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Testimony of the 107th Congress
Rural Development in the New Farm Bill
Senate Agriculture Committee
August 2, 2001
Rural Development In The New Farm Bill
Thank you Chairman Harkin and other members for holding today's important hearing on rural development in the new farm bill. I applaud you for the work you have done on this issue. Your focus on rural economic development is essential given the difficulties our farmers and ranchers face in these stressful times and the need to diversify our rural economies so that so that farmers and ranchers have economic opportunities off the farm as well as on the farm.
My name is Steven Lane, and I serve as President of the Iowa Independent Bankers Association. I'm also President and CEO of Security Savings Bank, an agriculture bank located in the small community of Gowrie, Iowa. Security Savings Bank is a $48 million asset bank and most of our loans are agricultural credits. Our town of 1028 people relies heavily on the agricultural economy.
I'm also representing the views of the Independent Community Bankers of America (ICBA). ICBA is the only national trade association that exclusively represents the interests of our nation's community banks. Over two-thirds of ICBA's member banks are located in small communities of under 10,000 population. Over three-fourths of our membership serves communities of under 20,000 people. Eighty-six percent are in communities of less than 50,000 population. Clearly community bankers across the nation have a long standing interest in ensuring credit availability to our nation's farmers, small businessmen and women and other consumers in our nation's rural communities. We also have a strong interest in rural development initiatives that can underpin a strengthened farm safety net and help diversify our rural communities.
Challenges Of A Difficult Farm and Rural Economy
Let me say at the outset that we hope the new farm bill can have some significant new money for rural development. The statistics and trends reveal that off-farm jobs are becoming increasingly important to the health and viability of the farm sector. Census numbers also reveal that counties dependent largely on agriculture have been losing population. My point is that our farm programs and our rural development programs need to both be on center stage in terms of enhancing the overall farm safety net. We should put some real money into rural development.
We do work hard in our small community to try an attract new businesses. It is a difficult challenge. With the low prices we've seen in agriculture, farmers are struggling to make their farm operations cash flow. The government farm aid packages have allowed many farmers to hang on from one year to the next. The big problems of course are profits and equity. Profits are often non-existent and farmers' equity has eroded severely.
Farmers may be able to stay in good standing with their lenders by paying their yearly operating loans, but they're not able to upgrade their equipment as needed. The profits are not there and unfortunately their net worth continues to drop. Most of our area farmers and their spouses are working off the farm 40 hour a week to cover living expenses. Others that are not working off-farm are incurring large amounts of debt. Each year cash flows are harder to keep positive and financial statements are slipping.
Many farmers have had to turn to off farm jobs to keep their farms afloat. That is why diversifying the economic base of our rural communities is so important and why rural development, which encompasses value added agriculture, is such a crucial issue. But some farmers are just giving up and selling out. Others continue to hope for better prices and continued government support. I believe this year we will see more farmers quitting than any other time since the 1980's in our area.
We are actively searching for solutions to this difficult challenge. For example, our community offers new businesses an arrangement where they pay no property taxes. Unfortunately, that incentive - by itself - hasn't worked well, simply because it is hard to attract new businesses to small rural towns. Rural communities do offer people a lot of benefits, including a high quality of life, low-crime rates, a clean environment and friendly neighbors. What we need to be successful is a much larger funding commitment from Congress and some new legislative initiatives in this arena.
One concern we have, Mr. Chairman, is that recent statistics show that communities relying largely on agriculture have declining populations. To be successful in rural development, we need to both keep the people we currently have in our rural communities and attract new ones as well. Because at some point communities can fall below the "critical mass" of people needed to sustain the town's infrastructure and services. That leads the town to an irreversible decline because they lack the human resources needed to remain viable. The per capita cost of providing services becomes too expensive. Ultimately, keeping people, leaders, workers, and citizens in rural communities is essential to keeping a healthy rural social infrastructure in place, which is the foundation of a diverse economic base in our rural communities.
Maintaining the social infrastructure in terms of human resources is key to maintaining a viable physical infrastructure-- adequate roads, schools, health care services, utilities, Main Street businesses and locally owned community banks focused on meeting local financial needs.
This morning I first would like to offer a few general principles to help guide rural development policy and then make some specific legislative recommendations.
Key Principals To Drive Rural Development Policies
I suggest four basic principals that should underlie the federal government's approach to a sound and broad-based set of rural development policy initiatives. These principals are:
1) Target Resources to Rural Communities -- We need to ensure that programs first and foremost truly target rural areas and lead to the creation of new jobs and to business start-ups and business expansions. This means there should be a population-based criteria as the first component of deciding where federal monies go, such as the Business and Industry (B&I) loan program's requirement that loans go to communities of 50,000 or less.
This population limit should apply to all types of rural businesses including farmer-owned cooperatives, contrary to action by the House Agriculture committee to provide an exemption, which would allow dollars intended for rural areas to flow to large cities. The House bill did not provide any additional funding to offset this loss for rural areas. When the decision is whether to finance a business or processing facility in a rural setting versus an urban setting, the rural community will almost always lose that decision due to factors such as a smaller workforce and less access to technology. Rural development needs to have a jobs component in order to truly revitalize and diversify the local rural economic base.
There are many benefits of targeting rural areas based on population. These include:
2) Recognize and Complement the Efforts of the Private Sector -- We should compliment and add to the efforts of the private sector, especially private sector financial institutions. Many residents in rural communities will tell you that their community bankers are the leading catalyst to bringing together the people and leveraging the resources necessary to attract new businesses to the rural community.
Specifically from the standpoint of community banks there should be a recognition that there are thousands of community banks in our rural areas that can help stimulate our rural economy if they are given the right tools. For example, there are approximately 3,000 "agricultural" banks alone and several thousand non-ag banks all in rural areas. These banks are keenly aware that the future of their institutions are directly tied to the future of their rural communities. Rural development policies need to be intricately tied into this vast network of private sector lenders if these policies are to be successful.
3) Target Resources to Various Sizes and Types of Businesses, Including Individuals - In addition to targeting rural communities based on population, we need to ensure that credit is available to individual entrepreneurs as well as larger corporate and cooperative ventures. Obviously it may be easier to get financed if you are a multi-million dollar business. But we need to also ensure that individual entrepreneurs can thrive in a rural environment.
For example, a banking colleague of mine has a farm customer who started a business that uses flax straw to make 20 foot long erosion control logs that are shipped all over the country to minimize erosion after flooding or forest fires. He is further expanding his business to make hanging basket liners for horticultural use out of absorbent and environmentally friendly flax blankets. He bought a closed-up schoolhouse for the manufacturing site. This is value-added agriculture. He wasn't a large cooperative or a large corporate business, just a single individual involved in value added agriculture.
4) Maintain the Population Base and Infrastructure of Rural Communities - Diversifying rural economies is important because more and more farm families appear to be relying on off-farm income to support the farming enterprise. USDA statistics indicate that a significant part of the total income of farm households comes from off-farm sources. Unfortunately, trends indicate that counties which have relied largely upon agriculture as the main industry lost significant population in the last decade. The recent 2000 census revealed that while the general population grew 13 percent in the 1990's, 676 counties, primarily rural counties, lost population. Those counties losing population are largely dependent on agriculture. This shows the importance of diversifying rural economies because doing so will help keep people in rural America and will help farm families have additional sources of income thereby reducing the need to rely solely on farm programs for survival in rural America.
From the standpoint of the community banks in these rural areas, the loss of population, with its subsequent result of fewer depositors and fewer deposits, is a critical problem since fewer deposits mean fewer funds available to make loans to local businesses and citizens and therefore less investment in the physical and social infrastructure of rural communities.
Adopting Viable Solutions
Obviously an important goal for our rural areas should be to focus on value-added agriculture. If we can process more of what we produce in the local areas, rather than shipping our commodities across the country for processing and packaging, then local farmers will reap the benefits in their local communities. These benefits would include greater income from the local business if they have an ownership stake in the business, but even more significant would be the off-farm jobs created to keep local townspeople employed where they live. We've seen a lot of farmer-owned cooperatives get involved in producing ethanol and this is a future growth area that shows great potential because we can use our surplus ag commodities to meet the growing demand for energy in our country.
Businesses other than cooperatives, such as individual proprietorships and other small businesses are also important to building a stronger rural economic foundation. But the key is locally oriented, value-added initiatives that help create a better market for our area farmers and also create jobs for those smaller farmers that need the off farm income.
This also strengthens the small, locally owned community businesses on Main Street. I learned a long time ago that when the farmer struggles it has a major effect on every business in town. As more farmers disappear, so do our local businesses.
Equity Financing in Rural America
Rural Equity Fund - Mr. Chairman, I want to applaud you for introducing legislation last year to establish a rural equity fund. A broad coalition of organizations have joined together in support of this legislation to spur business development in rural communities. These organizations include the ICBA, the American Bankers Association, the National Cooperative Business Association, the Farm Credit Council, the National Rural Electric Cooperative Association, the National Cooperative Bank, the Rural Telephone Finance Cooperative, the National Farmers Union, CoBank, Agribank and others.
The "rural equity fund" would encourage private investment in value-added agriculture enterprises and small business start-ups and expansions. A healthy rural community obviously needs many types of rural businesses. This includes both cooperatives and non-cooperative businesses and both large and small businesses, and credit tools that encourage individual entrepreneurship. Unfortunately, large venture capital funds are not interested in focusing on rural America.
So this legislation creates a public/private partnership designed to attract equity investment into cooperative and other business ventures in rural America. The fund would be capitalized by investments from private sector institutions and the government would match these monies up to a specified level. From a banker perspective, this fund could provide equity financing to help complement loan packages put together by the private sector and would therefore complement the debt financing offered by private-sector lenders. Projects could be brought to the attention of this fund by a variety of sponsors including cooperatives, banks and community development groups.
Investments made by this fund will provide off-farm income, additional markets for agricultural products and new business opportunities in rural communities. The intent of the fund is to target rural business recipients in rural communities, defined as those with 50,000 people or less.
In addition, by investing in an equity fund, rather than individual projects, private sector lending institutions would also avoid the mixing of banking and commerce, which has traditionally been prohibited by Federal law.
The issue of bringing more equity financing to rural America has had increasing attention in recent years. A couple years ago the Center for the Study of Rural America, headquartered in the Federal Reserve Bank of Kansas City, and a national rural outreach committed to illuminating the issues and challenges facing rural America, conducted a national conference on this issue. The Center's 1999 report, Equity for Rural America - from Wall Street to Main Street", offered a number of important observations. These included:
Mr. Chairman, we look forward to working with you on this important initiative. We hope this measure, as outlined above can be made a part of the farm bill in an effort to help rural America.
Other Rural Development Recommendations for the Farm Bill
In the context of what this committee can do in the farm bill to promote rural development, I would like to also offer these suggestions.
Let me address a few of these issues.
Increase funding for USDA's Business & Industry Guarantee Loan program -- We were pleased that Congress last year provided the USDA Business and Industry (B&I) program with a significant funding increase of 50 percent, bringing the budget to $1.5 billion for the current fiscal year. This program lends money to any rural business that provides economic opportunity to people living in towns with populations of less than 50,000 people, including gas stations, factories, and other local businesses. USDA reports that B&I loans reportedly saved or created more than 29,000 jobs last year.
This is good news for banks in their efforts to help stimulate slow-growing rural markets. However, we are told that only about 400 banks are able to use the program and more are trying to get in. The main problem has traditionally been that the B&I program is under-funded. Last year almost $1 billion in guaranteed loans, for nearly 400 projects, could not be approved due to lack of funding. Remember that the lenders are the ones providing the funding, the government's expense comes only in cases of a loan default.
Limit/Eliminate Fees on Guaranteed Loan Programs in Rural Areas -- USDA's FY 2002 Budget included an increase in the loan origination fees on B&I guaranteed loans to 3.25 percent, well above the current 2% level. USDA stated they would implement this through a regulatory change since legislation was not necessary to accomplish the higher fee. This increase to the guarantee fee will have an adverse impact on access to credit for many rural businesses as it will make the costs of credit greater. Bankers won't be able to absorb these costs and they will be passed on to borrowers in the form of higher interest rates. The increased fees being proposed would jeopardize needed credit to small business at the worst possible time as our economy has slowed dramatically and small business lending has become more difficult.
Obviously, in the next budget cycle, new and higher fees could again be proposed. To deal with these issues, for USDA (and SBA) loans on a more permanent basis, we suggest:
We point out that some of the demand for small business loans in rural areas is limited due to high fees. Eliminating these fees for all borrowers would attract greater participation and enhance the strength of the portfolio and the viability of the program as a whole. If the fees are too high, only high-risk ventures will seek financing, thus weakening the loan portfolio.
Other Rural Development Issues Outside the Committee's Jurisdiction
Greater Broadband Capacity in Rural Areas -- We also need to find the right mix of policies that will spur greater investment in telecommunications technologies in rural America to help us bridge the "digital divide" between our rural and urban areas. Not only do we need to create more jobs in rural areas, we need to ensure that rural areas have access to the latest technology to make them less isolated from larger metropolitan areas and to attract people with the kind of leadership and job skills necessary to help our rural areas survive and thrive. Rural America's future rests with our ability to compete in the new economy. We need the technological infrastructure to line up at the starting gate.
Increase Deposit Insurance & Index it to Inflation -- Another key ingredient to providing more funds for investing in our rural communities would be to significantly increase deposit insurance and index it to inflation. Many rural banks are having difficulty growing their core deposit base which forces them to seek other sources of funding to meet the lending needs of their rural communities.
While American agriculture is undergoing dramatic changes resulting in fewer and larger farms as well as larger corporate and agribusiness interests, deposit insurance hasn't been raised since 1980 and its value has been eroded in half, to approximately $50,000 based on 1980 dollars. Increasing the deposit insurance level and indexing it to inflation would be a quick and efficient way to immediately help infuse more funds into our rural areas and ultimately benefit rural citizens, including farm families that depend on off-farm income to survive.
Subchapter S Reform -- ICBA supports the Small Business and Financial Institutions Tax Relief Act of 2001 introduced in both the House and Senate (H.R.1263) and (S. 936). This legislation would help ease the tax burden on thousands of small businesses and community banks and free up capital to reinvest into the local communities they serve.
This legislation would afford many small businesses, including community banks, needed relief from punitive double taxation and would improve the viability of our nation's small banks and the communities they serve. When Congress passed the Small Business Job Protection Act of 1996, it made community banks eligible to elect S Corporation status for the first time in tax year 1997. Unfortunately, many community banks and small businesses are having trouble qualifying under the current rules and cannot benefit from Congress intended tax relief. The key focus is on expanding the number of eligible shareholders for Subchapter S tax status from 75 to 150.
Mr. Chairman, we appreciate the Committee's efforts. Strengthening the agricultural economy and creating business investment opportunities in our rural communities is key to a viable future for many family farmers and local area businesses.
Again, I want to emphasize that rural development should be an integral part of the new farm bill and should be considered a working partner, not an outsider, to a broad based farm safety net. Off-farm jobs go hand in hand with a new and improved farm bill in accomplishing the goal of keeping farmers on the land, keeping Main Street vibrant and keeping our rural communities healthy.
Obviously, there are a number of issues that are important to rural America that may go beyond the scope of this committee. Issues that include tax incentives for greater ethanol production, subchapter S reforms, and increasing the deposit insurance coverage levels and indexing them to inflation. We will be working within other congressional committees to achieve these needed changes. These are all very important issues to rural America and although outside of this committee's jurisdiction, I hope each committee member will support community bank positions on these issues.
ICBA and its Agriculture-Rural America Committee will be discussing farm policy and rural development issues in more detail during their two days of committee meetings next week. I'm sure they will be happy to pass along additional recommendations from those meetings. Community bankers look forward to working with the committee and others in Congress to ensure enactment of a new farm bill that has a stronger farm safety net -- one in which rural development plays a major role.