until it is clear that all demand has been met, but this often makes funds available too late in the year for many farmers.
Our conclusion, is that the FSA guaranteed programs should have a high enough level of funding to meet the increased demands resulting from heavier use of the program in times of farm financial stress and to avoid the need to use the targeted or set-aside funds for general purposes. Raising the funding allocations would be one very economical way to help strengthen the farm safety net, especially considering that the loan size caps have now been raised to $700,000.
Page 102 PREV PAGE TOP OF DOCTHE FY 2000 BUDGET AND SUPPLEMENTAL APPROPRIATIONS
The President's FY2000 budget does increase the program level for guaranteed operating loans from about $1.1 billion in the current year to $1.7 billion in the next fiscal year, which would bring it back to the funding level of a couple years ago. The actual funds estimated to be spent only increases from $13 million up to $24 million, showing that the guaranteed program provides a way to greatly leverage money. The program only costs pennies on the dollar, since the loans are guaranteed, meaning money is only spent typically in cases of defaults or loan losses.
However, the Guaranteed Subsidized or Interest Assist program is budgeted to decrease from the program level of $357 million to only $97 million. This decreases the actual estimated outlays from $31 million to $9 million. This program allows a producer to receive a reduction in his interest rate of up to 4 percent if the cash flow projection is not positive at the full interest rate and that a positive cash flow can be developed with the subsidy. Under the current conditions, it would be very useful to increase funding significantly for this program. We also recommend an increase in the Guaranteed Farm Ownership program which is budgeted to increase only slightly in the next fiscal year but which annually has a backlog of applications.
BANKER EXPERIENCES WITH THE FSA GUARANTEED LOAN PROGRAM
Mr. Chairman, our bank, which is not atypical, has worked with the FSA guaranteed loan program on a limited basis. My loan officers would have liked to have used FSA guarantees more. But quite frankly, we backed off from the program because we found it difficult to get a response back to farmers in time to meet their Spring credit needs.
The time delays and the paperwork were too problematic to be acceptable and the local staff were too overworked. Such frustration on the part of lenders is not unique and staffing problems, especially given the recent county office consolidations, seem to be growing more common and serious. Therefore, it may be prudent to explore some form of centralized servicing to handle increased needs of the programs.
Page 103 PREV PAGE TOP OF DOC We do appreciate USDA's efforts to streamline these programs and their efforts will be helpful. However, we believe continued, ongoing efforts to streamline the program and adequately fund it will be necessary.
Mr. Chairman, our original comment letter addresses a number of issues we raised in regards to the proposed FSA regulations and we noted a number of areas where we felt the new regulations would be helpful. We would be happy to make that comment letter available to the committee for your review.
IBAA and its Agriculture-Rural America Committee, comprised of ag bankers from across the nation, will be reviewing the new FSA regulations released today in detail and we will be happy to share our views with your committee and with Congress. But again, the legislative changes noted above should be pursued immediately.
Testimony of Dennis Everson
Mr. Chairman and members of the Subcommittee, I am pleased to be here on behalf of the American Bankers Association (ABA) to participate in this important hearing to examine current agricultural credit conditions and to discuss the USDA's guaranteed loan programs. I am Dennis Everson, senior vice-President of First Dakota National Bank in Yankton, South Dakota. In addition, I am currently Chairman of the ABA's Agricultural and Rural Bankers Committee and Chair ABA's Task Force on 21st Century Agricultural Banking. First Dakota National Bank is the oldest bank in what was once the Dakota Territory, and today our bank has more than $300 million in assets. We presently have $100 million loaned out to farmers and ranchers in our service area.
In addition, First Dakota National Bank offers a service called Dakota Mac that is a Farmer Mac seller organization that works with 42 other banks in a 15 state region to process and service Farmer Mac I and II loans. We started Dakota Mac in 1993 and since that time we have successfully sold $65 million in loans through the Farmer Mac program. We expect our Farmer Mac service to grow considerably this year. Last year we did a total of $14.5 million in loans sold to Farmer Mac. In the first 30 days of this year we have received applications for almost $14 million.
Page 104 PREV PAGE TOP OF DOC The ABA brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membershipwhich includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banksmakes ABA the largest banking trade association in the country.
I would like to begin my remarks by thanking you, Mr. Chairman for your interest and work in the area of agricultural credit. The banking industry remains very aware that you and Chairman Combest worked closely with us in 1992 to pass legislation that authorized many improvements to the USDA's guaranteed loan programs. Specifically, you successfully offered an amendment that authorized the Department to create an express application for small loan requests, and, with Chairman Combest, you created the Preferred Lenders Program. Today, USDA is about to finalize the regulations on these and other program improvements. They could not have come at a better time for our farm and ranch customers.
I would like to say first and foremost that I, and the thousands of bankers that I am representing today, are very concerned about our farm and ranch customers. Over the last 18 months we have experienced a roller coaster of price highs and lows, and currently we are experiencing historic price lows. I am sorry to say that there is nothing in my testimony today that will raise the price of corn, wheat, soybeans, hogs or cattle. I am frustrated by the fact that I do not have the answers that my customers want. Our industry provides the vital credit that farmers and ranchers need to be successful. The banking industry has more at stake in the future of agriculture than any other lender. At the end of 1998 banks had over $70 billion outstanding to farmers and ranchers; more than forty cents out of every dollar of credit loaned to every farmer and rancher in America comes from my industry. Despite the important role banks play in the health of American agriculture, and the role my bank plays in the economic well being of Yankton, what my customers really want to know is when the price of hogs will get back over $42 per hundredweight. I do not have that answer.
Page 105 PREV PAGE TOP OF DOC The erosion of the cash flow of my customers has been, in some cases, severe. My loan officers have completed the majority of their annual reviews with our customers in preparation for the spring lending season. They are reporting to me that even our most productive, best managed and best capitalized customers had a tough time last year and that they are worried about what the next 12 months will bring.
Our concern is great. Agricultural lending is still strongly based on relationships. While I and my fellow bankers employ every conceivable technology available to us to determine if the loan we are about to make will pay as agreed, it still comes down to me looking across the kitchen table at that farm family and judging if what we are about to enter into makes sense for all parties. It has been harder this year for me to do that.
I tell you these things not to alarm you, but to alert you to the fact that we have a great opportunity this year to honestly examine the future of agriculture and to come together in a proactive manner to find solutions. The American Bankers Association is trying to do just that. As I mentioned earlier, I am chairing a special task force on 21st century agricultural banking. We have assembled bankers from all over the country to discuss what tools bankers will need to meet the demands of their customers immediately, and what they will need to continue our honored role as the largest provider of credit to this nationally vital industry. Many of my recommendations to you today came from the initial discussions our task force held, and will deal with the immediate concerns we have about doing our job of providing credit to our farm and ranch customers. My recommendations today will focus on expanding the partnership between the government, banking, farmers and ranchers.
As difficult as conditions presently are, we are not in a situation like we were in the early 1980's. We are facing new challenges and we have, I believe, remembered the lessons learned in the 1980's.
THE BANKING INDUSTRY AND AGRICULTURE
Page 106 PREV PAGE TOP OF DOC For the last ten years, banks have been the primary source of credit for American agriculture. At the end of 1998 banks had over $70 billion loaned to farmers and ranchers, which amounted to 40 percent of all farm debt. American banks have much at stake in the agricultural and rural economy.
The bank portfolio of credit to farmers and ranchers is extremely diverse. USDA studies indicate that banks provide credit to a wider range of farm operations than any other lender. Banks have credit extended to part-time farmers, beginning farmers, moderate-sized family farms and large farming and ranching operations.
Lending to agriculture is a major line of business for many banks in the US. Nearly 3,100 US banks have more than 16 percent of their total loans in direct farm and ranch loans. Banks with this percentage or higher of agricultural loans to total loans are considered to be ''agricultural banks'' by the Federal regulators. ''Agricultural banks'' tend to be smaller institutions located in rural areas. For these banks, many of their remaining loans are to farm and ranch dependent businesses along with all of the other businesses that healthy and sustainable rural communities depend upon. In addition to the smaller ''agricultural banks'', many of the largest banks in the US have considerable portfolios of loans to farmers and ranchers.
THE CURRENT SITUATION IN US AGRICULTURE DIFFERS IN MANY WAYS FROM THE 1980'S
While we have a difficult economic situation in agriculture today, there are many factors that make the current situation different than the 1980's. Farmers, ranchers and their bankers are better positioned to deal with a temporary downturn in the economy.
FARMERS AND RANCHERS PROSPERED DURING THE 1990'S
The 1990's have been very profitable years for farmers and ranchers. During much of the decade, US agriculture experienced record profitsnet cash income in 1997 was a record $60.7 billion. Alternatively, in the 1970's and 1980's, many of the asset gains that farmers experienced were the result of inflation, not real profitability. The situation in the 1990's is clearly different. Farm and ranch businesses have increased their wealth through profits and retained earnings, not asset inflation.
Page 107 PREV PAGE TOP OF DOC Debt levels are significantly lower today. Farmers and ranchers used their profits from the 1990's to reduce debt and to build liquidity. Total farm debt at the end of 1997 was approximately $166 billion and is estimated to total $172 billion at the end of 1998. During the peak of the farm debt crisis in the 1980's, total farm debt reached nearly $200 billion (1984).
Farmers and ranchers have the strongest asset cushion they have ever had. At the end of 1997, the average debt to asset ratio for US farmers and ranchers was 15 percent. The average US farm or ranch has 85 percent owner equity in the business, the highest equity percentage in history. This sizable equity cushion will allow farmers and ranchers to more easily restructure debt as necessary to help compensate for temporarily reduced cash flows.
Interest rates have been relatively stable and low and are projected to continue this way. One of the key elements that drove the farm credit crisis of the 1980's was historically high interest rates. During the early 1980's, farmers experienced rates that exceeded 20 percent. Today, average interest rates are less than half that amount.
Farmers and ranchers have become more astute borrowers and business managers as they have invested in computers, farm management software and marketing software.
THE BANKING INDUSTRY IS WELL POSITIONED TO MEET THE CHALLENGES IN AGRICULTURE
A healthy agricultural economy in the 1990's has allowed agricultural banks to build capital. Total capital at farm banks rose 9.1 percent to $18.1 billion in 1997 alone. Farm banks continue to maintain a higher equity capital to assets ratio than other banks. That ratio, at the end of 1997 was 10.3 percent. At the end of 1997, 98.6 percent of all farm banks met the regulatory definition of ''well-capitalized.''
The banking industry has abandoned lending practices that depended upon asset inflation as the primary source of repayment. One of the key lessons learned by farmers, ranchers and their lenders was that profit enables a business to successfully retire debt, not asset inflation.
Page 108 PREV PAGE TOP OF DOC Bankers have invested billions in technology that enables them to be better lenders. In the 1980's the banker's most powerful tool for credit analysis was a calculator. Today, bankers employ sophisticated credit analysis software, credit scoring systems and a host of other tools that allow them to manage credit risk, and to help them provide their customers with better service and more options.
Banks have more financial tools available to help them work with farmers and ranchers than they did in the 1980's. Since 1986, banks have greatly expanded their use of the USDA's guaranteed loan program, which allows banks to work with agricultural borrowers who have some type of credit deficiency. Banks write nearly all of the loans under this program, and the portfolio has grown from zero in the early 1980's to about $6.8 billion at the end of 1998. Through Farmer Mac, which Congress created in 1987, banks are able to structure long term fixed-rate farm real estate mortgages for their customers. Recent rule changes by the Federal Housing Finance Board allows banks under $500 million in assets to pledge farm and small business loans as collateral if there is a full time occupied dwelling on the property. ABA strongly supports increased access to the Federal Home Loan Bank system for rural banks.
During the farm crisis of the 1980's bankers and their customers learned the importance of open communication and the need for cooperation when there are credit problems. In the aftermath of the credit crisis of the 1980's, banks increased their loans to farmers and ranchers while other lenders retreated. Bankers worked through the problems with their customers while other lenders adopted inflexible and unworkable postures. These hard learned lessons have stayed with the agricultural community.
I wanted to review with you why I believe we are not presently in the same situation as we were in the 1980's because it is important for everyone to understand that agriculture faces new challenges. In order to face these new challenges, we must prepare for the future, not the past.
Page 109 PREV PAGE TOP OF DOCTHE USDA, FARM SERVICE AGENCY GUARANTEED LOAN PROGRAM IS A MODEL PUBLIC/PRIVATE PARTNERSHIP THAT HAS WORKED FOR AGRICULTURE
Earlier I made the point that there was only a limited USDA guaranteed loan program available to farmers and their lenders in the early 1980's. In the 1980's the Federal Government believed the way to respond to the problems farmers and ranchers were having was with a massive direct loan program. At one time USDA had nearly $28 billion in direct loans to farmers and ranchers. I do not need to review the problems that USDA has had with their direct loan program with this committee.
However, I think it is important to tell you that since the 1980's the guaranteed loan program has been a success story. Some 48,000 farmers and ranchers have 65,000 loans from banks and other private sector lenders that are guaranteed by the Farm Service Agency (FSA). Each year FSA receives approximately 15,000 requests for new guaranteed loans. Today, the guaranteed loan portfolio has about $6.8 billion outstanding and currently only about 2.4 percent of the payments are past due. To put that in context, the banking industry's non guaranteed loan portfolio to farmers and ranchers currently has a past due rate of 1 percent. Considering the fact that FSA guaranteed loans are made only to those farmers and ranchers that have some type of credit weakness, this portfolio of guaranteed loans is performing very well.
I am pleased to report to you that it is the banking industry that writes the overwhelming majority of the USDA guaranteed farm loansover 80 percent of all of the guaranteed loans are written by the banks. For my bank, and many thousands of banks like mine, the guaranteed loan program is an essential tool that we use to help farmers and ranchers get the credit they need. We are very judicious in our use of the program and the regulations require that we certify on every application submitted to USDA that we can not provide credit at comparable rates and terms without the guarantee.
It is important for everyone to understand that once we receive the guarantee from USDA we service the loan more closely than we service our non-guaranteed portfolio. USDA regulations rightfully require that we closely monitor the performance of the borrower, maintain close tabs on the collateral and constantly monitor the customer's financial condition. Further, if we have a situation that requires the bank to liquidate the account, the USDA requires that we painstakingly account for all collateral and account for all sales proceeds before we may apply for a loss payment. The Farm Service Agency has adequate safeguards in place to make sure that poor underwriting and loan servicing practices are not tolerated. Banks that fail to meet these strict conditions loose money.
Page 110 PREV PAGE TOP OF DOC I have reviewed this process with you to assure you that I am not here today advocating something that is not a true three way partnership between the farmer, the banker and the FSA. As we look to the future, the guaranteed loan programs offered by the Farm Service Agency are a vital component of the delivery of credit to farmers and ranchers. By providing bankers this tool, Congress and the FSA help thousands of farmers and ranchers who could not meet the strict underwriting requirements demanded by bank regulators.
As you contemplate how the Federal Government will respond to the needs of the agricultural sector during this difficult year and in the future, you must consider the guaranteed loan programs offered by the USDA to be one of the most cost effective and highest impact tools that Congress can provide quickly. This program is not an answer to low agricultural prices, but it is an effective short-term response to credit problems faced by farmers and ranchers.
Recently FSA has proposed many program improvements that the ABA has long advocated. In September 1998, FSA published proposed rules that we hope are the first step in a comprehensive rethinking of how the guaranteed programs work, and how they can be more efficiently delivered. The ABA would like to complement the staff of the FSA for responding to the needs of the banking industry and to the needs of the ultimate beneficiary, farmers and ranchers. It is our hope that the new regulations for the preferred lenders program, the low documentation loan application for small loans and many other program improvements in the proposed rule will result in a program that will be more efficient and will result in greater access to capital by a wider range of agricultural borrower. As the agricultural economy continues to erode, more and more farmers and ranchers will need the help the guaranteed loan program offers.
Unfortunately, now that USDA is about to finalize the regulations leading to a better program, bankers and their customers are being told that there is no more money available. Earlier this month, USDA officials informed us that 15 states have spent all of their Guaranteed Farm Ownership (GFO) allotment for the entire year. Interest Assist (IA), which allows lenders to lower their interest rates on short and intermediate term loans by up to 4 percent is exhausted in 5 states at present. It is expected that many more states will be out of funding by the end of this month.
Page 111 PREV PAGE TOP OF DOC USDA has experienced unprecedented demand for all of their guaranteed loan funds- demand for the Interest Assistance funding is 160 percent greater this year than this time last year. Demand for Guaranteed Farm Ownership is 92 percent ahead of last year.
Earlier this month we joined with American Farm Bureau, American Soybean Association, Farm Credit Council, Independent Bankers Association of America, National Association of Wheat Growers, National Cattleman's Beef Association, National Corn Growers Association, National Cotton Council, National Farmers Union, National Grain Sorghum Association, National Grange, National Milk Producers Federation, National Pork Producers Council and USA Rice Federation in a letter to Congress asking you to make funding for the FSA guaranteed loan programs a priority.
Recommendation: We urge you to make funding for the FSA guaranteed loan programs a priority. We need a supplemental appropriation for the remainder of this fiscal year, and we urge you to support funding for next year at a level that is consistent with the demand the program has experienced this year.
The Farm Service Agency Should Continue to Aggressively Streamline and Improve the Guaranteed Loan Programs- The Regulations Proposed in September, 1998 Should Be Viewed As a Beginning
We share this subcommittee's enthusiasm for the work that the Farm Service Agency has done to create a Preferred Lenders Program, a low documentation loan application and many other program improvements. Publication of this regulation in September 1998, represents the culmination of many hundreds of hours of effort by our members and staff working with FSA to create a program that works for lenders and their customers. The ABA believes that FSA has taken an important first step in what we hope is an ongoing process of program improvement. The following recommendations represent some of the thoughts for further improvements expressed by our members:
Page 112 PREV PAGE TOP OF DOC Is it possible for this Committee, working with FSA, to answer once and for all the question about what constitutes adequate cash flow in order for a borrower to qualify for a guaranteed loan? I can think of no other issue involving the guaranteed loan programs that has been more misunderstood, more a source of frustration, has cost more time and money and has resulted in more farmers not receiving credit on a timely basis than this issue. Congress tried to legislate this issue in 1992 and 1998. Still, we are confronted with confused interpretations in different parts of the country of what FSA wants when they require a 110 percent cash flow coverage. This year is going to be a very challenging year for agricultural bankers and their customers. If we are to be as flexible as possible, to do everything that we can to help borrowers who are having cash flow problems, does it make sense for USDA to demand a cash flow coverage standard that could be in excess of what many non-guaranteed farm borrowers struggle to meet in difficult times?
There is more to this issue than the actual percentage of excess cash flow coverage. There is widespread confusion about what happens if a customer fails to meet 110 percent or even 100 percent of cash flow. If a farmer has a cash flow coverage of less than 110 percent , but greater than 100 percent , all this means is that the farmer had less excess capital, at the end of the year, available for reinvestment. If a farmer has a cash flow coverage of less than 100 percent , this means that he was unable to meet all of his operating and debt obligations. Even in the best of years, a farm may not experience 100 percent cash flow coverage. Does that mean that he automatically goes broke? Absolutely not. In many cases the farmer may have additional debt as a result, or may have some unpaid trade accounts. In other cases, if the shortfall is severe enough, the viability of the farm may be in jeopardy, or it may be necessary for the farmer to restructure debt. My point is that FSA's insistence that 110 percent cash flow coverage must be met in all cases, at all times, is flawed, and this has been an artificial barrier to credit for thousands of farmers and ranchers. Recommendations: FSA should immediately abandon the 110 percent cash flow coverage requirement- this is especially important now, when so many farmers are suffering cash flow problems. A cash flow coverage of 100 percent should be sufficient for FSA- especially if the bank is willing to make the loan.
Page 113 PREV PAGE TOP OF DOC Further, FSA should consider lowering the percentage of guarantee if the cash flow coverage is less than 100 percent and the bank has indicated that they will approve and fund the loan. Give my bank the option of making the loan if we decide to take on the additional risk. By flatly denying the guarantee if the cash flow coverage is less than 100 percent (or when it is less than 110 percent as is presently required), FSA immediately forecloses on all options for the customer.
Congress should revisit the term limits on guaranteed loan eligibility. While we have moved many farm borrowers from direct FSA loans to guaranteed bank credit to non guaranteed bank credit, there are some borrowers who, for a variety of reasons, must continue to have their credit guaranteed by FSA in order for the private sector to lend to them. In my service area, we are starting to encounter more and more borrowers who are running out of eligibility. I understand that this requirement has created an administrative nightmare for the FSA. Recommendation: Given the fact that the agriculture sector is expected to be under increased financial stress, the current term limits should be eliminated.
In order to be a Certified Lender (CLP), or to be one of the new Preferred Lenders (PLP), banks must demonstrate that they have had low loan loss experience with FSA guaranteed loans. We support this requirement- poor credit underwriting should not be tolerated by FSA. However, banks that are in a service area that has been subject to natural disasters should not be penalized for loan losses that are the direct result of these uncontrollable events. Recommendation: The FSA National Office should conduct a ''second look'' review of any bank that is denied renewal of CLP or PLP status to make sure that loan losses were not the result of natural disasters.
FSA's current system of program delivery reflects a time when there were nearly unlimited resources available to USDA. Over the last 40 years the predecessor agencies (FmHA and ASCS) deployed a vast delivery network that was highly local, heavily dependent on labor and one that demanded many skilled workers. The people who built this delivery system are to be commended for their contributions to the health and well being of rural America. But times have changed for all of us, and FSA must reinvent themselves to meet the challenges of the future. At my bank, I do not have the resources to do things the same way I did them last year, let alone four decades ago. Recommendation: FSA should consolidate guaranteed loan making and loan servicing at state offices, or in specialized districts in very large states to ensure consistency and efficiency of program delivery. Today, my loan officers must deal with nine (9) different FSA County Offices. It is impossible for all nine offices to be consistent on the hundreds of pages of procedure they must follow when administering the guaranteed loan program. Further, it no longer makes economic sense to try to maintain a delivery network that worked best before there were faxes, e-mail or even an interstate highway system. The banking industry has the local infrastructure necessary to deliver credit. FSA's role is to provide the necessary oversight of the private sector lenders and this can be done much more efficiently that it currently is being done.
Page 114 PREV PAGE TOP OF DOC FSA has made tremendous improvements to the program since they first introduced the concept of guaranteed loans in the early 1980's. The soon to be finalized regulations represent another important and evolutionary step in the process. The banking industry has strongly supported FSA's guaranteed loan program, and we want to work with the Congress and FSA to continue to make the guaranteed loan programs work better for farmers and ranchers.
CREDIT CAN NOT REPLACE PROFITABILITY
Not all farm and ranch operators can survive in the new, more volatile environment that the global economy presents. Some will decide to exit farming. Some will take advantage of off-farm employment opportunities and will farm on a part-time basis. Others will find opportunities to successfully grow their businesses. As the primary credit providers to American agriculture, bankers will work with all of their agricultural customers to help them find where they best fit in this new environment.
Bankers will work with their customers to restructure debt, to provide credit for operating expenses for the coming year, to find ways for beginning farmers to get started and to provide the financial services and financial stability that rural communities need. We will continue to provide credit to those farmers and ranchers who can make the necessary and rapid adjustments to the new global environment. Even in this uncertain environment, competition for safe and sound credit opportunities is strong, and that competition among lenders benefits the producer.
Credit, however, can not be used as a replacement for earnings and profits. One of the key lessons learned in the farm crisis of the 1980's is that agricultural businesses must be profitable in order to successfully manage their debt obligations. This was a hard learned lesson, but a lesson never to be forgotten.
The ABA looks forward to working with you as you address the challenges facing our nation's farmers and ranchers. I will be happy to answer any questions that you may have at this time.
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Statement of Jack Webster
Thank you for the opportunity to appear before the Subcommittee, Mr. Chairman. I am Jack Webster, president and CEO of Farm Credit Services of America. Farm Credit Services of America is a jointly managed production credit association and Federal land credit association serving farmers, ranchers and rural homeowners in Nebraska, Iowa, South Dakota and Wyoming. We currently have about $4.5 billion in mortgage and operating loans outstanding to about 42,000 customers.
I am appearing today on behalf of the Farm Credit System. My testimony will focus on three specific areascurrent credit conditions, the outlook for the future and the Farm Service Agency (FSA) guaranteed loan program.
The institutions of the Farm Credit System remain focused on meeting the credit needs of our customers. Through the first three quarters of 1998, Farm Credit's loan volume stood at $66.1 billion, an increase of more than $3 billion over the previous year. When the System formally announces its year-end results in another two weeks, I believe the report will show our loan volume continued this growth trend through the fourth quarter.
Overall, credit quality within the Farm Credit System remains fairly strong. At the end of the third quarter 1998, non-accrual loans stood at 1.3 percent of gross loans up from .9 percent at the end of the second quarter 1998. To put this in perspective, non-accrual loans were 10 percent of the System's gross loans at the end of the very difficult year of 1987. At the end of 1990, they were 5.1 percent of gross loans.
However, as good as the current numbers are, I don't expect them to remain that way. The results of a recent survey indicates that 42 percent of Farm Credit associations are expecting poorer loan performance in 1999. When Farm Credit associations were asked about expected loan performance a year ago, only 12 percent indicated they expected declines. I would not be surprised to see the System's level of non-accrual loans increase from the level of third quarter 1998.
Page 116 PREV PAGE TOP OF DOC It is significant to note that USDA continues to report that the balance sheet of the U.S. farm sector remains strong. In fact, USDA projects that farmers' equity will increase in 1999 for the tenth straight year. Despite the weak commodity prices of last year, USDA estimates that the $48 billion net farm income expected in 1998 will be the fourth highest on record. Although USDA is forecasting significantly lower net farm income, $44.6 billion, for 1999, it will remain only slightly below the average income levels for the past decade.
While neither USDA's projections nor our own indicate a widespread and immediate economic crisis, it is a major concern that many farmers will find it impossible to generate a positive cash flow from their crops and livestock at either current or forecasted prices. We commend the actions taken by Congress last year to provide assistance for farmers at this difficult time. We recognize that without those actions we would be facing a much more difficult situation. USDA has stated that the legislative packages approved by Congress in 1998 combined with payments made under the 1996 Farm Bill resulted in $12.9 billion flowing to farmers in 1998. If those payments had not been made, my testimony likely would be much different today.
Mr. Chairman, I do not want to leave you with the impression that there is not significant financial stress in some rural areas. In parts of the country, producers have been hit hard by weather or disease problems. Some have been devastated by both problems. For many of these producers, the destructive force of mother nature combined with disastrously low prices have left them with few options. Some are deciding to get out of farming while they still have some equity. Others have decided to try one more year.
We are doing whatever we can to work with these individuals, no matter which path they choose to take. For those who choose to stay, we will work with them to develop a financing package that will offer them the best chance to survive long term. To meet that demand, Farm Credit will do everything we can to offer our customers the most flexible financing options and to do so at competitive rates. To do otherwise would only drive up the expenses of farmers at a time when they are struggling to make ends meet with depressed commodity prices. For those who choose to leave agriculture, we will work with them to finance the sale of their assets.
Page 117 PREV PAGE TOP OF DOC As we work with borrowers, they continue to express frustration over the availability of effective, risk-management tools. What is available to producers today is not providing them the protection they want or at a price that makes sense to them. We stand ready to work with the Agriculture Committee as you review the operation of the existing crop insurance program. In these volatile times, both farmers and lenders need programs that will instill confidence for the future.
What about the future? The prospects are troubling. Twice a year the Farm Credit Council surveys all Farm Credit associations regarding credit conditions. The purpose of the survey is not to obtain specific numbers, but to identify trends. I want to highlight what we have found in the responses to two questions because they will give you a feel for how the leaders of Farm Credit institutions see the future.
The first question asked was as follows, ''Over the next 12 months, do you expect farm income to increase, be about the same or decrease?'' Sixty-one percent of the respondents said they expect farm income will decrease. One year ago, only 30 percent said the expected this outcome.
The second question dealt specifically with financial stress. The Council asked Farm Credit System leaders: ''Do you expect farm financial stress to increase, be about the same or decrease over the next 12 months?'' Seventy-two percent said they expect financial stress to increase. A year ago, only 38 percent responded that way.
It is one thing, Mr. Chairman, for Farm Credit System leaders to see storm clouds on the horizon- after all we are paid to be cautious with other peoples money. It is more unnerving to hear the Department of Agriculture's own assessment as to whether commodity prices might recover this year. I think one line in USDA's January 1999 Agricultural Outlook report sums up the situation pretty bluntly. It says that there is ''little reason to expect significant changes in 1999.''
Page 118 PREV PAGE TOP OF DOC Late last year, Farm Credit and commercial bank representatives met with Secretary Glickman to discuss credit conditions and the outlook for the agricultural economy. The Secretary was told that credit would be available through the remainder of 1998 and into 1999. However, before we could reassure the Secretary about what credit conditions might be in late 1999 and the year 2000, the lending community wanted to learn from USDA what their outlook was for the future. The Secretary was told that lenders needed reassurance that USDA would maximize their efforts to return profit to the commodity and livestock markets.
Mr. Chairman, we come to this hearing with much the same dilemma as our representatives had late last year in the meeting with the Secretary. As borrowers come in for loan renewals, we have to evaluate them based on their financial projections, and estimates of whether they will cash flow, and then we have to make the determination as to whether we can adequately secure a loan. Given current USDA projections, it is becoming increasingly difficult to develop farm plans that project profitability.
I mentioned earlier that demand for loans has gone up as has our loan volume. What I didn't say then is that every day we are seeing customersgood customerswho are being forced to substitute credit for what income had covered a year ago. Good managers are prepared to do this as part of adjusting to the ups and downs of the farm business cycle. But this is a strategy that will sink even good managers if a down cycle is both broad in its impact across commodities and livestock, and it lasts for a prolonged period of time.
Just like our customers, Farm Credit institutions have used the last few good years to build up capital reserves. Our institutions are financially strong today. As of September 30, 1998, the System's capital as a percentage of total assets was 15.1 percent. In addition, we have streamlined operations and reduced overhead. Our continued agricultural focus has allowed us to retain experienced, high quality loan officers who understand agriculture and the economic cycles producers go through. Agriculture will not receive less attention from the Farm Credit System because times are tough.
Page 119 PREV PAGE TOP OF DOC The Farm Credit Act contains a whole section on the rights of borrowers, including those who are experiencing difficulty in meeting their loan obligations. It provides specific guidance on notices to borrowers, on the restructuring of distressed loans, and on the use of credit review committees as an appeal process that requires farmer director involvement. These provisions worked well in the 1980's, and they remain in place as a guide for loan servicing actions. However, you should know that System institutions go well beyond what the law requires in order to work with customers during tough times.
Finally, Mr. Chairman, I want to briefly talk about the FSA guaranteed loan program. Loan guarantees are a risk management tool for lenders. If the programs are too cumbersome, too time consuming, too bureaucratic, too unpredictable in their application of guidelines and too unpredictable in terms of funding availability, their usefulness, even as a risk management tool, decreases. Farm Credit institutions have had mixed experience with these programs. Some within Farm Credit have found them very useful, while others would tell you nightmare stories about trying to use them. The pattern of usage within Farm Credit reflects this experience.
The current managers of the guaranteed program are to be commended for recognizing that their customers for this program are the lenders that actually use it. To their credit they have sought user input and even hosted a two day meeting to identify needed changes in their regulations. Unfortunately, that meeting took place in June 1997, and we are just now seeing these needed changes put in place. It should not take almost two years to get positive changes made to improve the program.
On behalf of the Farm Credit System, the Farm Credit Council filed extensive comments on the Farm Service Agency's proposed guaranteed loan regulations last October. We would be happy to submit those to the Committee for your review if they would prove helpful in your review of that program. We hope that the final rules that have been announced will have addressed our concerns.
Page 120 PREV PAGE TOP OF DOC Farm Credit institutions will continue to make use of the FSA guaranteed loan program when it is necessary and appropriate for managing our risk as we serve individual customers. We urge the Congress to provide needed supplemental funding to keep loan guarantees available. But I stress that we would prefer to see a healthy agriculture economy where loan guarantees would not be necessary and where credit would not need to be a substitute for income.
Again, thank you Mr. Chairman for the opportunity to be here this morning. We look forward to working with you during 1999 for the betterment of agriculture and rural America.
Testimony of John D. Hawke, Jr., Comptroller of the Currency
Statement required by 12 U.S.C. 250:
The views expressed herein are those of the Office of the Comptroller of the Currency and do not necessarily represent the views of the President.
Mr. Chairman and members of the subcommittee, I appreciate this opportunity to submit a written statement that describes how the Office of the Comptroller of the Currency (OCC) views the impact of current and projected agricultural credit conditions on national banks. I am responding to the Subcommittee's expressed desire to learn more about the OCC's recently released handbook on agricultural lending and how our examiners use that guidance in their supervisory and regulatory activities in the field.
Today, the U.S. agricultural sector faces its most significant challenges since the mid1980's. A combination of lower commodity prices and severe weather has created economic difficulties for many farmers in certain regions of the country. The United States Department of Agriculture (USDA) has recently forecasted financial stresses for this sector of the economy at least into the year 2001. USDA Baseline Projections, February 1998.
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Farmers rely primarily on banks for agricultural credit and, as of September 30, 1998, national banks held $31.9 billion in agricultural credits18.8 percent of the approximately $170 billion of farm debt last year. While the national bank system is financially safe and sound and well positioned to weather the financial stress of the agriculture sector in the coming years, certain banks that specialize in agriculture lending may need to carefully monitor and reassess the risks of their loan portfolios.
My primary message to the subcommittee is that the OCC believes that a balanced examination approach is the best approach to handling stresses in the agricultural economy. Banks should continue to serve their communities and devise ways to help farmers through temporary financial difficulties. However, bankers must also adhere to sound lending practices. Banks balance sheets must reflect accurately the risks embedded in their loans. Their reserves for loan losses and capital levels must also be sufficient. If banks are to be a reliable source of agricultural loans in both good and bad times, they must remain financially strong. One enduring lesson from the thrift crisis of the late 1980's is that forbearance on the part of the regulatorsparticularly at times when the asset values are likely to be less than book valueonly leads to more serious problems for banks and the communities they serve down the road.
Given the current agricultural credit conditions, we felt it appropriate to issue a handbook on agricultural lending. The purpose of the handbook is to help examiners and bankers understand the fundamentals of sound agricultural lending, to consolidate existing OCC guidance, and to see that examiners do not automatically criticize loans solely because farmers may need more time to service them. It reflects our enhanced understanding of agricultural credit issues over the past 15 years. I am submitting a copy of that handbook for the record with my testimony.
Page 122 PREV PAGE TOP OF DOCNATIONAL BANKS AND AGRICULTURAL LENDING
Before I discuss specifics on national banks and agricultural lending, I would like to provide a brief overview of present and projected economic conditions in the agricultural sector. The USDA forecasts that farm profits in 1999 will decrease 8 percent to $44 billion from $48 billion last year. Economic Research Service, U.S. Department of Agriculture, December 21, 1998.
The Asian financial crisis in 1998 hit Midwest farmers the hardest as it contributed to a drop in the prices for wheat and corn and secondarily contributed to the collapse of hog prices. This year prices on Southern crops, such as cotton and soybeans, are also projected to significantly decline. The Midwest region, not yet recovered from last year's price declines, is projected to experience a decrease in dairy prices. According to the USDA: hog prices decreased 70 percent from 1997 to 1998; export prices on wheat and corn fell 13 and 14 percent respectively; 1999 soybean export prices are projected to decrease 17 percent from 1998 levels; large overseas harvests of cotton have resulted in a six-month supply, the biggest reserve in 13 years; and due to record high milk prices and relatively high producer returns in 1998, milk production in 1999 is projected to overtake milk demand, resulting in a sharp drop in milk prices.
Recent sources of financial stress such as the Asian financial crisis and the recent devaluation of the Brazilian real have contributed to a decline in American farm exports, an increase in the supply of farm commodities and a stronger dollar. According to the USDA, exports were $59.8 billion in 1996 and had declined 10 percent by fiscal year 1998 to $53.6 billion. The latest export projections for 1999 are $50.5 billion - a 16 percent decrease from the 1996 figure.
The end result is lower commodity prices, which, coupled with severe weather in certain regions in the country, have placed significant financial strain on parts of the agricultural sector of the economy. Farmers who have assumed a significant level of debt will be under substantial pressure, if farm prices remain low. Thus, we anticipate that some farmers will be unable to service their loans if they continue to be negatively impacted by economic conditions in the agricultural sector.
Page 123 PREV PAGE TOP OF DOC Agricultural lending is broadly distributed across the national banking system, and the lack of concentration of agricultural loans reduces the overall risk to the national banking system. Over 70 percent of the agriculture lending of national banks occurs in lenders that do not specialize in agricultural credit. Since these lenders do not specialize in agricultural lending, their overall exposure to agricultural credit problems is limited.
As of September 30, 1998, 27.9 percent ($8.9 billion) of the national banking system's agricultural credit was held by 528 national banksone-fifth of all national banksthat regulators classify as agriculture lenders.These are defined by the Federal Deposit Insurance Corporation (FDIC) as banks where agricultural production and farm real estate loans combine to amount to 25 percent of total loans and leases.
We are concerned about the impact of the current financial stresses on the balance sheets of these agricultural national banks and the ability of these banks to extend additional credit, if the stresses continue. For example, agricultural banks, which rely primarily on deposits for funding, are more susceptible to regional economic downturns and liquidity problems than national banks overall. On September 30, 1998, the average deposits to total liabilities ratio for agricultural national banks was 94.6 percent compared to 73.2 percent for all national banks.
Nearly three-fourths of agricultural national banks are in the OCC's Midwestern and Southwestern Districts, These Districts cover Arkansas, Iowa, Kansas, Louisiana, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma, South Dakota, and Texas.
precisely where many farmers are experiencing difficulties. Thus, the potential for credit quality problems with the agricultural loans is regionally concentrated in the national banking system. As of September 30, 1998, 40 national banks had exposures to agricultural lending that exceeds five times their equity capital. Three-quarters of them are in Nebraska, Texas, and Iowa. In addition, 33 national banks hold non-performing agricultural loans in excess of 10 percent of their equity capital. Twenty of these banks are in just two states: Nebraska and Texas.
Page 124 PREV PAGE TOP OF DOC It is important to keep in mind, however, that the vast majority of the 528 agricultural national banks are small community banks that are typically strong and profitable. In fact, they average $66.4 million in assets, less than one-twentieth the size of the average non-agricultural national bank ($1.5 billion), have an average equity capital to asset ratio of 10.7 percent as of the third quarter of 1998, and experience an average return on assets of 1.1 percent. Thus, despite our focus on the credit quality of agricultural loans, the agency has not to date found weaknesses in bank loan portfolios of the magnitude we saw in the mid1980's.
OCC'S AGRICULTURAL LENDING HANDBOOK
The OCC has significant supervisory experience dealing with agriculture credit quality issues. We have learned over the years that a balanced examination approach that gives banks the flexibility to work with farmers experiencing temporary financial difficulties is the best approach. During 1984, when national banks last faced substantial agricultural problems, we issued guidance to our examiners instructing them not to classify agricultural credits solely because the borrower's cash flow was negative. OCC Examining Circular 222, May 21, 1984.
That policy proved useful and effective. We have recently clarified and reissued this guidance as part of our handbook, entitled ''Agricultural Lending''. This handbook serves as a single reference source for our examiners and for bankers and draws upon the lessons we have learned through the examination process about making sound agricultural loans and managing agricultural lending risks.
The handbook addresses three important subjects. First, it provides background information on the characteristics of agricultural loans that distinguish them from other kinds of commercial loans. It offers specialized information to augment the more general advice and guidance that we give our examiners about loan portfolio management and credit underwriting. Second, it discusses how we evaluate individual agricultural loans. And third, it describes how we evaluate a bank's agricultural loan portfolio and its administration of that portion of its lending business. Let me discuss each of these areas in more detail.
Page 125 PREV PAGE TOP OF DOC The handbook highlights the special risks inherent in farm lending, including underwriting, credit administration, and risk management issues. For example, production loans are usually repaid though the sale of the underlying collateral. On occasion, prices farmers receive for their crops or livestock do not generate sufficient cash to repay the entire loan, necessitating a refinancing of the unpaid portion into next year's loan (referred to as carryover debt). In the handbook, we discuss ways in which bankers can work with their farm borrowers in these situations and we make clear that this carryover debt should not be automatically classified. Also, the handbook points out that agricultural lenders are exposed to significant risks that are not in the control of an individual borrower, such as shifting commodity prices and severe weather conditions. We note that banks can reduce their exposure to those risks with hedging strategies or by requiring the purchase of crop insurance.
The methods by which the OCC evaluates credits receives heightened attention when the economy softens. The Agricultural Lending handbook describes in some detail what we expect our examiners to take into account in making those judgments. The handbook advises them to weigh carefully the full range of relevant factors, including the borrower's financial strength, payment history, future prospects over the life of the loan, and the value and quality of the collateral. The handbook explicitly states that, just because a farmer carries over an unpaid loan from a prior crop year, the examiner should not automatically lower the credit quality rating on the loan through the loan classification process. Classification of a loan is explained in detail in The Comptroller*s Handbook for National Bank Examiners, Section 215.1, March 1990.
Further, the handbook makes it clear that the potential for loan classification does not mean that the banker should terminate the credit. Additionally, our examiners understand that a borrower with a problem or classified loan at one point in time may become a solid customer in the future. Efforts by the bank to restructure loans by extending repayment terms or advancing additional credit, when prudently done, can improve the prospects for repayment. Our examiners consider all of these factors when they judge the quality of agricultural credits.
Page 126 PREV PAGE TOP OF DOC With regard to assessing the nature of the bank's agricultural loan portfolio and the quality of its management of that business, our primary objective is to make certain the bank remains strong and healthy so it can continue to be a source of financial support for the community it serves. A bank must maintain sound underwriting practices and solid internal risk management controls. If it makes exceptions to its lending policies, the bank must know the number and type of exceptions it is making and how these exceptions could affect its expected future earnings or exposure to losses in the event of default by the borrowers. The bank must also conduct a periodic independent loan review to identify and evaluate risks. And they must make provisions for possible losses in light of changing economic conditions. These are all essential risk management practices, and remain fully consistent with a flexible loan workout program when borrowers get into trouble. Banks need to work with an otherwise sound borrower experiencing temporary financial difficulties, but the bank must also accurately reflect in its loan portfolio the impact of such a decision.
OCC EXAMINATION APPROACH
We are actively taking steps to make certain that we apply our supervisory policies in a consistent manner. We conduct national and district reviews of our examination approach to avoid overreaction by our examiners to agricultural credit conditions. Additionally we work with other banking regulators to ensure that we all treat similar loans in a similar manner.
Late last year, in an attempt to assure consistency among our examiners and to provide a platform for training some less experienced examiners, we performed a cross-sectional examination of ten agriculture banks. This process, which was led by an experienced agricultural credit examiner, focused on national banks active in agriculture lending. Examiners experienced in assessing agriculture loans were paired with less seasoned examiners and jointly conducted a credit review of each of the ten banks.
Page 127 PREV PAGE TOP OF DOC At a more local level, the Southwestern District Includes the states of Arkansas, Louisiana, Oklahoma and Texas.
has established an internal group of examiners experienced in agricultural lending to be an information resource and clearinghouse for agricultural loan classifications. This group reviews proposed classifications and provides feedback to examiners to ensure classification criteria are applied in a manner consistent with OCC guidelines.
On an interagency basis, we are making some initial efforts to standardize the treatment of certain agricultural examination issues, such as valuing agricultural collateral and analyzing farm cash flows. The Southwestern District office has initiated a program with the Dallas office of the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Bank of Dallas, and the Texas State Banking Department to share information on agricultural conditions and lending activities in the Southwest. We are hopeful that programs such as these will ensure a more consistent regulatory treatment of loans to troubled agricultural borrowers.
Finally, all national banks have the opportunity at any time to raise examination concerns. The OCC's Ombudsman and his staff are responsible for ensuring that the OCC appeals process provides a fair and speedy review of disagreements on agency findings or decisions. The office has the discretion to supersede any agency decision or action during the resolution of an appealable matter.
The OCC has an active outreach program and we have stepped up our activities with bankers and trade groups in our Districts that have been most affected by problems in agriculture. Our purpose is to educate bankers about our policies, candidly discuss issues, and identify local problems. This dialogue helps us to strike the right balance in our supervision of agricultural banks, and prevent overreaction to existing economic conditions affecting the agricultural sector. Topics of recent meetings include credit classifications; the impact on agricultural credit conditions of reduced yields on corn and wheat from drought; crops lost to freezes and floods; and low beef and pork prices.
Page 128 PREV PAGE TOP OF DOC In addition, our District Offices are offering training programs for bankers. For instance, last September, the OCC's Omaha Field Office organized an outreach session on agriculture credit classification for over 200 senior lenders and chief executive officers from banks in Nebraska and Iowa. The program was so successful that it has been incorporated into the training programs of three other OCC field offices.
Although the OCC has concerns about the difficulties farmers are facing in some areas of the country, the current problems in the banking system from exposure to agricultural credits are not as severe overall as those we saw in the mid1980's. Nearly all agricultural banks hold more capital and have higher levels of loan loss reserves than 15 years ago. Therefore, most agriculture banks are currently in a sufficiently strong financial position to work out problem credits with their farm borrowers.
As Comptroller, I am determined that the OCC maintain a balanced supervisory approach: one that avoids overreaction to problems and results in a steady flow of credit to agriculture, but one that also ensures that national banks remain safe and sound and that the system does not suffer overall from sectoral difficulties. We can achieve these objectives through consistent application of proven polices under which we encourage banks to work with their customers and to adhere to sound lending fundamentals.