[Senate Hearing 114-643] [From the U.S. Government Publishing Office] S. Hrg. 114-643 THE FARM CREDIT SYSTEM: OVERSIGHT AND OVERLOOK OF THE CURRENT ECONOMIC CLIMATE ======================================================================= HEARING before the COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY UNITED STATES SENATE ONE HUNDRED FOURTEENTH CONGRESS SECOND SESSION __________ MAY 19, 2016 __________ Printed for the use of the Committee on Agriculture, Nutrition, and Forestry [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Available via the World Wide Web: http://www.agriculture.senate.gov ______ U.S. GOVERNMENT PUBLISHING OFFICE 23-591 PDF WASHINGTON : 2018 COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY PAT ROBERTS, Kansas, Chairman THAD COCHRAN, Mississippi DEBBIE STABENOW, Michigan MITCH McCONNELL, Kentucky PATRICK J. LEAHY, Vermont JOHN BOOZMAN, Arkansas SHERROD BROWN, Ohio JOHN HOEVEN, North Dakota AMY KLOBUCHAR, Minnesota DAVID PERDUE, Georgia MICHAEL BENNET, Colorado JONI ERNST, Iowa KIRSTEN GILLIBRAND, New York THOM TILLIS, North Carolina JOE DONNELLY, Indiana BEN SASSE, Nebraska HEIDI HEITKAMP, North Dakota CHARLES GRASSLEY, Iowa ROBERT P. CASEY, Jr., Pennsylvania JOHN THUNE, South Dakota Joel T. Leftwich, Majority Staff Director Anne C. Hazlett, Majority Chief Counsel Jessica L. Williams, Chief Clerk Joseph A. Shultz, Minority Staff Director (ii) C O N T E N T S ---------- Page Hearing(s): The Farm Credit System: Oversight and Overlook of the Current Economic Climate............................................... 1 ---------- Thursday, May 19, 2016 STATEMENTS PRESENTED BY SENATORS Roberts, Hon. Pat, U.S. Senator from the State of Kansas, Chairman, Committee on Agriculture, Nutrition, and Forestry.... 1 Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan... 3 Thune, Hon. John, U.S. Senator from the State of South Dakota.... 4 ---------- WITNESSES Panel I Spearman, Hon. Ken, Chairman, Farm Credit Administration Board, McLean, VA..................................................... 5 Tonsager, Hon. Dallas, Member, Farm Credit Administration Board, Chairman, Farm Credit Insurance System Corporation Board, McLean, VA..................................................... 7 Hall, Hon. Jeffery, Member, Farm Credit Administration Board, McLean, VA..................................................... 8 Panel II Barker, Verlin (Gus) J., President and Chief Executive Officer, Community Bank of Oelwein, Oelwein, IA......................... 27 Stark, Doug, President and Chief Executive Officer, Farm Credit Services of America & Frontier Farm Credit, Omaha, NE.......... 29 Welder, Jed, Owner, Trinity Farms, Greenville, MI................ 31 Wolfe, Leonard, President and Chief Executive Officer, and Chairman of the Board, United Bank and Trust, Marysville, KS... 25 ---------- APPENDIX Prepared Statements: Stabenow, Hon. Debbie: Transcript of floor statements by Hon. Patrick J. Leahy and Hon. Richard Lugar for submission into the record.......... 46 Leahy, Hon. Patrick J........................................ 51 Thune, Hon. John............................................. 53 Barker, Verlin (Gus) J....................................... 56 Hall, Hon. Jeffery........................................... 70 Spearman, Hon. Ken........................................... 73 Stark, Doug.................................................. 84 Tonsager, Hon. Dallas........................................ 98 Welder, Jed.................................................. 101 Wolfe, Leonard............................................... 103 Document(s) Submitted for the Record: Thune, Hon. John: Study: Farm Income Plummets in 2015, The Daily Republic...... 116 Stark, Doug: American Farmland Trust...................................... 120 Clemson University........................................... 122 Drake University............................................. 124 Empire State Council of Agricultural Organization, Inc....... 125 Farm Credit Agriculture Coilition Letter..................... 127 Farmer Veteran Coalition..................................... 129 FreshFarm, prepared statement................................ 131 Frontier Communications, prepared statement.................. 132 Iowa State University........................................ 133 Land for Good, prepared statement............................ 135 Local Food Strategies, LLC, prepared statment................ 137 Market Maker, prepared statement............................. 139 Matson Consulting, prepared statement........................ 141 Morse Marketing Connections, prepared statement.............. 142 National Rural Electric Cooperative Association.............. 144 National Rural Water Association............................. 145 National Cooperative Business Association, CLUSA International.............................................. 147 National Council of Farmer Cooperatives...................... 149 NTCA, The Rural Broadband Association........................ 151 Originz, LLC, prepared statement............................. 153 Sustainable Agricultural Education (SAGE), prepared statement 154 Southern Sustainable Agriculture Working Group............... 156 The Federation of Southern Cooperatives...................... 158 The Ohio State University.................................... 160 The Rural Advancement Foundation International............... 161 University of Arkansas....................................... 163 Wallace Center, prepared statement........................... 165 Western Telephone Association, prepared statement............ 167 Wholesome Wave, prepared statement........................... 172 Question and Answer: Barker, Verlin (Gus) J.: Written response to questions from Hon. Pat Roberts.......... 172 Written response to questions from Hon. John Thune........... 173 Written response to questions from Hon. Robert Casey, Jr..... 175 Hall, Hon. Jeffery: Written response to questions from Hon. John Thune........... 177 Spearman, Hon. Ken: Written response to questions from Hon. Pat Roberts.......... 179 Written response to questions from Hon. Thom Tillis.......... 182 Written response to questions from Hon. Charles Grassley..... 185 Written response to questions from Hon. John Thune........... 187 Written response to questions from Hon. Heidi Heitkamp....... 189 Written response to questions from Hon. Robert Casey, Jr..... 191 Stark, Doug: Written response to questions from Hon. Pat Roberts.......... 194 Written response to questions from Hon. John Thune........... 195 Written response to questions from Hon. Robert Casey, Jr..... 198 Tonsager, Hon. Dallas: Written response to questions from Hon. John Thune........... 201 Written response to questions from Hon. Robert Casey, Jr..... 203 Welder, Jed: Written response to questions from Hon. Pat Roberts.......... 203 Written response to questions from Hon. John Thune........... 203 Written response to questions from Hon. Robert Casey, Jr..... 204 Wolfe, Leonard: Written response to questions from Hon. Pat Roberts.......... 205 Written response to questions from Hon. John Thune........... 206 Written response to questions from Hon. Patrick J. Leahy..... 206 Written response to questions from Hon. Robert Casey, Jr..... 208 THE FARM CREDIT SYSTEM: OVERSIGHT AND OVERLOOK OF THE CURRENT ECONOMIC CLIMATE ---------- Thursday, May 19, 2016 United States Senate, Committee on Agriculture, Nutrition, and Forestry, Washington, DC The committee met, pursuant to notice, at 10:17 a.m., in room 328A, Russell Senate Office Building, and in room 328A, Hon. Pat Roberts, Chairman of the committee, presiding. Present or submitting a statement: Senators Roberts, Boozman, Ernst, Tillis, Sasse, Grassley, Thune, Stabenow, Brown, Klobuchar, Bennet, Gillibrand, Donnelly, Heitkamp, and Casey. STATEMENT OF HON. PAT ROBERTS, U.S. SENATOR FROM THE STATE OF KANSAS, CHAIRMAN, U.S. COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY Chairman Roberts. I call this hearing of the Senate Committee on Agriculture, Nutrition, and Forestry to order. Thank you all for coming. Today's hearing will examine the overall climate of credit in rural America, the health of ag lending from both the commercial bank and the Farm Credit System perspectives, and what impact the current credit environment is having on our nation's farms. We will also examine whether the Farm Credit Administration is exercising appropriate oversight of the Farm Credit System. Farmers and ranchers all across the country are experiencing difficult economic conditions as farm sector profitability is forecast to decline for the third straight year. Over the past three years alone, net farm income is expected to decline by 56 percent. As our nation's farmers and rural communities continue to deal with low commodity prices and always elevated input costs, access to affordable credit in rural America is absolutely crucial. The Spring 2016 Agriculture Lenders Survey released by Kansas State University's Department of Agriculture Economics expects the credit environment for farmers to remain difficult for at least a few more years. Lenders indicate that demand for operating loans will continue to remain high as liquidity and cash flow are problematic for many farmers. Further, non- performing loans have increased and are expected to continue on this unfortunate trajectory due to low commodity prices. In addition to the Lenders Survey, the Federal Reserve Bank of Kansas City painted a similarly bleak projection of the farm sector credit conditions for the first quarter of 2016. Lenders note an increasing share of farmers carrying over outstanding debt from previous years, with an increased demand for loans and weakening repayment rates. Now, for farmers, every year--every year--is a high-stakes bet as they put their confidence in their crops, livestock, and the business decisions they make all throughout the year. While farmers continue to manage their risk through a period of low commodity prices and stubbornly high input prices, it is vitally important we begin discussions regarding next year's borrowing decisions. There is no doubt that today's discussion is timely, especially considering it has been just under a decade, ten years, since we have had representatives from either the banking industry or the Farm Credit System before this committee to discuss some of the issues we will cover today. Rural America relies on a network of credit providers consisting of the private sector and the Farm Credit System. Created under the Federal Farm Loan Act of 1916, the Farm Credit System is a nationwide system of privately owned cooperative lenders statutorily required to provide farmers and other rural borrowers with a permanent and affordable source of credit. Currently, the Farm Credit System is comprised of 74 agricultural credit associations and four regional banks which provide the ag credit associations with funds to make loans to producers and other retail borrowers. The agency tasked with regulating the Farm Credit System is the Farm Credit System Administration, or the FCA. The Farm Credit Administration is an independent agency comprised of a three-member Board nominated by the President, and as we all know on this committee, confirmed by the Senate through our committee. Like the banking industry, the Farm Credit System is not a lender of last resort. The lender of last resort for farmers who are otherwise unable to secure private financing is the Department of Agriculture's Farm Service Agency. Our commercial banks and the Farm Credit System often relies on USDA farm loan guarantees to make loans when borrowers are less creditworthy. Now, to date, the Farm Service Agency has seen a 21 percent--that is 21 percent--increase in farm loans as compared to last year, a further troubling indication of a struggling agricultural economy. Obviously, much has changed since Congress established the Farm Credit System a hundred years ago. One thing that has not changed, however, is the importance of providing farmers and other rural borrowers with easily accessible and affordable credit. Now, I along with a few of my colleagues on the Ag Committee here remember very well the difficult times with the farm economy during the 1980s. No one--no one--wants to see a repeat of those dark days. I look forward to hearing from our two distinguished panels of witnesses regarding the landscape of the current economic conditions in farm country, what is working or needs improvement from a legislative perspective to protect the financial well-being of our farmers and our rural communities. Now, before we hear from our witnesses, I recognize our distinguished Ranking Member, Senator Stabenow, for any of her opening remarks. STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR FROM THE STATE OF MICHIGAN Senator Stabenow. Well, thank you very much, Mr. Chairman, and thank you to our witnesses as well as the leaders from the Farm Credit Administration. It is great to see all of you, and Mr. Chairman, this is a very important hearing, so thank you for holding it. I want to especially welcome Mr. Tonsager and Mr. Hall, whose nominations this committee unanimously approved last year. It is wonderful to see you again. I also want to give a warm welcome to Jed Welder, who will be on our second panel. Jed served in both the United States Marine Corps and the U.S. Army, and he and his wife, Milka, are now the proud owners of Trinity Farms in Greenville, Michigan. It is great to have you here today, and thank you for your service to our country and for taking time away from planting corn to join us and tell your story. As many of us know, a hundred years ago, as the Chairman said, in 1916, Congress passed the Federal Farm Loan Act to address the serious problems facing our farmers and agricultural producers, a problem that threatened the long-term success of our rural economy. At that time, obtaining reliable credit was often unaffordable in most rural areas. Many lenders avoided farm loans altogether because the inherent risks of weather and price swings made lending to farmers unappealing. As a result, Congress established the Farm Credit System to fill the gap in credit and provide American farmers and producers the financing they needed to expand in good times and to weather the bad times. A hundred years later, the Farm Credit System continues to ensure that producers of all types and sizes have adequate and reliable access to credit. In fact, farm credit lenders nationally provide more than $200 billion in loans to rural America. In my home State of Michigan, GreenStone Farm Credit provides more than $5 billion in loans to producers, including to more than 17,500 small, new, and beginning farmers that need access to capital. As we will hear from Mr. Welder, it was exactly this type of support that helped him secure land and create a new life for himself and his family after his military service. However, as we look ahead to the next several years, we know that we are entering a period of low commodity prices, especially compared to what we have seen in the past few years, which will make it more challenging for farmers to make ends meet. This year alone, net farm income is projected to decline for the third consecutive year, a drop of 56 percent from 2013, and thank goodness, Mr. Chairman, we did the farm bill. To weather this downturn, American farmers will continue to rely on commercial banks, USDA, and our Farm Credit System to provide the necessary short, medium, and long-term financing that will allow American agriculture to continue and prosper. I am pleased that we will also be hearing today from lenders on our second panel who play an important role in providing credit throughout the entire food supply chain. I would also like to briefly mention the longstanding support of the Farm Credit System by Senator Pat Leahy. I understand that he is in an Appropriations Committee meeting and will be unable to attend today. But, Mr. Chairman, as Chair of the committee during the 1990s when many important reforms were made to the Farm Credit System, Senator Leahy has asked me to submit for the record a transcript of his and then-Ranking Member Lugar's floor statements during the consideration of one of those major changes, and I would ask the Chair to enter this into the record. [The information of Senator Leahy can be found on page 46 in the appendix.] Chairman Roberts. Without objection, it is so ordered. Senator Stabenow. Thank you, Mr. Chairman. Senator Thune. Mr. Chairman, could I welcome a South Dakota witness? Chairman Roberts. I would be delighted to have you do that. Why do you not just go right ahead. STATEMENT OF HON. JOHN THUNE, U.S. SENATOR FROM THE STATE OF SOUTH DAKOTA Senator Thune. Dallas Tonsager has a farming operation with his brother in northeastern South Dakota. He has also served as Under Secretary for Rural Development at USDA, someone who has a great and distinguished career in public service here. Thank you for being here and welcome to the committee. Give your family our best, all right. Thanks, Dallas. Chairman Roberts. Thank you, Senator. Today, I am pleased to welcome our first panel of witnesses who represent the Farm Credit Administration, led by our Chairman and CEO, the Honorable Kenneth Spearman. Mr. Chairman, we appreciate your joining us while you recover from a medical procedure, note that you are under doctor's orders to wear your chapeau. I think that is the proper term. As I told you in the back room, I was going to give you a black cowboy hat, a ``caboy'' hat, as we say in Dodge City, but we do not want this to be a hearing with black hats, so---- [Laughter.] Chairman Roberts. But, you are permitted and you are looking good. Mr. Spearman, appointed to serve on the Farm Credit System Board by President Obama on October 13, 2009, has an extensive background working in finance, agriculture cooperatives. From 1980 to 1991, Mr. Spearman served as the controller of a $100 million citrus co-op in Orlando, where he handled financial management, reporting, and supervision of staff accounts. After serving in this capacity, Mr. Spearman went on to become Director of Internal Audit for Florida's Natural Growers, and then served as an outside director on the Ag First Farm Credit Bank Board until his appointment to the Farm Credit Administration Board. Mr. Spearman is also a U.S. Army and Vietnam veteran. We thank you, sir, for your service. Mr. Spearman, thank you for your service to our country. I look forward to hearing your testimony today after I introduce your fellow Board members. Our next witness on this panel is the Honorable Dallas Tonsager, already introduced by my distinguished colleague. Mr. Tonsager brings decades of experience working on issues concerning farm credit, rural America, and is now on his second stint serving on the Board of the Farm Credit Administration. In addition to being a Board member of the Farm Credit Administration, Mr. Tonsager serves as Chairman of the Board of the Farm Credit System Insurance Corporation, which is responsible for insuring the timely payments of principal and interest on obligations issued on behalf of the Farm Credit Banks. Before being nominated by President Obama to serve on the Farm Credit Administration Board, Mr. Tonsager served as USDA's Under Secretary for Rural Development from 2009 through 2013, where he worked to expand broadband and other critical infrastructure projects all throughout rural America. Mr. Tonsager hails from South Dakota, where he grew up on a dairy farm. It is a pleasure to have you back before the committee, Dallas, and I look forward to your testimony. Our third witness on the panel is the Honorable Jeffery Hall. Mr. Hall was appointed to the Farm Credit Administration Board by President Obama on March 17, 2015. Prior to his appointment, Mr. Hall was President of an association management and consulting firm he co-founded in 2009. Before working in the private sector, Mr. Hall was the Kentucky State Executive Director for USDA's Farm Service Agency, where he was responsible for farm program and farm loan program delivery and compliance, and was a scout for the University of Kentucky's basketball team, as I understand. I made that up, so you can leave that out. [Laughter.] Chairman Roberts. Prior to his time at the Department, Mr. Hall served as an Assistant to the Dean of Agriculture at the University of Kentucky and previously served as a Senior Staff Member to our Majority Leader McConnell from 1988 to 1994. Altogether, he has enjoyed a 30-year career in ag policy. Jeffery, thank you so much for joining us today. I look forward to hearing all three of your testimonies today, asking you some questions about the state of the Farm Credit System. Mr. Spearman, why don't you kick things off. STATEMENT OF HON. KENNETH A. SPEARMAN, CHAIRMAN, FARM CREDIT ADMINISTRATION BOARD, McLEAN, VIRGINIA Mr. Spearman. Thank you, Mr. Chairman. Chairman Roberts and Ranking Member Stabenow and members of the committee, it is a privilege to appear before you today to report on the mission of the Farm Credit Administration. I have a written statement to submit for the record. President Obama appointed me to the FCA Board in October of 2009 and designated me FCA Chairman and CEO in March of last year. I have the pleasure of serving on the Board with two very distinguished colleagues, Dallas Tonsager and Jeff Hall, whom you will hear from in a moment. FCA is an independent federal agency that regulates and examines the banks, associations, and related entities of the Farm Credit System, including Farmer Mac. Our responsibility is to ensure that the System meets its Congressional mission to provide a dependable source of credit for agriculture and rural America. FCA was created by an Executive Order of President Franklin Roosevelt in 1933. During the agricultural credit crisis of the 1980s, this committee restructured FCA, giving it regulatory and enforcement powers similar to those of other federal financial regulators. FCA is not an appropriated agency. We are funded primarily through assessments paid by System institutions. The Farm Credit System is the nation's oldest government- sponsored enterprise. It is a nationwide network of borrower- owned cooperative financial institutions. Currently, the System includes four banks and 74 direct lending associations. The banks provide loan funds to associations, which in turn provide operating loans and long-term real estate loans to farmers, ranchers, and other eligible borrowers. One of the System's banks also has the authority to lend to agricultural cooperatives and rural utilities. Farm Credit Banks and associations cannot take deposits. The System obtains loan funds by selling securities on the national and international money markets. The securities are not guaranteed by the federal government. The System is the only GSE that makes loans at the retail level. It was established to provide a dependable source of competitive credit to farmers, ranchers, and farm cooperatives. Its mission is to serve American agriculture in good times and bad. After several years of record farm income, the agricultural industry has entered a new period of lower profits. In 2016, net farm income is forecast to decline for the third straight year. Times like this underscore our nation's need for dependable, affordable agricultural credit. Because Congress had the foresight to establish the Farm Credit System some 100 years ago, our farmers and ranchers have been able to provide abundant, affordable food and fiber to people at home and around the world. Of course, stress in the farm industry can also create stress for the Farm Credit System and we are already seeing signs of stress in a few institutions. However, I am happy to report that System banks and associations are fundamentally safe and sound, as is Farmer Mac. FCA is taking steps to make sure the System remains safe and sound. The Board recently finalized a rule that updates our capital regulations and aligns them with the Basel III accord. We continue to emphasize robust internal controls in all System institutions and to monitor for emerging risks. Regarding the System's similar entity authority, we have taken steps to ensure that it uses this authority only for the purpose of mitigating risk, and, as always, if we find a transaction that is outside the limits and purpose of the law, we require the institution to take corrective action. We also emphasize mission fulfillment. The System must serve all eligible creditworthy potential borrowers regardless of race or gender and regardless of the commodities they produce or the size of their operations. We want to make sure the System also serves small organizations and operations that produce organic and value-added foods for local markets. Mr. Chairman, this concludes my opening statement. Thank you, and I will be happy to answer any questions. [The prepared statement of Mr. Spearman can be found on page 73 in the appendix.] Chairman Roberts. Mr. Tonsager. STATEMENT OF HON. DALLAS P. TONSAGER, MEMBER, FARM CREDIT ADMINISTRATION BOARD, AND CHAIRMAN, FARM CREDIT SYSTEM INSURANCE CORPORATION BOARD, McLEAN, VIRGINIA Mr. Tonsager. Chairman Roberts, Ranking Member Stabenow, and members of the committee, thank you for the opportunity to testify today. I am pleased to now be serving a second term on the Board of the Farm Credit Administration with my distinguished colleagues, Chairman Spearman and Board Member Hall. I have previously served on the FCA Board from 2004 to 2009. At the outset, I want the committee to know of my absolute commitment to the continued safety and soundness of the Farm Credit System as we navigate through the downward cycle in the agricultural economy. Rural America and the Farm Credit System are important to me, both in my role as an FCA Board member and in my personal connection to farming and rural America, as I was raised on a farm in South Dakota and was engaged in farming for over 40 years. The Farm Credit System, which is cooperatively owned by farmers and ranchers, was well positioned to persist through the 2008 financial crisis. In fact, the System's capital and liquidity positions, risk profile, stress testing capacity, and lending practices in the agriculture sector have all significantly strengthened over the last eight years. With the challenges now facing the agricultural economy, FCA's oversight role and the Farm Credit System's purpose to be there for agricultural producers and rural communities in bad times as well as good times are more critical than ever. I lived through the difficult years in agriculture in the 1980s and well understand the importance of the Farm Credit System to farmers and ranchers in such times. I have great confidence in the FCA's ability to ensure that the Farm Credit System institutions remain a source of sound, adequate, and constructive credit to those farmers and ranchers struggling to keep their ag operations going and remain in their rural communities. In addition to my duties as a Farm Credit Administration Board member, I serve as Chairman of the Farm Credit System Insurance Corporation along with my colleagues on the FCA Board. Congress created the Insurance Corporation to ensure the timely payment of principal and interest on the debt issued by the Farm Credit System banks. Congress also gave the Insurance Corporation the responsibility to provide assistance to troubled Farm Credit System institutions and to act as a conservator or a receiver for failed System institutions. By law, the Insurance Fund must maintain a secure base amount equivalent to two percent of the adjusted insured obligations of the System banks, and there is currently $4.1 billion in the Insurance Fund, an amount that is marginally under the base amount. This fund acts as a safety net for the farmer- and rancher-owners of the Farm Credit System in addition to the protections afforded by the joint and several liabilities agreements of the System banks. That concludes my opening statement. Thank you to the committee, and I look forward to your questions. [The prepared statement of Mr. Tonsager can be found on page 98 in the appendix.] Chairman Roberts. Mr. Hall. STATEMENT OF HON. JEFFERY S. HALL, MEMBER, FARM CREDIT ADMINISTRATION BOARD, McLEAN, VIRGINIA Mr. Hall. Thank you, Mr. Chairman, Ranking Member Stabenow, and members of the committee. My name is Jeff Hall, and it was just a little over a year ago I sat before this committee, and I appreciate your confidence in me in appointing me and I appreciate the chance to come back today as a Board member of the Farm Credit Administration. The Farm Credit Administration is an independent arm's length regulator of the Farm Credit System and Farmer Mac. Our agency examines System institutions for safety and soundness and compliance with laws and regulations. FCA exercises increased oversight with institutions at a higher risk. The Farm Credit System was created to provide a permanent, reliable source of credit to U.S. agriculture. When Congress enacted the Federal Farm Loan Act in 1916, credit was not always available and affordable in some rural areas. Many lenders avoided farm loans due to the inherent production and price risk of agriculture. The foundation of the Farm Credit System is its cooperative structure. Agriculture has changed in many ways and will continue to change, but the guiding principles of the cooperative model continue to stand the test of time. Member ownership and governance are key ingredients of the System's success. As Chairman Spearman has reported, the Farm Credit System is safe and sound. The health of the System today is due in no small part to the actions of this committee. During the agricultural credit crisis of the 1980s, Congress made some very important changes to the Farm Credit System that gave it the opportunity to emerge stronger and better able to serve rural America and meet its mission. As you well know, farm income is projected to decline for the third consecutive year. Virtually all sectors of commodity prices are lower than any time in the last five years. Farm debt continues to increase, and many farmers and ag businesses have been forced to draw from the equity they had built. Fortunately, agriculture has entered this down cycle from a position of strength, with historically low interest rates helping to hold down debt levels. There are challenges ahead and the Farm Credit System is well situated to remain a reliable source of credit. Chairman Roberts told me as I sat at this table a little over a year ago to get outside of Washington and go meet people in the System. I have prioritized my travel to meet with borrowers, association boards, and employees who are dealing with these challenges on a daily basis. Also in my visits, I learn about the consequences of the rules and the regulations imposed by the Farm Credit Administration. My visits have helped me greatly in my role as a Board member. Without the input from the regulated community, my job would be much more difficult. I like to say, we will not always agree, but I will always listen. At our March Board meeting, the Farm Credit Administration Board approved a new capital rule which will require the System to hold on to more and higher quality capital. By raising the capital requirements, farmers' investment in their associations is better protected from impairment. The Farm Credit Administration Board also adopted guidance to the System on the use of similar entity lending activity. I understand that reputation risk is a valid concern and adopting this guidance will increase the examination and reporting requirements. It gives FCA an added tool to monitor similar entity lending activity. It also gives us an indication whether additional guidance from this Board is necessary. Both the capital rule and the similar entity guidance are good examples of the additional focus on internal controls. From the beginning of my term, Chairman Spearman has made internal controls a stated priority. Modern agriculture and the financial service industry are more complex than ever. The Farm Credit Administration and the System will continue to strengthen the internal controls in order to maintain your confidence and carry on the legacy of service to American agriculture and rural communities. Thank you again for inviting me to testify. There are many challenges that face the System. Having been a Federal Land Bank borrower in the 1980s, I can say with confidence that the System is much better and much stronger than it was 30 years ago. I do not consider myself an advocate for the Farm Credit System. I do consider it my responsibility to ensure a safe and sound source of credit to eligible borrowers and owners of this cooperative. When the System is safe and strong, the agency is doing its job as a regulator, and the benefits of a dependable, competitive source of credit will help bring prosperity to rural America. Thank you, Mr. Chairman. [The prepared statement of Mr. Hall can be found on page 70 in the appendix.] Chairman Roberts. Thank you all again for appearing today before our committee and for your statements. Mr. Spearman, the reports I cited in my opening statement by the Kansas City Fed and Kansas State University paint a very bleak economic picture for farmers all throughout the country. I do not like saying that and you probably do not like agreeing to it. Now, I served in Congress in the 1980s, during the last farm crisis, the big one, and I am confident that nobody-- nobody--wants to see a repeat of those tough times. Today, what are the conditions of the farm economy and how do they differ from those present 35 years ago? I am hopeful they show we are not headed for another crisis. Even more importantly, what safeguards are in place to ensure our farmers are protected in the event we do see two, three, four, five more years--I hope not, but if that is the case--of low commodity prices? Mr. Spearman. Mr. Chairman, thank you for that question. The Farm Credit System, as the three of us all stated, is well capitalized at this time. It is well positioned to withstand the possible downturns in the agriculture economy that are looming. The capital position is very strong. There is 16 percent capital, with $48 billion or so, roughly, in capital. The asset positions are strong in the System. The managements that are currently at the institutions are, I do not want to say a lot better, but they are kind of more informed, I think, today than they were back in the 1980s. The earnings are--were very well in the System, as you can see from our financial statements, and liquidity ratios are over the top. In fact, they are more than twice what the regulations require of 90 days. I think that the System is well positioned, again, to withstand any downturns. Of course, there could possibly be some black swans out there that we are not aware of, but we have systems in place at the agency to keep us abreast of what those might be, and as an agency, we will take measures that will end up protecting the System more. Thank you. Chairman Roberts. I appreciate that, Mr. Spearman. Mr. Tonsager, your role as Chairman of the Farm Credit System Insurance Corporation is to ensure proper maintenance of the Farm Credit Insurance Fund in order to safeguard the timely payment of principal and interest on the debt issued by the System banks. This funding comes from a collection of premiums from System banks. As you noted in your written testimony, in 2013, when times were pretty good, the Farm Credit System Insurance Corporation and the Federal Financing Bank entered into a $10 billion line of credit agreement. Please explain what financial conditions within the Farm Credit System prompted this decision when we were in a much better situation, and what authority exists allowing the Insurance Corporation to take out this line of credit. Mr. Tonsager. The line of credit can only be used in times of economic emergency for the United States in general, not for agriculture specifically. It is a liquidity line designed to ensure the flow of capital to the Farm Credit System should there be an event similar to 2008 that might occur again. We simply cannot use it unless the Federal Financing Bank agrees with us, that it cannot be used in the event that the System fails to fund, or properly manage itself. It can only be used in those economic emergency occasions. Similar lines of credit are available to the FDIC and to the National Credit Union Administration. The agency at that time felt it prudent, after watching what occurred in the 2008 time frame, to make this line of credit available and to have it there to assist us should there be a liquidity event within the markets. Chairman Roberts. Well, that was not only prudent, but you were a prophet, these rather bleak times we are in. I appreciate that. Let me ask a question of the full panel, so anybody is welcome to answer. Do not be bashful. One of the main criticisms we hear about the Farm Credit Administration is that FCA's oversight of System lenders' loans is not thorough enough, that loans are being approved that fall outside the System's charter or scope. How do you respond to that criticism, and furthermore, how does the Farm Credit Administration execute its regulatory duties to ensure that System members are able to serve farmers, but in a way that complies with the statute? Feel free. Mr. Spearman. Mr. Chairman, what you may be referring to there is the similar entity lending process that the System is involved in. This was a practice that was included in the Act in 1992 as a risk mitigator. There are--one of the primary criteria for participating in that program is that they be ineligible loans that are functionally similar. There are limits on what the participation that these institutions can involve themselves in these type of loans, and the agency drafted and approved a bookletter to provide guidelines for the System to actually update their procedures and get more approval from the Board on any of these loans that are entered into. The bookletter also addressed the possible reputational risk with involving themselves in these type loans. Chairman Roberts. I appreciate that. Mr. Hall, in your testimony, you talked about a capital rule recently approved by the Farm Credit Administration Board this past March, just a couple of weeks ago. Can you expand a little further on this rule, the rationale for approving it, and explain what you hope it will accomplish. Mr. Hall. The primary goal is to make the System more comparable to other banking institutions. The money comes from Wall Street, and when you have common terms and common factors that people on Wall Street look at buying paper, or buying the System's paper, this comparability was an important step. It is a program that I think the agency has been involved in for about three or four years, proposing rules, and in March, the Board approved the adoption of that rule. Chairman Roberts. I appreciate that. Senator Stabenow. Senator Stabenow. Thank you very much, Mr. Chairman, and again, thank you, to all of you. I wonder if you might just expand a little bit, because I am sure we are going to hear more about similar entity authority and some of the high profile cases that there have been concerns raised about, if you could expand a little bit more on steps that you have taken to address that, and again, how this mitigates risk from your perspective. Any of you are welcome to answer that, so Mr. Spearman. Mr. Spearman. Okay. I will start, Senator. Thank you. As I mentioned previously, some of the steps that have been taken have been to raise or heighten awareness that these type loans may create some controversy. There is--the Act does permit these type loans as a risk mitigator, and the way that it does is that the System is a monoline lender. They have to be there for agriculture in good times and bad. The guidelines that we put out in our bookletter are that the Board needs to be more involved in these type loans and that there--the policies and procedures are examined by our examiners to make sure that they have been updated and that there is--the institutions are keenly aware that these are controversial type loans. Senator Stabenow. Would anyone else like to respond? Yes. Mr. Tonsager. Yes, if I could. Thank you, Senator. I would just like to mention that Congress over the years has provided several elements within the Farm Credit Act that require banks and the Farm Credit System to work together, and this is one of those elements. For every dollar that is invested in a similar entity loan, there is a dollar from a private banker. These loans cannot be done without a private banker involved with it, and there has to be at least a 50 percent involvement by another party other than the Farm Credit System. I believe there has been, there is some misunderstanding about these kinds of loans. They have been authorized for many, many years. They include, for CoBank's perspective, utility loans, communication loans, and other types of loans. You not only broaden the capacity of the System by having these loans, you strengthen the relationship with bankers in this particular area and other areas of the System. There is literally billions and billions of dollars done together with the banking community each year and thousands and thousands of transactions between the Farm Credit System and banking. Senator Stabenow. Thank you. Mr. Hall, did you want to add anything? Mr. Hall. The only thing I would add is the reason behind the similar entity lending back in the 1990s was to allow the institutions to broaden their base of risk. They are functionally similar. They are not eligible loans, so I think that is where some of the confusion comes in. But, I think that we have monitored as an agency similar lending activity. We have asked for additional oversight and we will continue to monitor as an agency to make sure it is proper and appropriate. Senator Stabenow. Thank you. Changing a little bit to a different area of concern in terms of risk in agriculture, and that is the decline in the total number of farms, which is certainly something that we are all concerned about. According to the USDA, from 2014 to 2015, the United States lost more than 18,000 farms and over one million acres of farmland. The trend in the average age of the American farmer, as in all of our areas in the economy, the average age is 58 years old. I wonder if you might speak to and describe some of the work that your institutions are doing to support new and beginning farmers, which are very, very important, obviously, to all of us. Mr. Spearman. Mr. Spearman. Thank you, Senator, for that question. Yes. The YBS program that you alluded to was a program that was added to the Act in the early 1980s and it was added with the purpose of providing a vehicle to bring more young, beginning, and small farmers into the agricultural sector. Some of the provisions that are provided under that Act is that there could be lesser interest rates charged in the underwriting process. Education is provided for those folks who are not very familiar with some of the operations of agriculture. We have passed a bookletter that encouraged farmers who borrow from the System to be more involved with the youth aspect of farming. The lenders are--the bookletter addresses the fact that the System institutions who lend the money actually survey their territories and make sure that they are addressing underserved folks within the territories. Senator Stabenow. Thank you. Would anyone else like to respond to the role that you have with new and beginning farmers? Yes, Mr. Tonsager. Mr. Tonsager. I think it has been, for the Systems mission, it is a significant success story to look at the data that has been accumulated regarding the growth in those loans in those areas, and I think the System has taken this very seriously, in my discussions with them, the requirement to do this, and they have taken it to heart and actually aggressively pursued this program. They each have their own individual programs designed for their region. We examine for them to execute those programs. The report is given to us each year, and we, in turn, report to Congress each year about the results of that effort. Senator Stabenow. Great. Mr. Hall, did you want to add anything? Mr. Hall. Just one comment. Based on my previous experience working with the Farm Service Agency, I note there are a lot of partnerships between the System and the Farm Service Agency on guaranteed programs that are available. I know the System is very active in working with other partners and making sure that this population is served. Senator Stabenow. Thank you, Mr. Chairman. Chairman Roberts. Senator Tillis. Senator Tillis. Thank you, Mr. Chairman. First, I am from North Carolina. We have a highly diversified farming community and some farmers are doing pretty well right now, but others are struggling. I just want to echo that we need to be careful. If this downturn in prices continues, we could see a greater number of farmers harmed over time and we need to make sure we are working to get things back on track. Second, I want to talk about some of the future risks to farmers and the agricultural sector. It may seem odd asking this panel about GMOs, but is the Farm Credit Administration looking ahead and seeing how the different fixes for GMO labeling will affect farmers? If we do not fix this labeling issue, then people like Kellogg's and Campbell's, and a number of other major producers of food, are going to start reformulating. Over the course of the next few years, sugar beets will end being an input to most sugar in favor of sugarcane. Over 90 percent of all the corn grown in the United States is a product of GMO. I do not know what Campbell's is going to do to replace that in their soups. The same refomulatory dilemma that sugar and corn present will happen, to a certain extent, with white potatoes. In 2014 53 percent of all the sweet potatoes grown in the United States were grown in North Carolina. Roughly seventy percent of the exports were from North Carolina. None of them are GMO. I assume that Campbell's will decide to replace white potatoes with sweet potatoes. It would be good for North Carolina, not necessarily good for the white potato growing states. The point that I am making is this labeling issue represents a major risk in terms of demand in the near future. Has FCA looked at this in terms of your portfolios to analyze what it means if a labeling law completely shuts demand down for certain commodities, say, sugar beets? Mr. Spearman. Senator, a very good question. What we do as a safety and soundness regulator is to try and examine all risks. We do have economists on staff who report to us regularly---- Senator Tillis. Have these economists done analysis on the particular policy and if Congress does not act, what the near, intermediate, and long-term effects will be on some of these commodity producers? Mr. Spearman. Well, they analyze all risks within the System, some known and some unknown to others---- Senator Tillis. Would it be possible for my staff to get in touch with you to see to what extent they recognize the impact reformulation by Campbell's and Kellogg's and the major food producers will have on the farm economy? These food companies will increase demand that will exceed our own capacity, say, for sugar, corn, soybeans. If these commodities that are grown in the United States are not available, they will source them from other parts of the world. They will find other sourcing inputs, and it seems to me that will have a devastating impact on commodity prices. Unless economists have taken that analysis into account, recognizing this reformulating starting right now, it will start on steroids in July and August if nothing is done regarding this labeling issue. It is not one of these five-or ten-year market disruptions. This is probably a one-or two-year market disruption. I would be very interested in getting any analysis on how ingredient reformulation would affect the portfolio of farmers who are in the crosshairs of these target commodities. There is no question in my mind that the major food producers, those who put cans and boxes on the shelves, are going to reformulate to the maximum extent that they can. When you are talking about commodities that are in the 90th percentile in terms of GMO products--safe products, I might add, at least according to the FDA, the Department of Agriculture, and the EPA--what are farmers going to do? Who are they going to sell to? If they do sell, with the demand being down, to what extent does this affect a portfolio, a financial portfolio in terms of farmers ability to pay their bills? I do not expect you to answer that question now. You probably did not expect to get this question, and frankly, when I came into the room, I did not expect to ask the question. [Laughter.] Senator Tillis. But, this is an example of risks that are dependent upon Congressional action or inaction, and I think it is something that you need to look at, because this labeling issue is a potential looming crisis for some of the farmers out there. I will follow up with questions to the agency so that we can get specific information on how this could be destabilizing to the sugar beet growing states, the corn growing states, the potato growing states, the soybean growing states. I mean, it is an equal opportunity disrupter and I think we need to get some financial analysis behind it. Thank you. Thank you, Mr. Chairman. Chairman Roberts. Let me say before I recognize Senator Bennet, on behalf of the Ranking Member, our distinguished Ranking Member, that the responsibility and requirement that Mr. Tillis just raised with regards to agriculture biotechnology, note the difference. As opposed to GMO, it is just called agriculture biotechnology, ABT. It is a good question, and it is a challenge that the Farm Credit System ought to be thinking about, as well as every lender that we have at our disposal within the world of agriculture. That responsibility is right here in this committee, and also right in the Senate of the United States. The House has acted. We will act. The distinguished Ranking Member and myself and staff have been working overtime to try to come to an agreement that we could bring to the floor where we could get 60 votes. But, I think Mr. Tillis' admonition is a very good one, more especially to everybody in the farm lending field. Reformulation is a pretty fancy Senate word for we are not going to buy what you are selling, and that is happening today, as we speak, with the sugar beet producers. We know that we must act. Everybody on this committee knows we must act. I want you to know that, but I also want you to know that Mr. Tillis has raised a very, very important point. Senator Tillis. Yes. Mr. Chairman, if I may, it is just that we need to put a face on who is affected by this policy, and it is farmers. It is farmers that have got crops in the ground now. They have got plans to put crops in the ground next year. The big businesses will find out what they can buy to avoid what I think is ill advised policy, and the first evidence of this is in Vermont. They will be able to make the change because they have the resources and the reach to do it. The farmers do not. Thank you, Mr. Chairman. Chairman Roberts. Senator Bennet. Senator Bennet. Thank you, Mr. Chairman. Thanks for holding this important hearing, and I wish you and the Ranking Member well in your negotiation. Time is not on our side. I want to thank the witnesses for being here today and for your prudent oversight of the FCA. Mr. Chairman, you said that the mission of the FCA is to serve farmers and ranchers in good times and in bad times. As has been said, farmers and ranchers across the country are facing real financial hardships spurred by low commodity prices. Producers are bringing in less revenue, but their overall costs of farming have increased year over year and are forecasted to increase next year, as well. On top of that, persistent drought conditions have added extra volatility, which makes it clear to me that farmers need all available options when it comes to lending, and the Farm Credit System was designed to mitigate against these fluctuations and the risk posed by farming and ranching. I wonder whether you could describe the role of the Farm Credit System, particularly in tough economic times, what role it plays in rural communities facing these economic hardships, and I would be happy to hear anybody on the panel address them. Mr. Tonsager. Sure. Thank you, Senator. I think that the obligation was made clear to us in the 1980s, in the struggling time we had back at that time, that there needed to be a level of strength and commitment, and in rural America, these are farmer-owned cooperatives. These farmer board members are extremely committed to their communities, and that is number one, that basic governance that occurs within that. I think the System has an obligation to make sure the System remains safe and sound, that it is a reliable lender through that time, but it also has an obligation to make sure to work closely with producers, and I think they have developed pretty good strengths in their loan officers and how they work with clients and how they make sure they get the best opportunity for financing. I think that the financial strength of the System and the capacity of the System in their lending and working with producers is going to make a lot of difference. In the 1980s, we saw a lot of producers that simply could not get the credit they needed at the time, or they were overextended credit, and so their income was replaced by credit and they lost ground. I think one of the critical elements of this is how loan officers, both in the Farm Credit System and the private sector, work with those individual producers and help them recognize the circumstances they are in, fund them if they possibly can, or help work with them if it becomes too challenging. It is a tough, tough thing that happened that time. We lost thousands of producers, and many of them were fundamentally personally harmed in the process of doing that. Additionally, I would like to add that there are borrower rights involved in this. The law requires that the Farm Credit System provide rights to borrowers in the event they are foreclosed on or acted upon. By law, a process must be followed with individual producers when the time comes to make decisions about their credit. Senator Bennet. Thank you for that thorough answer. Is it thorough enough? I will ask a second question, then. Last year, Colorado producers exported more than $1.8 billion in farm goods to countries around the world. Some Farm Credit institutions like CoBank, which is headquartered in Colorado, are engaged in export financing to support producers as they look to markets abroad. Could you talk a little bit about the sort of growth that we are seeing in export financing for ag in this country. Mr. Hall. I think part of the change we have seen is previous USDA programs like GSM programs have been replaced or substituted with other private credit funding, and I think the ability for CoBank, in particular, to step up and add that kind of financing option helps improve the export market. Obviously, when you are dealing with billions of dollars, you are going to have to have some line of credit to be able to participate in the international markets. Senator Bennet. It is becoming increasingly an important part of our rural economy, these exports. Eighty percent of the wheat that is grown in Colorado is exported from Colorado. Our dairy is exported, as well, and we are looking to open up these new markets and this can help. Thank you, Mr. Chairman. Chairman Roberts. I want to remind members that we will soon have three votes. We are going to keep the hearing going by alternating who holds the gavel. I appreciate everybody's help and patience. Senator Ernst. Senator Ernst. Thank you, Mr. Chairman. Thank you, gentlemen, for joining us here this morning. I would like to talk about different groups that might be given funding through the FCS, groups like veterans or other minority groups. Are there certain areas that maybe you target or would like to see more participation, whether it is women farmers or ranchers? If you could delve into that a little bit, maybe talk if you have some of those programs where you are looking at veterans or others that want to get into farming, ranching, any opportunities that we might be able to express to our constituents. Mr. Spearman. Thank you, Senator. The YBS program provides an excellent entre for nontraditional agriculture. That program, it was structured for young, beginning, and small, but also we have expanded it to some degree with our rule, our diversity and inclusion rule that we passed a couple years ago, where we requested that the mandated institutions look at their system, look at their--the area that they operate in, their district, and because the mission of the System is to serve all qualified creditworthy folks. The System is doing that, and we are examining for it and we are definitely seeing a lot more improvement, at least since I have been on the Board, particularly in veterans areas. Also, thank you for your service. Senator Ernst. No, thank you. No, I appreciate that. Any other thoughts or examples? Mr. Tonsager. I would like to say the FCA Board has been learning itself. We traveled together to Pine Ridge Indian Reservation last year to explore the challenges of lending in Indian country and got a great experience from that visit. Senator Ernst. Very good. Yes, Mr. Hall. Mr. Hall. I would just add, I visited Texas just a few months ago and visited with a young producer who was a veteran, did not have much agriculture experience, but has become very successful as a borrower in the Farm Credit System. He was complimentary of the support that he receives and the other educational programs that are available. I will also mention another example closer to home, from Kentucky, a young lady who used to be an employee of the Farm Credit System. She and her husband are involved in locally grown, community supported agriculture---- Senator Ernst. Oh, good. Mr. Hall. --and recently recognized as one of the farm women of the year, and I know that they are System borrowers. There are great examples out there, but I will say there is always more that we can do. Senator Ernst. Very good. Well, I appreciate your work with both veterans and others that might have challenges getting into farming. I think it is really important that the opportunity exists out there for them, so thank you for doing that. Senator Tillis had brought up an interesting perspective with ABTs, or GMOs, whatever the term might be that we decide to use for different types of commodities. But, that does create a wrinkle that is out there. Whether you are facing challenges with legislation, whether you are facing challenges with drought or other natural disasters, which you really cannot plan for or predict, but with the outlook of the ag economy over the next several years, what are the steps that you can take within the Credit System to prepare for that? Maybe you could explain how that works. Mr. Spearman. Well, Senator, as a safety and soundness regulator, as I mentioned previously, we try to examine and anticipate all risks that may happen. In fact, our examinations are risk based. We try to look at what problems that might be on the horizon and we try to develop rules and regulations that would help us to do a better job to make sure that the System remains safe and sound. Senator Ernst. Okay. Are you able to adapt quickly in those situations if the rules are going through the Board, reacting to the situation on the ground, whether it might be a drought or other crisis that you might see? Mr. Spearman. Well, I think ``quickly'' may be kind of relative. Not fast enough for me, personally, but we do spend time with it and we do try to plan and try to see if we can help the System do a better job in helping distressed areas. Senator Ernst. Very good. Well, thank you, gentlemen. My time is expiring. Back to the Ranking Member. Thank you. Senator Stabenow. [Presiding.] Thank you very much. Senator Casey. Senator Casey. Thanks very much. I want to thank you for your testimony. Chairman Spearman, I wanted to commend you on the answer that you gave about beginning and small--young and small farmers and the work you are doing there. I wanted to also raise, though, a question about some of the new risks or new challenges that you face. I know we have a lot of evidence that, in light of what happened in the 1980s and the difficulties then, that you can learn lessons from that that you can apply. I would have to assume, and correct me if I am wrong, though, that because of technological innovations and both the technology-based financial and ag system we have now, that some of those lessons may not apply because the technology and other strategies have changed. In light of that, if that is true, in light of that, how do you assess some of the risks you are going to face going forward that might be more based on the limits of the technology or based upon other challenges as opposed to the old 1980s problems that were encountered then? Mr. Spearman. Well, Senator, as I mentioned previously, our examinations are risk based. Our examiners make a determination as to where the greatest exposures might be and our resources are pretty much concentrated in that area. You bring up a very interesting point there about technology. Cyber kinds of threats now are very apparent in almost all sectors of our economy. One part of our examination is to spend time in the IT area with the institutions that are being examined, and if issues are found, corrective action is mandated. Senator Casey. Well, I hope if, when you encounter those, that you bring them to our attention and ask for resources where appropriate. I also wanted to raise a question regarding when you assess that credit stress level in the System's loan portfolio is within, well within risk, within the risk bearing capacity, in light of that, but also when you reference declining protein and dairy product and grain prices driving a decline in profitability, I guess it follows from that that you will experience maybe moderate loan growth. If you could just pinpoint just for 2017, as best you can, what is your outlook just in terms of 2017 and loan repayments. Mr. Spearman. Well, Senator, one of the points that we look at when we make determinations for where to focus our efforts in our examinations is what is going to be anticipated in the allowance of doubtful accounts for the entities that are being examined, and we also look at, because of payback abilities there that could have a deleterious effect on an institution there. If we see an area of stress in that area, then we would indicate to the institution that they may want to look at their underwriting standards there because there may be something there that they are overlooking when they make a loan. Senator Casey. I appreciate that, and I will have some questions for the record for the witnesses in the interest of time. Thanks very much. Senator Stabenow. Senator Brown. Senator Brown. Thank you, Madam Chair, and Senator Roberts, also. Mr. Tonsager, if you would answer this, and then if others want to follow up. The farm economy continues to evolve, and we have heard discussion, obviously, about prices in the months and years ahead. Touch for us on how Farm Credit is equipped to withstand a possible higher delinquency rate on loans while ensuring continued access to credit for rural America. What is the state of the insurance fund? How much capital? Is there sufficient capital in the system? Share your thoughts about that, if you would, Mr. Tonsager. Mr. Tonsager. Well, if I could start with, I think there were lessons learned in the 1980s. Coming out of the 1970s, many farmers were very highly leveraged, so there were programs that allowed them to borrow a lot of money. After that, the crisis of the 1980s, the amount of debt leveraged was dramatically reduced. I think the System did a pretty decent job, as did most lenders, about not over-leveraging credit to current borrowers, and I think that is a big difference coming into the current circumstances we are in. Capital-wise, there are about $50 billion worth of capital in the Farm Credit System and about $250 billion worth of loans. The total leverage comes to about 16 percent, which is a very strong position to be in overall for the position of the System. Again, as I mentioned earlier, I think the ability of working with people on how they borrow money and how they work through their challenges is fundamentally different than it was previously. There is a lot of relationship lending done where that engagement is part of that. I think it is incumbent on the agency to be very diligent and to closely watch the situation evolve. As Chairman Spearman said, the payment rate is excellent still--the debt is being repaid. We have very low need for allowances for losses at this point. But, that can change quickly as we go into these coming years, and so it is necessary to look for that. I think it is going to be a balancing act for the agency on how hard we press the System to work with producers, whether we stress the safety and soundness of the System or the safety and soundness of producers. I think we have to keep learning. We have to diligently watch the situation evolve and watch what the System does in working with producers. Senator Brown. Thank you. I think, obviously, if we learned anything from 2008, it is the importance of capital, and that is Fannie and Freddie and it is Farm Credit and it is the nation's major financial institutions. Let me shift, and for all three of you to answer this, if you would. There has been increasing interest in my state, especially in the city I live in, Cleveland, in locally grown food. In places like Senator Stabenow's Detroit and in my large urban areas, it is an increasingly viable use for land. Do you see Farm Credit institutions involved in these areas? What do we do to ensure that these non-traditional farmers have access to credit? Mr. Spearman. That is a very good question, Senator. That is particularly an interest of mine. In fact, I initially met Senator Stabenow up in Detroit once when I was at a convention there for locally grown and urban agriculture issues that were being discussed. The entre into urban agriculture, the way that I look at it is that you are expanding the pie. I think it could help the System grow by getting more directly involved with the urban agriculture. As my colleague mentioned there, he visited a place in Texas, and I also went to a place in Texas where I saw a young farmer who started out in his backyard with a little garden and now, through the help of the System, he has 200 acres and he is involved in the CSA program, and one of his major customers is Whole Foods. Getting out and seeing what is actually happening out in the field is something that I hold near and dear and I would like to see more of it. Senator Brown. Mr. Tonsager or Mr. Hall, any additional thoughts on that? Thank you, Chairman Spearman. Mr. Hall. I would just add a couple of comments. One of the things that the FCA has required is for individual institutions to include this in their regular business planning and we examine to that. In addition to that, many of the institutions actually have local food coordinators where they work with people within the system to help support the local producers. Senator Brown. Okay. Mr. Tonsager, anything to add? Mr. Tonsager. Yes. I think we are very much focused on the producer side of this. USDA, the Marketing Service, Rural Development, and other agencies, they offer a lot of resources to the co-ops or the groups that want to establish niche or emerging markets. I think the System is working closely with them to help make sure there is a flow of product. Senator Brown. Understand--and, obviously, you are more rural oriented than urban oriented--my city of Cleveland had a population the year I was born of about 950,000. Today, it is under 400,000, and there are lots of opportunities, maybe--I guess it is the right word--but opportunities for rural agriculture that people are really taking advantage of. There are a lot of kind of trendy new restaurants that want to source locally and can really matter. I just ask all three of you to always be aware of that. It is a relatively small part of your portfolio, but a crucial area for a lot of the things that you all three believe in, so thank you. Senator Grassley. [Presiding.] I guess I am the only one at the table now. [Laughter.] Senator Grassley. First of all, even though Chairman Roberts is not here, I think it is very good for all of us to say it is a very appropriate oversight hearing to have, and particularly with regulators to be effectively enforcing our rules and regulations that are designed to preserve an important System for agriculture. Particularly, this hearing is appropriate because of the price of, maybe I should not say all agriculture products, but at least in Iowa where we are such a corn and bean state, with the production of those being way below the cost of production. We count on people like you keeping the System very sound. I will ask any one of you that want to answer this, but I do not expect all of you to have to get in, how detailed are the audits of the Farm Credit Administration performed? By that, I mean does the Farm Credit Administration randomly pick different loan portfolios and examine them line by line to see if what is being reported matches up with the actual risk, or are the audits more at the 30,000-foot level in the nature of looking at totals and final projections? Mr. Spearman. A very good question, Senator, for a regulator. I would say off the top of my head, it is all three. The primary focus of the examinations is risk-based, though, to see where could the System be at more jeopardy of not remaining safe and sound. Each institution is examined once every 18 months--a report is issued once every 18 months, but the examinations can be ongoing all year. The one bank where we see the most risk is examined once a year. These reports are issued once a year on that institution. That is pretty much the approach that we take in our examination. Senator Grassley. You wanted to say something. Mr. Tonsager. If you do not mind, I would like to add to it. The examiners are extremely well trained; years of training are involved. The data comes from each institution all the time, so we have an ongoing look at the System's progress. Each institution, by statute, must be done every 18 months at a minimum. We have sat down and gone through with an examiner demonstrating what they go through in the examination process. It is extremely thorough. Each examiner reports to the boards of directors of each institution privately at the end of the examination to make sure the boards of directors are well aware of what has occurred in the examination. It is a very, very thorough process. Senator Grassley. Well, then, would it be--I gave two alternatives. Would it be assumed that your answer to my question that you randomly pick different loan portfolios and examine line by line to see if what is being reported matches up with actual risk, is that---- Mr. Tonsager. Yes. It is---- Senator Grassley. Is that the way it is done? Mr. Tonsager. Well, it is not random, it is planned. Senator Grassley. Okay. Now, my second question is, has the Farm Credit Administration ever required an institution to divest a loan that was not appropriate to the mission of the Farm Credit System? Mr. Hall. Yes, sir, it has. There have been instances that the FCA has taken action, corrective action, and asked for an institution to actually divest. While we cannot give you specifics here, that has happened, yes, sir. Senator Grassley. Okay. My last question. Before I ask the question, I hope I am right. By law, Farm Credit lenders cannot take deposits. However, many advertise the ability of members to, quote, ``advanced conditional payment accounts.'' One of these accounts has an online advertisement that as of yesterday stated a person could, quote, ``earn interest without tying up your funds,'' end of quote. Quote again, another one, ``easy access. Your funds are always available to you. Go online and use the phone.'' And the last quote, ``complete liquidity, contrary to CDs,'' end of quote. Those are online advertisements. Could you explain to me how these accounts are any different from checking or savings accounts? These Farm Credit accounts seem to function exactly like checking and savings accounts based upon the way that they are being marketed. Mr. Spearman. Senator, these accounts are not checking accounts. They are--this particular procedure is allowed for under the Act and they are actually prepayment or draft accounts where borrowers from the System can put funds in to pay their loans down. Senator Grassley. Then you are telling me--I think you just told me that they are not like checking and savings accounts, even though the advertisements online seem to lead people to believe that. Mr. Spearman. I would have to kind of see the advertising, but, no, they are not checking accounts. Mr. Tonsager. Senator, they are not insured by the Federal Deposit Insurance Corporation. They are at risk. Those funds are simply accounts that allow producers with long-term credits to build up their repayments and have these funds still available to them. Senator Grassley. Mr. Chairman, I have asked the questions that I have to ask this panel. Just in case I do not get back, since we have got two more votes, just in case I do not get back for the other panel, I have a constituent, Mr. Verlin Barker here from Oelwein, Iowa, and I would like to have you ask him a couple of questions I was going to ask if I do not get back. Chairman Roberts. [Presiding.] I would be delighted. Senator Grassley. Thank you. Go ahead. Chairman Roberts. Thank you. Senator Klobuchar. Senator Klobuchar. Thank you very much, Chairman Roberts, and thank you to all of you. Mr. Tonsager, we know how important credit is to rural America including the loans, loan guarantees, other financial tools offered by the Farm Credit System, as well as commercial community and farm banks. We know that each of these lenders provides about 40 percent of all farm debt, whether it is financing for farm real estate or for farm production. Often, the Farm Credit System and our commercial and community banks work together on deals for the benefit of farmers, ranchers, and producers, and yet other times, Farm Credit banks provide loans that are non-agricultural loans. I have heard from a lot of our small banks from Minnesota that they believe there is an unfair advantage here because of how that is being handled. Could you explain what is happening and your view on this. Mr. Tonsager. Well, there are a couple of things to consider, I think. First, so, when the Farm Credit System is loaning to an individual producer, if that producer is a full- time farmer, the System can lend to him for all of his credit needs, including if he establishes other businesses. We have had some cases where farmers may choose to start another business of some kind and they are allowed by the statute to use the funds from the Farm Credit System for that purpose. It appears to some people as if Farm Credit is lending to those businesses without any link to agriculture. That is one key element, I think, that we run into from time to time about concern on that matter. Senator Klobuchar. Well, one thing that is always true in agriculture is that the price of commodities is changing and that is why we want to make sure that our end users and farm producers can safely use futures and options, and we have had some issues with this, as in rural America. It is also a reason why providing credit to the agricultural sector is complicated. About ten years ago, our grain elevator operators were facing some pretty big margin calls, as you know, and about two years ago, we saw price volatility in the swine market resulting in margin calls of about 300 to 350 million dollars. What role do the Farm Credit System banks play when there is volatility in commodity prices? Mr. Tonsager. I recall when that happened, and the System was able to help address that challenge for producers and was able to fund several billion dollars to meet the margin calls, primarily of grain elevators in that case, which were seeing a huge price increase--well, it would be less than ten years ago, I suppose--but it was seeing a huge price increase in a very large crop, so it was able to meet those needs. Senator Klobuchar. Mr. Hall, with experience in farming yourself, the same type of question. Do you think the Farm Credit System is prepared to handle the current volatility in agricultural markets, and how is the current market situation similar to those that occurred in 2007 and 2008, or how is it different? Mr. Hall. I think there are a lot of similarities and I think the system is prepared, and as examiners of the system, we want to make sure they are prepared as we go into periods of more volatility. I will go back even to the 1980s. I think one of the big differences between now and then is the cost of money. At that point, a lot of the farm income was going to pay off debt. I think farmers have paid down debt coming into this current period, and I think with lower interest rates, they are going to be able to work their way through it. I do not see a comparison to the 1980s, but I do see that there is volatility and bigger challenges for producers which present challenges to the System and us as examiners and regulators. Senator Klobuchar. Mr. Spearman, do you want to add anything about the volatility in the market and how you think Farm Credit is prepared to handle that? Mr. Spearman. Well, as my two colleagues have said, the System is well positioned, a strong capital position, strong liquidity position, strong earnings it is a lot different than what it was, I think. Back during the 1980s, there were issues with land, where property had been borrowed on and unfavorable underwriting standards that today cannot happen. There is--the underwriting standards are a lot more modern and a lot more favorable. There is a lot that is going on today there that just did not exist at that time. Senator Klobuchar. Back to you, Mr. Hall. I know in your testimony, you talk about reforms that have been made after the agricultural credit crisis of the 1980s and that those reforms came about because of that crisis. Do you think that there is a reason to make more reforms to the system now? Mr. Hall. At this point, I do not. It would not be our position as a regulatory agency to propose any reforms, but I do think that as a result of those things, things like restructuring of the system has made it much more efficient and better able to serve producer needs, and I think the similar entity lending was an important tool that this committee approved in order to diversify the portfolio of the System to help farmers, ultimately, by making sure that there is plenty of capital and credit available. Senator Klobuchar. All right. Thank you very much. Chairman Roberts. I thank the Senator for her questions. That concludes the first portion of our hearing this morning. Thank you, gentlemen, for appearing before our committee to discuss the state of credit in farm country and the role of the Farm Credit Administration in assuring our national Farm Credit System is both sound and operating within the bounds of the statute. To my fellow members, we would ask that any additional questions that you may have for the record be submitted to the committee clerk five business days from today, or by 5:00 next Thursday, May 26. We would now like to invite the second panel of witnesses to come to the table. [Pause.] Chairman Roberts. I would like to welcome all the members of the second panel. As you can see, we are in a process of having three votes on the floor of the Senate. I think to accommodate all members and to do this in a way that would be consistent with the time constraints that we have is that I am going to introduce--I am going to exercise executive privilege or Chairman privilege and introduce the gentleman from Kansas, and then if you would give your statement, and then by that time, perhaps the distinguished Ranking Member will be here or whomever. We may have to recess the committee until somebody comes back. But, at any rate, I am going to introduce Mr. Leonard Wolfe, and Leonard, then give your statement, and then, gentlemen, when you are introduced, if you could give your statement, we will let Senator Stabenow know what the order is. Mr. Wolfe, Leonard is the President and the CEO and Chairman of the Board of United Bank and Trust in Marysville, Kansas. I have to add, home of the famous black squirrel. [Laughter.] Chairman Roberts. I know that this is the home of the famous black squirrel because some gentleman dresses up as a black squirrel. Mr. Wolfe. It is not me. Chairman Roberts. I know that. [Laughter.] Chairman Roberts. But, he tapped me on my back and I turned around to discover a life-size black squirrel. I hope that the EPA and Fish and Game folks and Interior will not list him as being endangered. United Bank and Trust is a $600 million agricultural bank with 15 branches in nine northeast Kansas communities. Leonard is the past Chairman of the Kansas Bankers Association. He currently serves as Chairman of the American Bankers Association Agriculture Lending Task Force, no small task. A graduate of Southwestern College in Winfield, Kansas, Mr. Wolfe began his banking career in 1979, and first became President and CEO of a bank at the young age of 28. Leonard, I really appreciate your being here and representing our great state. Thank you again to the witnesses for appearing. Basically, we will rotate back and forth, so Leonard, why don't you proceed. STATEMENT OF LEONARD WOLFE, PRESIDENT, CHIEF EXECUTIVE OFFICER, AND CHAIRMAN OF THE BOARD, UNITED BANK AND TRUST, MARYSVILLE, KANSAS, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION Mr. Wolfe. Thank you, sir. Chairman Roberts, Ranking Member Stabenow, and members of the committee, my name is Leonard Wolfe. I am the President, CEO, Chairman of the Board for United Bank and Trust in Marysville, Kansas. We are the largest commercial agricultural lender in Kansas, second only to the Farm Credit System. I appreciate the opportunity to present the views of the ABA on credit conditions and availability in rural America. The topic of today's hearing is very timely. While farm and ranch incomes over the past five years have been some of the best in history, there is no question that the agriculture economy is slowing. Despite this, the banking industry is well positioned to meet the needs of U.S. farmers and ranchers. Interest rates continue to be near historic lows. And the banks have the people, capital, and liquidity to help America's farmers and ranchers manage through any turbulence in the economy. Importantly, with the farm bill in place, farmers, ranchers, and their bankers have certainty from Washington about future agricultural policy. In 2015, farm banks, defined as any bank with more than 15.5 percent of their loans made to farmers or ranchers, now provide over $100 billion in total farm loans. Small farmers rely particularly on banks for funding. Farm banks hold $48 billion in small farm loans, with $11.5 billion of that in micro small farm loans. Farm banks are healthy and continue to be forward looking, growing capital and increasing reserves. This provides flexibility to serve our nation's farmers and manage risk associated with any downturn in the agricultural sector. I would like to thank Congress and especially the Agricultural Committees for repealing the borrower term limits on USDA Farm Service Agency guaranteed loans in the last farm bill. Banks work closely with the USDA to make additional credit available by utilizing guaranteed farm loan programs. On the subject of USDA guaranteed farm loan programs, I believe that Congress needs to consider reforms to the programs, specifically to raise the cap on these loans due to the rising cost of agriculture along with the modernizing of the programs. The USDA Farm Service Agency guaranteed loans have allowed farmers to continue to access credit from banks like mine as they grow and assuring credit access for farmers across the country. We remain concerned, however, with one area of the agricultural credit market, the Farm Credit System. Over the years, the Farm Credit System has veered away from its intended mission and now represents an unwarranted risk to taxpayers. As a government-sponsored enterprise, it represents a risk to taxpayers in the same way that Fannie Mae and Freddie Mac do. The Farm Credit System was founded in 1916 to ensure that young, beginning, and small farmers and ranchers had access to credit. However, that is not its focus today. The Farm Credit System has grown into an enormous $304 billion System offering complex financial services. To put this into perspective, the Farm Credit System--if the Farm Credit System were a bank, it would be the ninth largest bank in the United States, and it is larger than 99.9 percent of the banks in this country. The Farm Credit System benefits from significant tax breaks valued at $1.3 billion in 2015, giving it a significant edge over private sector competitors. Moreover, the Farm Credit System enjoys government backing formalized by the creation of a $10 billion line of credit with the U.S. Treasury in 2013. It is shocking that nearly half of the entire Farm Credit System's portfolio is to individuals that each owe more than a million dollars. These are not young, beginning, and small farmers and ranchers. The System now primarily serves large established organizations that do not need subsidized credit. It is clear that the Farm Credit System has become too large and unfocused, using taxpayer dollars to subsidize large borrowers. We urge Congress to perform an autopsy on the system to ensure that its charter of helping young, beginning, and small farmers is being followed. If it is not, we urge Congress to remove the significant tax break provided to the System. Banks like mine are proud of the work we do to support our nation's farmers and ranchers. The agricultural community is a critical part of our economy and America's banks remain committed to serve it through good times and bad. Thank you, and I would be happy to answer any questions. [The prepared statement of Mr. Wolfe can be found on page 103 in the appendix.] Chairman Roberts. Our next witness is Mr. Gus Barker, President and CEO of the Community Bank of Oelwein, Iowa. Mr. Barker. Thank you, Mr. Chairman. Chairman Roberts. Just a moment. Mr. Barker. Okay. Chairman Roberts. I have got to say some other---- Mr. Barker. Oh, okay. Sorry. Chairman Roberts. --wonderful things on your behalf. Mr. Barker grew up on a small grain and livestock farm in northwest Iowa, always had the dream of taking over that operation. But with escalating costs and little capital, Mr. Barker was forced to begin his banking career in the 1970s and has served in senior management positions in community banks ever since. He now serves as an elected federal delegate for the northern half of Iowa for the Independent Community Bankers of America. Mr. Barker, thank you again for testifying and we welcome your statement. STATEMENT OF VERLIN ``GUS'' J. BARKER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, COMMUNITY BANK OF OELWEIN, OELWEIN, IOWA, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA Mr. Barker. Thank you, Mr. Chairman. As you stated, I am Gus Barker, President and CEO of Community Bank of Oelwein, Iowa. I thank you for the opportunity to testify on behalf of the ICBA, the Independent Community Bankers of America. Community Bank of Oelwein is a $112 million full-service bank employing exceptional bankers who work with our customers, providing them products they need while treating them like friends and family. Our success is measured by the relationships we build with customers and providing individuals with hands-on service. We are located in northeast Iowa, serving ag borrowers who produce corn, soybeans, and livestock. America's 6,400 community banks, located primarily in rural areas and in virtually every small town, do an outstanding job providing credit in good times and bad. Rural community banks provide more than one-half of all ag credit from the banking sector. Most farmers are, at best, breaking even right now, and then only if they have low debt levels and low carryover debt. Most threatened are the young, beginning, and small, or YBS farmers, particularly if they have high debt levels or if they have little to no additional financial backing. YBS and less financially secure farmers are the most at risk of exiting agriculture in the future. However, continuation of low farm prices will cause many farmers to exit, including those currently financially strong and larger farmers. We do urge Senators to discuss this with the banking regulators so they do not overreact to this situation. My written testimony also makes recommendations on USDA farm loan programs to keep our farmers in business. Regarding FCS, year-end 2015 FCS total assets were $304 billion, an 86 percent increase from just ten years earlier of $163 billion. FCS gross loans of $236 billion represents a 92 percent increase from a decade earlier. FCS net income last year was $4.7 billion, and the FCS effective tax rate is four percent. By comparison, my bank, a C Corp, is taxed at 34 percent Federal and five percent state, almost 40 percent total tax, 35 percent more than the FCS. FCS has a huge advantage in pricing loans, enabling their cherry picking. FCS also grows their retained earnings greatly with this tax benefit. FCS has had tremendous growth over the last decade when FCS lobbied Congress and its regulator for expanded powers and inappropriately received many of those powers through their complicit regulator, the FCA. We also question FCA's obtaining the $10 billion line of credit at a time of record profits. FCS has an insurance fund supposedly to protect their lenders, but we note that their allowance for loan losses is only 54 basis points. By contrast, my bank's is 186 basis points. Perhaps if FCS had an adequate insurance fund and higher loan loss reserves, they would not need to dash to the Treasury for a $10 billion line of credit with no Congressional involvement, contrary to what was recommended by the Brookings Institution report. Why did FCA act in secret behind Congress's back and without meaningful public transparency? We have surveyed bankers in every geographical region on FCS issues in recent years. All bankers are alarmed by the FCS's cherry picking activities. FCS leverages tax and funding advantages as a government-sponsored enterprise, a GSE, to undercut loan rates on community banks' biggest and financially strongest customers and ignores the less creditworthy borrowers. Banks' larger, more stable borrowers are important to bank portfolios, allowing lending risks to be spread over both small and large operations, and losing the biggest and best borrowers elevates the risk in our banks' lending portfolios. This also diminishes banks' ability to serve agriculture and rural America. It lessens credit expertise available to the farmers. FCS below-market pricing lessens the credit choices for farm borrowers and lessens credit availability in rural America. The regulator, FCA, wants to allow FCS to broadly make non- farm loans. While FCS will continue to make farm loans, they want to also cherry pick the very best non-farm loans from bank portfolios, although not authorized by law. FCA's proposed mission-related investment regulation would allow FCS lenders to gain approval for broad non-farm lending programs labeled as investments. Loans for manufacturing, apartments, and office buildings would be eligible. FCA's lack of awareness of CoBank's $725 million Verizon loan is alarming. Verizon and Vodafone are located in New York City and London. This is not rural Iowa. It is not rural America. It is not authorized by statute. FCA's excuse--allowed under the similar entity provision of the Act. Not credible. That provision is not intended to allow enormous non-farm loans of hundreds of millions of dollars to the largest corporations in non-rural areas or in the world's largest cities. FCS cherry picks the very best loans. FCS seeks to lend aggressively for non-farm purposes. FCS and CoBank are loaning to very large non-farm corporations. These activities undermine community banks' ability to remain in business and serve rural communities and farmers. This diminishes the number of rural community banks. FCS's actions, therefore, threaten rural credit availability. They are worse than a race car that has veered off-track and we suggest reforms are needed. Thank you. [The prepared statement of Mr. Barker can be found on page 56 in the appendix.] Chairman Roberts. I appreciate your statement, sir. Our next witness is Mr. Doug Stark of Omaha. Senator Sasse was scheduled to introduce you. We will save a little time, in that Senator Sasse usually repeats the Constitution of the United States before he asks a question. [Laughter.] Chairman Roberts. Mr. Stark is the President and CEO of Farm Credit Services of America and Frontier Farm Credit. Mr. Stark has been with the Farm Credit System for 35 years, having served in several capacities, beginning as an Assistant Loan Officer. During his career, Mr. Stark also worked for the Farm Credit Administration in Spokane, Washington, for two years as an examiner and supervisor. Mr. Stark, thank you for joining us today, and hopefully, we will turn to our distinguished Ranking Member for the next witness, but if not, I will try to do the best job possible. Please go ahead, sir, with your statement. STATEMENT OF DOUG STARK, PRESIDENT AND CHIEF EXECUTIVE OFFICER, FARM CREDIT SERVICES OF AMERICA AND FRONTIER FARM CREDIT, OMAHA, NEBRASKA, ON BEHALF OF THE FARM CREDIT SYSTEM Mr. Stark. Okay. Thank you, Mr. Chairman, Ranking Member Stabenow and members of the committee. I appreciate the opportunity to testify on behalf of the Farm Credit System. My name is Doug Stark and I am President and CEO of Farm Credit Services of America and Frontier Farm Credit headquartered in Omaha, Nebraska, and Manhattan, Kansas, respectively. Mr. Chairman, Senator Stabenow, thank you very much for being original cosponsors of the Congressional resolution congratulating Farm Credit on its 100th anniversary. We are very proud that so many of your colleagues on this committee are also resolution cosponsors. We and our colleagues in the banking industry come before you today with good news. The commercial banking industry recently announced record profits, and the Farm Credit System is as financially strong as it has ever been. Given the challenges facing farmers and ranchers today and the extraordinary capital requirements of this industry, our nation's agricultural producers need the Farm Credit System and the commercial banking industry to be viable and strong. The Farm Credit System, as you have heard this morning, is made up of 78 individually and cooperatively owned and governed institutions. All have separate boards of directors elected by their customer owners. There are no federal funds or taxpayer dollars appropriated for the ongoing operations of the Farm Credit System. As a cooperative, net income in Farm Credit goes to one of two places. It is either retained within the institution to build financial strength to serve customers or it is paid out to customers in the form of patronage dividends. As one of our directors wrote in a letter to a fellow customer this year, and I quote, ``The board believes the cooperative lending system allows us to bring a unique and important value proposition to the market. We want stockholder capital to be held as close to the farm as possible,'' unquote. That is the beauty of the Farm Credit System that Congress had the foresight to create in 1916. Farm Credit's cooperative business model is fundamentally different by design. A healthy Farm Credit System and a healthy commercial banking industry bring greater stability and competition to the credit market. If we lose business to commercial banks, and we do, that means the lending market is working for producers. If we partner with a commercial bank to meet the credit needs of an enterprise serving rural America, and we do, that means the lending market is working for those communities. If a local bank cannot take on the risk of a beginning operation and refers a young farmer to Farm Credit, and it happens, that means the lending market is working for producers. We know that competition makes all of us in lending work hard each day to be more efficient and customer-centric. We focus our time and energy on better serving producers versus asking for the elimination of competitors. There is room in the market for both commercial banks and Farm Credit. Producers need us both. At Farm Credit Associations, we have been proactive in helping customers prepare for the challenges of the current cycle. We have counseled around the importance of working capital and have restructured debt where appropriate. We are committed to working with our customers through tough times. Strong earnings have allowed Farm Credit to build equally strong capital levels to protect against deterioration in loan quality. We have sophisticated stress testing procedures and are thoroughly examined by a federal regulator and issue transparent audited financial statements. The Farm Credit System does not pose a risk to U.S. taxpayers. In fact, the System has never been stronger. I personally take particular pride in the support we provide to our young and beginning and small producers. It is an important part of what we do every day. While some would have you believe that it is the sole reason we exist, our mission as spelled out by Congress is to serve all of agriculture, large, small, young, and old. In 2015 alone, the Farm Credit System made more than 62,000 loans to young producers, 80,000 loans to beginning producers, and 150,000 loans to small producers. Farm Credit's mission also extends to supporting rural communities by financing vital infrastructure, helping bring clean water to rural families, reliable energy to farms and rural towns, and modern high-speed telecommunications to connect rural America to the rest of the world. We also help finance entities that are similar to our directly eligible borrowers. As defined by Congress, these similar entity loans are always made in partnership with and at the invitation of commercial banks. In summary, I see farmers and ranchers working hard to adjust to the current decline in commodity prices and profits. They take enormous pride in what they do and many are trying to carve out a way for their sons and daughters to continue a family tradition. We are honored to serve agriculture producers, farmer-owned cooperatives, and rural infrastructure producers who own the Farm Credit System. They are the Farm Credit System. On behalf of our customer owners, we look forward to the next 100 years of serving rural communities and agriculture. Mr. Chairman, I have a variety of statements with me from groups representing producers, farmer-owned cooperatives, and others that reinforce the importance of Farm Credit's mission. I ask that those statements be made a part of the hearing record. [The following information can be found on pages 120 through 169 in the appendix.] Senator Stabenow. Without objection. Mr. Stark. Thank you. I will be pleased to respond to your questions. [The prepared statement of Mr. Stark can be found on page 84 in the appendix.] Senator Stabenow. Well, thank you very much, and I apologize for the back and forth today. I know you understand about the votes that are occurring and members having to try to be several places at once. But we very much appreciate all of your testimony and it is an important part of our deliberations going forward. I am pleased that I made it back in time to introduce Mr. Jed Welder, who, as I mentioned earlier, is taking time from a busy planting season to provide a producer perspective today. Mr. Welder served in both the U.S. Marine Corps and the U.S. Army and several tours in Afghanistan, Iraq, and Bosnia before returning to Greenville, Michigan, to start a farm with his wife, Milka, and two children, Daniella and Mirko. He is a proud alumnus of Central Michigan University, not far from where I grew up in Clare, and serves on the Inaugural Board of Directors for the Michigan Chapter of the Farmer Veteran Coalition. We thank you very much for joining us and look forward to your testimony. STATEMENT OF JED WELDER, OWNER, TRINITY FARMS, GREENVILLE, MICHIGAN Mr. Welder. Thank you, Chairman Roberts and Ranking Member Stabenow, for the kind introduction, and thank you to all the members of the committee for this opportunity to testify today. I am the owner of Trinity Farms, a mid-size farm in Greenville, Michigan, where my family and I raise corn, soybeans, and recently began growing several acres of hops. Before returning home to Michigan to begin my career as a farmer, I had the honor of serving as an officer in the United States Army for more than a decade. My service included tours in Iraq, Afghanistan, and Bosnia, serving as an armor officer with some of the greatest men and women in the world. In 2008, my wife and I made the difficult decision to leave the Army after repeated deployments and an ever increasing operational tempo. We wanted to start both a family and a farm back in Michigan. We loved moving to the country and enjoyed the challenges of this new profession, but we quickly realized we needed both land and capital to be able to farm full time. Farmers are a close knit group. You cannot just Google how to do things. You actually ask mentors and experienced farmers in the area what has worked on their farms. When I asked older farmers in West Michigan about access to credit, they told me that years ago, I would have gone to a local bank and taken out an operating loan, but that banks do not do that anymore. Even a small farm requires hundreds of thousands of dollars in seed, fertilizer, and fuel each year to operate. My small farm uses older equipment, but even that cost more than a mortgage most local banks would handle. There was a GreenStone Farm Credit Services office in my county that was recommended by several farmers, so I prepared a business plan and walked through their door. They understood what I wanted to do and what I needed to run my operation. They made good, solid recommendations and over time became a trusted partner. As my business changed and grew, they grew with me. Today, I farm more than 800 acres of land and have been able to continue farming land my folks had farmed since the 1960s. This summer, as I was building a grain drying and storage system, my loan officer came out to see the progress and talk about it with me. We constructed one of the first hop yards in our county. As we did, GreenStone walked through the yard to see what hops were. Their office is 20 minutes away. They know how the crops in our area look and what the prospects for harvest are because they are in the business of working with farmers. Last fall, an Army buddy contacted me because she wanted to buy land near my farm. She had talked to several banks, but she worked in Texas at the time and wanted to buy farmland near her family in Michigan. Every bank she talked to told her, ``We do not do that anymore.'' When I put her in contact with my GreenStone office, they told her, ``That is what we do.'' She ended up purchasing the land, and last Friday, my daughter and I planted that farm to corn. This fall, when we harvest that crop, this veteran will realize her dream of owning farmland even as my family expands its own operation. This is a challenging time for farmers like me across the country. Right now, we are planting corn and soybeans with prices very near break even. Many of us have second full-time jobs just to provide enough income to stay on the farm. There is an exciting revolution in precision agriculture and technology that will help us be more efficient, but at the same time, the costs of farming increase every year. Please understand, farmers, like veterans, are not victims. We are not looking for a free ride, just a fair deal. Having a lender that works with me, that knows my farm and the challenges I face is more important than ever. There is an old saying on the farm, ``If it ain't broke, don't fix it.'' The Farm Credit System is not broken. It is fulfilling its mission to serve farmers like me. Please do not break it now. I would like to leave you with some idea of how important this issue is to me. We are currently in the middle of planting season of our major crops. Michigan farmers have a very short window of time after the last frost to get our seeds planted for maximum yield. Families learn that there are no after- school activities, trips, or days off until the crops are in. That being said, when I had the opportunity to testify before this committee, I parked my equipment and came out here to appear before you today because this is important to my family and the families of all farmers. Thank you, and I would be happy to answer any questions you might have. [The prepared statement of Mr. Welder can be found on page 101 in the appendix.] Senator Stabenow. Well, thank you very much again, and thank you to all of you. Let me start, Mr. Welder, if you could tell us a little bit more about how GreenStone Farm Credit has helped you both in looking to expand operations, even diversifying your farm. We talked earlier how hops is a growing new industry in Michigan, and I know across the country, but talk a little bit more about GreenStone Farm Credit and their role in helping you be able to do that. Mr. Welder. Yes, ma'am. GreenStone has provided some educational things and allowed producers to use their facilities for getting together for conferences. They have also provided--my local loan officer has provided input as we talked about expanding our business to doing custom work for other farmers. As we look to increase and purchase new equipment, they have worked with us and provided suggestions. When we traded in my 37-year-old combine two years ago and bought a slightly newer piece of equipment, that was something that we financed through GreenStone. They have been with us every step of the way. Michigan is on the cutting edge of a new crop with hops. Hops is something entirely new, so it was gratifying to me when they came out and actually walked through the yard and took a look and learned what they were and knew what the challenges were that we face with this new industry. Senator Stabenow. Thank you. I am wondering--let me ask you and then anyone else on the panel that wants to respond--because in 2014 in the farm bill, we created several new opportunities for veterans coming home to either go back to the farm or to go into farming, including support for the new and beginning farmer and rancher development programs. In 2015, the National Farmer Veteran Coalition received funds from the farm bill to expand agriculture production, development, business development skills, and so on. Mr. Welder, you are a board member of the Michigan Chapter of the Farmer Veteran Coalition. Can you describe some of the ways that the Coalition is working to support our military veterans in Michigan. Mr. Welder. Yes, ma'am. The Michigan Chapter of the Farmer Veterans Coalition is in its first year and it is very exciting what we are doing, working with veterans in all different areas of agriculture. I have got friends that I have developed through the Michigan Farmer Veteran Coalition that are raising grass-fed pigs, that are working in poultry, that are raising crops, that are raising row crops all across the state. The Farmer Veteran Coalition is working to provide grants as well as educational opportunities in both the Upper and Lower Peninsula. We just held, in cooperation with the NRCS, a soil conservation class. We have also had grant writing classes that we have held with veterans who want to become farmers. Some of the best friends and peers I have in agriculture now are through the Farmer Veteran Coalition. Senator Stabenow. Thank you. Would anybody else want to respond to any programs or initiatives or benefits, either working with veteran farmers or veterans anywhere working in the food system? Mr. Stark. Senator, I would just add simply that we have supported the efforts that you just described and were just described here, both financially and with our resources personally. As you may recall, last summer, the Farm Credit System helped sponsor here in Washington a Homegrown by Heroes event, so we are really trying to feature the products that are raised by our veterans and make them more visible to the general public so they can be featured and distributed and help them be successful. Thank you. Senator Stabenow. Great. Mr. Barker. Ranking Member Stabenow, I just want to add that we do not have special programs for our veterans because we have honored them our entire careers in the community banking industry, and that would include rate concessions, some terms that maybe would be unusual in a normal situation, to try and stimulate their success. I appreciate Mr. Welder's Farm Credit Office up there. He sounds just like a community banker that I know. [Laughter.] Senator Stabenow. All right. Well, let me ask, and again, I will start with Mr. Stark, of course, the 2014 farm bill made a number of reforms to the farm safety net. We strengthened and expanded crop insurance, particularly for specialty crops, and hops is one of those new specialty crops. I think as we expand, it will be interesting to see what other opportunities there are. Also to provide incentives for beginning farmers. When producers approach your institution for loans, how do you take these safety net programs into account, and how important are things like crop insurance, particularly for beginning farmers, when you are looking at potential borrowers? Mr. Stark. Yeah, that has been a key topic of focus of both this committee and of Congress here through these last couple years. We are very pleased to get a farm bill last year that included a strong crop insurance program, and I certainly think this is one thing that the banks and ourselves can agree upon. It is vitally important to the producers up there, and particularly the feature that has revenue coverage for many of these producers because that really is a critical issue we have out here. Most of the producers in the marketplace today carry some level of crop insurance. They make their own choices around that. Certainly, we take that into strong consideration, and especially so if they would decide not to consider it. In that case, we would require significant improvements in liquidity in order to continue their financing. For young producers, it is essential and we counsel them a lot regarding the level of coverage that they might carry and the risk that they have the capacity to undertake, primarily as a result of the fact that most of them do not have working capital if, in fact, something should happen to their crop production year. Thank you for your support of crop insurance and we would appreciate that continuing support as we go forward. Senator Stabenow. Well, I think as we have moved from subsidies to risk management through crop insurance as well as conservation practices and other risk management tools, I think it is really important that we keep a strong system. I am also anxious to see as we go forward how the opportunities we have created through fruit and vegetable growers, specialty crops, whole farm policy for small growers, small farmers and so on, how we can continue to expand those opportunities for small as well as large farms so that they have that risk management tool. I think that is really important. Let me ask---- Mr. Wolfe. Senator, could I---- Senator Stabenow. Yes, sir. Mr. Wolfe. Could I respond to that, as well? Senator Stabenow. Yes, please. Mr. Wolfe. Okay. The first panel was asked, what are some of the differences in going into a potential crisis, this farm crisis---- Senator Stabenow. Right. Mr. Wolfe. --this time as compared to the 1980s. I became a banker in 1979. That was my first experience, was to experience the 1980s as an ag lender. But, that is one of the primary differences. I mean, there are some real differences. I think the producers are much higher capitalized and lower leveraged than they were going into the 1980s. The Farm Credit System is higher capitalized. The community banks are higher capitalized going into this. But one of the real fundamental differences is crop insurance. In the 1980s, probably less than five percent of all crops were insured in the United States. That number is reversed now and there is 95 percent that are and that makes a huge difference not only for our industry, but for the producers, to ensure that they will be around for the next season. We do thank you for that and it is a very critical part of what we do. Thank you. Senator Stabenow. Well, I appreciate that. As we go forward, and I hate to start talking about the next farm bill-- I get a headache thinking about all the challenges we have---- [Laughter.] Senator Stabenow. --but this is going to be a very important debate. We are going to need your voices here as we are talking about the increased importance of crop insurance as a critical risk management tool. Mr. Wolfe and Mr. Barker, I wonder if you might talk just a little bit more, and I apologize, I was not here for your testimony, but describe the work of your institutions to support the rural food and agriculture businesses, not just farmers, but more broadly, sort of rural communities, food industry, and so on. Could you talk a little bit more about that. Mr. Barker. Locally, we have a lot of growers in the farmers market category. Those markets are very popular in the State of Iowa in our area. We have converted many producers to organic production, and in doing so made those some trying times. They are not profitable at first. It takes several years to get to the level where they are sustainable as organic farmers. Some of the challenges that we face come from other states. I was involved in an egg production facility and the laws in California required that chickens needed more space in their cages. If they were familiar with agriculture, they would realize that the more space a chicken has, the more violent they get with each other and these laws are actually hurting those chickens. Also, it created a much more expensive operation. Those are some of the challenges we are facing now. We have had to loan more money to that facility to increase their buildings and their capacity to produce. Senator Stabenow. Thank you. Yes, Mr. Wolfe, did you want to respond? Mr. Wolfe. Yes, just quickly. We are located in north central, northeastern Kansas and we are in that transition between plains and good dark farm ground. We have wheat as a primary row crop in the western part of our trade area and that transitions to corn, soybeans. We also have a lot of dairies, hog operations, beef cattle. We are very diversified. We have been--well, we are the largest ag lender in Kansas. I mean, that is not all that large. It probably ranks number 50 in the United States. But, we do our part to take care of our local producers. We have been around for a long time and we relish the opportunity, even in the down times, to be there for our customers. Senator Stabenow. Thank you very much. I am going to step away to vote, and Senator Thune just came in. I am going to pass the entire power of the Senate Agriculture, Nutrition, and Forestry Committee. [Laughter.] Senator Stabenow. I am a little nervous about this, but I would be happy to pass it to the Senator from South Dakota. Senator Thune. [Presiding.] Well, thank you, Madam Chair. It is kind of a crazy day, and I would have liked to have been here to ask questions earlier of the previous panel, but we had the Administrator of the TSA up here to talk about wait lines at airports, so I was chairing that meeting. But, I appreciate the update today on what is going on in agriculture and particularly with regard to lending. I do want to include for the record, and since I am the only one here, I will say this will be included without objection---- [Laughter.] Senator Thune. --a story from the Mitchell Daily Republic in which it talks about a study that looked at farm income. I know it has already been mentioned a couple of times today, but at least in my state, in 2015, we saw it drop by $100,000, on average, last year, which is a 77 percent decline in net profit in 2015 compared to the year before. It goes on and elaborates and gets down into the specifics and drills down into the numbers a little bit about what that means in terms of our economy. But, I think it just puts a fine point on how important it is that we are really focused on agriculture and making sure that we do everything we can to get our producers through what are some pretty difficult economic times and, hopefully, on to when we get a better price structure. [The information of Senator Thune can be found on page 53 in the appendix.] Senator Thune. I know that we are planting in South Dakota, some of it is in, some of it is still going in, but we are hoping for a big crop. We need a big crop at the prices that we are dealing with today. But, I would be curious to know just from the lenders' standpoint, I know that, for example, Mr. Barker, you have got a smaller scale community bank with a portfolio of 35 percent agricultural loans. Could you talk a little bit about what your greatest challenge is today in terms of looking at the outlook for your agricultural borrowers. Mr. Barker. As far as our borrowers, our biggest challenge is the cash flow coming in. We are in times where most of our borrowers have equity to survive a year or two. Going forward, this equity is being used up with the low prices. With production roughly a dollar below cost of their sales prices on both corn and beans, it does not take long if they have any size at all for their equity to get used up. We are going to need the USDA programs. The USDA guaranteed Farm Loans and Rural Development Loans are very important and we ask the Senate to really beef up funding for the programs because we really will need guarantees going forward to keep producers in business. Patience by our regulators is a virtue. Many examiners were not around in the 1980s when we went through the last ag credit crisis. They are young and they are being told that this is perhaps a panic situation and patience will be a virtue in dealing with all of this. Senator Thune. I would direct this to you and others on the panel, as well, but do you believe that your banks and other ABA banks coordinate more closely with the USDA Farm Service Agency than does FCS to obtain guaranteed loans for some of those eligible borrowers? Mr. Barker. Well, from my personal experience, the banking community does. In fact, I have had a few local small borrowers come to us because their credit was shut off by the Farm Credit System. We have tried to look at getting a guarantee for those folks. But, our experience is that the loyalty has been to the larger borrowers by the Farm Credit Services and the smaller folks in our area, were not taken care of as well, because their farms require a lot of lender involvement. It is easier to book a $1 to $5 million loan than a YBS loan. Senator Thune. Do any of you have examples of how the Farm Credit System neglects young, beginning, and small farmers and ranchers in your area? Mr. Barker. Personally, I do not see the Farm Credit System serving YBS farms. I know they talk about that, but I have a report from 2014, which shows the numbers of those young, beginning, small farmers are quite stagnant. One of the footnotes I thought ironic was if they qualify under each of those categories, they can be counted under each of those categories, so I am not sure how the numbers make any sense. I know in theory, that FCA would like to count these numbers at the regional levels, but on the local level, I just do not see FCS lending to YBS farmers. [The following information can be found on page 173 in the appendix.] Senator Thune. Mr. Welder, you are a farm operator. When you are talking to other local farmers, have you noticed competition in ag lending driving down interest rates for borrowers? Have you seen any evidence of that? Mr. Welder. From my perspective in my very small operation, I have not seen that, Senator. We are getting competition from other large corporate farms that maybe have other lending resources. But at my level, no, not at all. The interest rates are staying pretty much constant for what we need to do for our operating loans, for our machinery loans. Senator Thune. From your perspective, to what extent do private banks, commercial banks, Farm Credit System, and FSA play a role in ensuring that credit exists for borrowers out there? How do you see that interaction working between the different entities? Mr. Welder. Again, I can only give a very micro perspective at my level, but the banks in my area do not deal with farmers as much other than checking and savings. The last farmer that had an operating loan with our very local Sidney Bank was my dad 20 years ago. At this point, because with 800 to 1,000 acres he might be talking a quarter-million dollar loan for an operating loan, most of that will go through the Farm Credit System as opposed to going through a banking system. Senator Thune. Okay. Mr. Barker, would you say your bank is consistently more competitive with loan rates and loan availability to, particularly as we talked about earlier, some of the younger, smaller, newer borrowers? Mr. Barker. We compete as much as we can. I cannot compete with the Farm Credit System on large loans. They have a funding structure that is very enviable. For example, on a million dollar loan, if I charge five percent, that is $50,000 in interest annually. I pay my 40 percent tax bill out of that. I net $30,000. The Farm Credit System is largely tax exempt, and they need only charge three percent on that same loan to net the same. They also do not have to charge appraisal fees, which I have to do, and there are other local fees in some states that they do not pay. We try to stay competitive as much as we can and make use of anything we can as far as Federal Home Loan borrowings or deposits, but I just cannot seem to touch the whole array of benefits that the Farm Credit System has. Senator Thune. You indicate in your testimony that 14 percent of your portfolio consists of loans ranging from $1,000 to $249,000, which is 76 percent of your portfolio by total number of borrowers. Since many of these are likely young, beginning, and small farmers and ranchers, do you believe that your portfolio of borrowers, assuming that we have the present state of circumstances in agriculture for the next couple of years, is going to be negatively impacted, much more so than the larger scale type borrowers that you have in your portfolio? Mr. Barker. I think they will be hit harder quicker than the larger farmers, yes, because they have not had a chance to build up the equity that the larger farmers have. Mr. Wolfe. Senator, could I respond to that, just quickly? Senator Thune. Yes, Mr. Wolfe. Mr. Wolfe. Yeah. Mr. Welder brings up a great point, because his area is what I foresee if we continue to go down the same path that we are going, that the local banks cannot compete any longer, so they have given that market share away. They have given it away. They have quit competing. That is, I am afraid, where we are heading. Just to give you an example, Mr. Barker used a similar example in Iowa, but in my state, I pay 34 percent federal income tax and 4.38 percent state income tax. As Mr. Barker says, on a five percent loan, they can charge three-and-a- quarter and start out the same place we do. My point is that when we go down that path, is that Farm Credit is not passing-- if I were a borrower of Farm Credit today, I would be angry that they are not passing that entire savings along to them, because they could have been fully taxed like a C Corp bank in America would be and they would still make more money than banks would the last two years. That is the point that I would like to make. Senator Thune. Okay, thanks. Mr. Stark, it looks like you want to---- Mr. Stark. Thank you. I would be delighted to respond to those comments. It is really unfortunate and disappointing to hear the allegations against a system which so many farmer- owned customers support and feel so strongly about. One thing I can say when it boils all down to the bottom line is what has been laid out here this morning is irrespective of our business structures, when it gets down to the bottom line, the fact of the matter is we are just different business models, and that is clearly, as I mentioned in my opening remarks, that was intended. As a farmer-owned cooperative, we have a very different business structure. Frankly, community banks enjoy some of the same, or maybe I should say similar accesses and backing by the federal government that the Farm Credit System does in the forms of Federal Deposit Insurance, the access to the GSE through the Farmer Mac and the Federal Home Loan Bank. They have access to Subchapter S Corporations. I mean, we could compare and contrast our business models for hours here today. The bottom line is, when you look at it over the last 50 years, community banks and commercial banks have 40 percent market share. We have 40 percent market share. By the testimony that was submitted here this morning, our colleague here, Mr. Barker, indicated they have over half of the farm loans in their community. If you look at the data they presented even in their own testimony, they grew 7.9 percent last year. We grew 8.5 percent. When you look at the facts, there is no evidence to indicate that the pendulum has really swung in favor of the Farm Credit System. Thank you for the opportunity to comment. Senator Thune. I appreciate that. Thanks, Mr. Stark. Mr. Barker. Could I rebut that just a bit? Sorry, Mr. Stark. There are a lot of GSEs out there, but I do not have any of the GSEs that directly compete with me and try to steal my loans. When we are not allowed to make a $5 million real estate loan, for example, that is a big part of my loan portfolio that goes to the Farm Credit System, no matter what my bank may obtain in terms of small loans. There is just no way to compete. My rates to large farmers will be undercut no matter what rate I have quoted, and I am sure every community banker in the nation can say the same thing, that FCS rates just are not the same as those of the private sector. The young farmer that comes in that has a quote from the Farm Credit Services gets a rate that is higher. They might get a rate that is six or eight percent compared to the three percent rate FCS gives large farmers. Does that really mean that they are taking care of those YBS farmers? When I price a loan to a YBS farmer, it is the same whether they are a multi- million dollar farmer or they are a young farmer that is really struggling and trying to start their farm. We are going to help them no matter what. But we do not get market distorting competition from the other GSEs as we do from the FCS. Senator Thune. Mr. Chairman, I would just say, and I appreciate you having this hearing because I think it is an important one and it is an issue that we need to pay close attention to, particularly over the next couple of years, because I think in production agriculture, if we do not see some improvement in the prices of our commodities, we are going to have more and more stress and there is going to be a real need on behalf of the lending community to be able to work with borrowers and figure out ways to get them through. I am particularly concerned about the young, beginning, and small borrowers and what this means for them, people who perhaps are not as established or do not own their ground and are making cash rent payments, those sorts of things. It is going to be increasingly, I think, difficult given the current price structure, which I said I hope improves, but I think that availability of credit and being able to work with--and having all the various people who represent that community here today, I think, is really good, too, because it gives us an opportunity to explore a little bit more in detail what the various dynamics and who is lending to whom and where sort of the weak spots are. If there is anything this committee can do in the days and weeks and months ahead, I hope that you all will communicate that to us, as well, because we want to make sure that we are being as responsive as possible when it comes to availability of credit for agriculture. Mr. Chairman, I thank you, and I thank our panelists today for being here. Chairman Roberts. [Presiding.] Senator Thune, thank you for that excellent statement. I share your concern with new, young--what was the other group? Senator Thune. Small, beginning. Chairman Roberts. Oh, beginning. I am concerned about the older, established, and big producers who produce most of the food for this country as well as everybody else. There is another vote pending, I would tell the gentleman, very quickly, in about ten minutes here, so we are going to have to adjourn this hearing. I have a question for the three lenders on the panel. Your answer, of course, is if this does not occur, the question that I am asking, we will be writing the sequel to the Grapes of Wrath in farm country. When you are considering whether or not to issue a farm loan, how important is the role of the federal crop insurance program? Let us just go down the line. Mr. Barker. Mr. Barker. Yes, sir. It is extremely important. It is just absolutely critical to the survival of the farmers out there and their stability. Chairman Roberts. Mr. Stark. Mr. Stark. Well, we totally agree and we thank the committee and your support, Mr. Chairman, and what you have done to get the last farm bill through as well as the provisions of the crop insurance program. It is imperative for this industry as we go forward. Chairman Roberts. I thank you, sir. Mr. Welder. Mr. Welder. As a producer, I maintain crop insurance, as do most of my peers. It is an important role as we move from a subsidy-based to a more market-based to stay with that crop insurance and I thank you for your support, sir. Chairman Roberts. If you were in the service that was always faithful, Semper Fi---- Mr. Welder. Oorah. Chairman Roberts. --and then chose to go Army Strong---- Mr. Welder. Yes, sir. Chairman Roberts. --you could be strong, but I am not sure always faithful. [Laughter.] Chairman Roberts. Why on earth did you switch? Mr. Welder. Sir, I was offered an Army ROTC scholarship and I did not have money for college and they said I could jump out of perfectly good airplanes, so I took them up on it. Chairman Roberts. Well put. [Laughter.] Chairman Roberts. Leonard. Mr. Wolfe. Yes. I talked about this earlier, but a question was asked of the first panel, some of the major differences as we head into what potentially could be a downturn in ag and the differences compared to the 1980s. The primary difference in as far as the producer protection is crop insurance. In the 1980s, I saw statistics that said that less than five percent--I was there, you were there--less than five percent of all crops were insured at that time. Today, that number is reversed. It is now 95 percent, and it is possible because of actions that this committee and you specifically have taken. I think that is going to be paramount going into any downturn, whether this is it or not. Our regulators have been predicting this for seven years, so if it finally happens, I think they are taking a certain level of glee from that. But, we are ready for it and crop insurance is one of the things that has prepared us for this if this does occur. Thank you. Chairman Roberts. I appreciate your answer. It is what it is. Every time--we are now doing our appropriation bills, which is a very good thing. We are going back to constitutionally Congressionally directed funding and that is a good thing, and we are doing it at a record pace. But when you open up the ag appropriation bill, we always have self-declared Secretaries of Agriculture wanting to change something and crop insurance is usually a target. Each one of you and every one of your organizations has a pretty loud megaphone and the value of crop insurance today means whether you make it or not, more especially with all of the climate change that we are experiencing. Let me just ask all of you, I note the somewhat differences of opinion with regards to what the Farm Credit System has at its disposal as opposed to what our community banks have, more especially with Dodd-Frank, which was not especially--Dodd- Frank was not supposed to touch you. It was a big mess. Obviously, it is--I do not know whether it is a touch or a massage or what it is, but it is not good. If, especially the three folks here that are representing our community banks, if there is one piece of legislation that could address your concerns, and that would probably fall to the Finance Committee--I happen to be on the Finance Committee--but what would that be? Let me start with you, Mr. Barker. I know that you want a whole series of things, but what is the one thing that we could do to make your life easier? Mr. Barker. Boy, that list is endless. Dodd-Frank is a huge thing for us right now and I think our topic here today is a really big concern for me locally and for all the community banks having the unlevel competion from the Farm Credit System. But, both of those topics are extremely important to us right now. Dodd-Frank and overregulation is causing a heavy burden on community banks, sorry. Chairman Roberts. Do not be sorry. I agree with you. Quite a few people would now agree with you. Mr. Stark, we are going to give you an opportunity, too. I do not want to leave you out. Mr. Stark. Yeah. I think, even though we are not subject to the same regulatory impact as the counterparts here under Dodd- Frank, the Farm Credit System does whatever it can to comply with the spirit of those laws because they, in most part, make good financial sense. The first panel talked about that specifically with regard to the credit, or the capital requirements, and the Farm Credit System and through the FCA has adopted the regulatory guidance under Basel III and implemented new capital requirements. Nonetheless, the answer to your question is a continuation of the crop insurance program would be first and foremost. As we are a farmer-owned cooperative, we are here on behalf of our farmer owners and that is first and foremost on their minds. Consistency and predictability around their businesses in this time of volatility is as critical as we could imagine, and that will do more than anything. The second would be trade. As you well know and we have talked about, that is a critical item for our producers, and depending on commodity, a majority of their, or a big majority of crops or a big percentage of crops in almost all our segments is traded overseas. U.S. production agriculture is extremely efficient and we need trade on behalf of our producers' customers. Chairman Roberts. I thank you for your comments on trade, more especially TTIP and TPP. Today, unfortunately--well, it has just been this way as long as I have had the privilege. All trade agreements are over-criticized. All trade agreements are oversold. But, they are absolutely essential and I thank you for that. Let us just keep going down the line. Mr. Welder. Mr. Welder. Senator, the one thing from my perspective would be certainty. Farmers do not like change and we certainly do not like change from Washington if we can help it. When we go to our local FSA office and ask about the farm bill or what is upcoming for crop insurance, generally, they have no idea. The more certainty we can have at my level for the farm bill and for crop insurance, the better off we are going to be. Chairman Roberts. Let me just interrupt by saying that we are not going to open up the farm bill, period. You will have that stability, whether you have preferences or not, more especially the ARC program, the PLC program, and more especially crop insurance. I am not saying that it's going to be an easy job, because there are always folks that want to do that. But providing consistency and stability, I think, is paramount. Leonard, what do you think? Mr. Wolfe. Well, since you cannot do anything about the weather, because that is the biggest variable in agriculture-- -- Chairman Roberts. I brought you the rain, man. What else do you want? Mr. Wolfe. You did, and now you need to make it stop. [Laughter.] Chairman Roberts. Okay. Mr. Wolfe. Dodd-Frank is just a monster hanging over community banks today. I mean, it is threatening our model. A lot of things threaten our model, but as Mr. Barker says, frankly, in my bank, the biggest threat to me, seriously, is Farm Credit. If we could somehow--Mr. Welder mentioned a fair deal. That is all he is looking for, is a fair deal. If we could just get to the point--and I am not talking--there is a real misconception that banks want to eliminate the Farm Credit System. No, that is not correct. That is not--I am not an advocate of that. We have to coexist. We have to find a way to do that. I think the--it is funny that you mention appropriations, because I have to take this opportunity to talk a little bit about last fall when we used a tax on banks to pay for the highway bill. We have something right here hanging in front of us that is a $1.3 billion tax preferential treatment that is given to Farm Credit that could be used to pay for this--some other critical elements of agriculture, which is crop insurance, things of that nature. This can be done a lot of different ways, but there is more than one way to do this. Rather than tax them, we could also eliminate taxes on all agricultural real estate loans, whether they are originated by banks, by individuals, by insurance companies, or even Farm Credit. Just you could level the playing field in that way. We all have different models. Even banks have much different models, as Mr. Stark points out. We recognize the difference between us and the Farm Credit, but there are a great deal of differences across the board, so thanks for the opportunity. Chairman Roberts. I want to thank all seven of our witnesses. My staff has informed me I have four minutes to skedaddle over there and make the final vote. But thank you for taking your time and your willingness to testify here. I know you are very busy people. The testimony provided is timely, very valuable for my fellow lawmakers to hear firsthand. To my colleagues who may not have heard it the first time, I would ask that any additional questions that they may have be submitted for the record, submitted to the committee clerk five business days from today, or by 5:00 p.m. next Thursday, May 26. Now, Mr. Barker, I have to say that Senator Grassley, my senior colleague, basically his question was with regard to Dodd-Frank, and I think you have covered it. Mr. Barker. Yes, sir. Chairman Roberts. I want the record to show that I have asked the question---- [Laughter.] Chairman Roberts. There was a very timely response, more especially from his constituent. With that, the committee stands adjourned. Thank you. [Whereupon, at 12:45 p.m., the committee was adjourned.] ======================================================================= A P P E N D I X MAY 19, 2016 ======================================================================= [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] ======================================================================= DOCUMENTS SUBMITTED FOR THE RECORD MAY 19, 2016 ======================================================================= [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] ======================================================================= QUESTIONS AND ANSWERS MAY 19, 2016 ======================================================================= [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] [all]