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Testimony of the 107th Congress
On Behalf Of The
Independent Community Bankers of America
House Small Business Subcommittee on Rural Enterprises, Agriculture and Technology
July 17, 2001
Review of Value-Added Agriculture
Thank you Chairman Thune and other members of this subcommittee for holding today's important hearing on value-added agriculture. I applaud you for the work you have done on this issue. Your focus on value-added agriculture is much needed and timely given the current difficulties facing farmers and our rural communities. ICBA will continue to work with members of Congress and others on ways to increase investments into rural America and provide for new economic opportunities for our nation's farmers and ranchers and our Main Street businesses.
My name is Terry Jorde, and I serve on ICBA's Agriculture-Rural America Committee. I'm also the President and CEO of CountryBank USA, an agricultural bank located in the small community of Cando, which is in Towner County, North Dakota. CountryBank USA is a $35 million asset bank and most of our loans are agricultural credits. In addition, my family owns a potato and grain farm. Our town has 1,300 people and is heavily dependent on the agricultural economy.
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 the ICBA as an association and its' community bank members 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.
Adapting to a Changing Economy
In our small community we have worked very hard to create new jobs over the past decade. New residents and displaced farmers have been attracted to the jobs in a pasta plant and a foundry. They have also been employed at construction sites, a medical center and a health and dental clinic. Our bank has served primarily an agricultural base for many years. However, we have tried to diversify our asset base and revenue sources. We continue to work with our farm customers on developing long-term business and investment strategies for the 21st Century global economy that we now participate in.
All of us know all too well about the difficult times facing America's farmers - times made less difficult by massive infusions of government financial aid the past couple of years. Despite this welcomed financial aid, many farmers have been left to wonder just how long these fundamental problems will last.
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. The need for stronger rural economies is also why our approach to sustaining rural America needs to go beyond the traditional realm of crop supports -- as important as they are.
Helping a Community Prosper and Grow
CountryBank USA, like many community banks across the nation, has tried to be a catalyst for rural development in our small town of Cando. Cando established an economic development group called the Durum Triangle Development Corporation back in 1978. That organization has now evolved into a county-wide development corporation whose nine member board consists of two community bankers, an attorney, our hospital administrator, a city council member, a county commissioner, and other representatives of our county.
Our experience has shown that before investing in a new rural business project a farmer, banker, or any entrepreneur needs to ask a most fundamental question - "Can we do this - Does this make sense?" If it does, then we stress developing a written business plan or concept paper to figure out how to structure the debt-financing and how to attract equity capital, which is in short supply in many rural areas, for the project. We're pleased to have had some successes.
Our community bank participated in the first totally integrated pasta plant in the nation. About 20 years ago, very little durum wheat was milled in North Dakota. Now, well over 10 percent of all U.S.-produced durum, which is the best wheat for making pasta, is being milled there. In Cando and other North Dakota towns, durum comes in the back door of the plant, is milled into semolina, and is processed into pasta, which is packed and sent out the front of the plant to the consumers across the U.S. This has created 500 jobs in the local pasta industry.
Our bank has also participated in a loan to a local foundry that casts small agricultural implement parts. We became aware of a Canadian foundry owner who was considering a U.S. foundry because many companies want their products to carry the "Made in the USA" label. We showed them why they should locate an American plant in Cando. We brought lots of people together with various types of expertise - two bankers, an attorney, a state legislative representative and the president of the electric cooperative.
They opened for business in the fall of 1995, and now have about 90 employees. These types of loans allow small rural communities to grow and diversify their economic base, adding value to the local economy. Yet despite these efforts our county has lost nearly twenty-one percent of its population according to the last census numbers from 1990 to 2000. Clearly we have to do more.
Key Principals To Drive Rural Development Policies
We appreciate this hearing today Mr. Chairman because we believe that a strong rural economy must go beyond simply writing a new farm policy. Therefore, Mr. Chairman, I would like to suggest three basic principals that should underlie the federal government's approach to implementing a sound and broad-based set of rural development policy initiatives. These principals are:
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) program's requirement that loans go to communities of 50,000 or less.
Limited flexibility to go outside of rural areas could exist when the benefits can be shown to directly help farmers. However, the flexibility for funding should be limited to the extent that such "non-rural" funding should never represent a majority of the rural development program's funding. Otherwise, we are talking about "Rural Enhancement" with only indirect benefits accruing to rural communities. We need to be sure to keep focused on job development within rural communities.
We need to be sure our rural development programs are well coordinated and work together and that rural citizens have adequate access to information about programs.
There are many benefits of targeting rural areas with the lion's share of rural development dollars. These include:
Recognize and Complement the Efforts of the Private Sector -- While an enhanced role for rural development policies is extremely important, ICBA believes a second fundamental principal of rural development policies is that they must be made to compliment and add to - not compete with and subtract from - the efforts of the private sector, especially private sector financial institutions. Many residents in rural communities will tell you that the community banker is the leading catalyst to bringing together the people and leveraging the resources necessary to attract new businesses to the rural community.
Congress must not diminish what the private sector is already doing or rural development efforts will be sparse and ineffective. This would include formulating any policies that allow the Farm Credit System, a government sponsored enterprise, or other new government assisted players into rural business lending to simply take away good business loans that the private sector is already making. So we stress that federal policies should only be complementary to what the private sector is already trying to do.
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. Rural development policies need to be intricately tied into this vast network of private sector lenders if these policies are to be successful.
As stated at the outset of my testimony, over 75% of ICBA's 5,000 members are in towns of less than 20,000 people. 86% are in towns of less than 50,000. Congress should develop and expand existing tools that can be utilized by this vast network of private sector community banks. One obvious way to do this is through greater use of guaranteed loan programs. These banks are keenly aware that the future of their institutions are directly tied to the future of their rural communities.
Target Resources to Various Sizes of Businesses, Including Individuals - In an era of limited funding we need to make sure that scarce federal dollars are targeted to achieve the most impact possible in our rural communities. 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 interest. But we need to also ensure that individual entrepreneurs can thrive in a rural environment.
For example, one of my customers is a farmer who started a business that uses flax straw to make 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 horticulture use out of absorbent and environmentally friendly flax blankets. He bought a closed-up school for $1.00 for the manufacturing site and our bank has helped fund this value-added project with the help of an SBA 7(a) guaranteed loan.
Maintain the Population Base and Infrastructure of Rural Communities -- Helping rural communities diversify their sources of income and their local 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. These off-farm earnings are reported to have averaged approximately $60,000 last year, up considerably from an average of $36,000 in 1992.
Yet trends indicate that counties which have relied largely upon agriculture as the main industry lost significant population in the last decade. For example, the FDIC's first quarter 2000 Regional Outlook report on the Kansas City region highlighted these troubling trends. Only about one quarter of the 400 rural counties studied were growing.
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 our 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. The more diversified economies in rural America appear to be the most viable for the long term.
Maintaining a stable population base in rural areas is important because many demographers say that at some point the populations of communities can fall below a critical mass, destining them for 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.
Three-fourths of our nation's counties are rural, most of which have populations under 50,000. A quarter of these counties have populations under 10,000. Of the nearly 40,000 governmental units in the United States, two-thirds have populations under 2,500, and nearly half have populations of less than 1,000. The elected officials in these jurisdictions are mostly part-time public servants, with minimal staff and/or decision support resources.
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, yes, locally owned community banks focused on meeting local financial needs.
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.
Necessary Tool Box For Fixing Rural Development
Mr. Chairman, we would suggest that a combination of policy tools are necessary for addressing the needs of rural America. This "tool box" should include:
Let me address each of these categories.
Appropriate Tax Incentives To Spur New Investment
HR 1093 and HR 1094 -- ICBA welcomes your legislative efforts to help producers capture more from their raw products through value-added processing. Value-added processing helps producers capture more of the food dollar higher up the marketing chain. HR 1093, the "Value Added Development Act for American Agriculture" provides for grants to assist value-added agricultural businesses. HR 1093 would grant $50 million to create Agricultural Innovation Centers for three years on a demonstration basis. These centers will provide much needed technical expertise to assist producers in forming their own value-added business. Assistance provided by these centers would include legal services, help with research, guidance with the engineering of the facility, and business advice.
This type of initiative could be very useful. For instance, last week USDA announced they were awarding a $5 million multi-state grant to establish the Agricultural Marketing Resource Center (AMRC), a dynamic collaboration of university research and outreach specialists focused on collecting and interpreting information and creating new research to support value-added agricultural activities. The universities involved in this effort would each have wide networks capable of directing resources, research and experience to value-added agriculture issues.
For example, North Dakota, known to be a leader in value-added cooperatives, has had a similar, but smaller program funded by the North Dakota legislature. It is called the Agricultural Products Utilization Commission. APUC provides grants for feasibility studies and start up technical expertise and has been a critical component for getting value-added projects off of the ground.
More of these types of multi-state initiatives should be pursued in an effort to provide additional resources for the development and marketing of value-added ventures. Again, I want to stress that given the thousands of community banks that exist in our rural areas, these efforts should be coordinated with bankers' involvement so bankers can help bring these resources and research to the attention of other leaders in the rural communities. We believe your legislation would help provide greater education and technical assistance to rural communities and bankers would stand ready to assist in these efforts.
Your legislation, HR 1094, the "Farmers' Value-Added Agricultural Investment Tax Credit Act", allows a tax credit for an investment by farmers in value-added businesses to create new economic opportunities for farmers. The bill provides incentives for farmers and ranchers to claim as much as a $30,000 credit for his $60,000 investment toward the purchase of producer-owned, value-added enterprises. Tax credits are helpful because farmers are limited in amounts they can invest, as are other rural businesses. We note also that the House Agriculture Committee's recently released farm bill draft contains a section that would provide grants for start-up farmer-owned value added processing facilities. We believe there is merit in such proposals, especially if they are targeted to rural communities, as we discuss earlier in our testimony.
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.
Subchapter S liberalization would correct many obstacles that often prevent small businesses and community banks from converting to Subchapter S. The key focus is on expanding the number of eligible shareholders for Subchapter S tax status from 75 to 150.
Promote Greater Use of Ethanol Legislation -- Mr. Chairman, I also want to applaud the efforts of you and other farm state congressmen and Senators in promoting greater use of ethanol. We seem to have two problems in this country where one could help solve the other. By this I mean that the surplus of ag commodities could be used to help meet the growing demand for energy in our country. Certainly this is value added agriculture since ethanol production adds 30 cents to the value of a bushel of corn and adds $4.5 billion to U.S. farm income annually. In addition it creates jobs in rural areas - 200,000 have already been created in rural America from ethanol production. In addition, ethanol has the potential to reduce our dependence on foreign oil imports and can contribute to the reduction of air pollution. One essential step among many would be for Congress to extend the federal ethanol tax incentive program as it considers comprehensive energy policy legislation this year.
Enhancing Existing Programs
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, more expensive 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.
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 currently taking part in 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.
Given the statistics that show the loss of population in many agriculturally dependent counties and the need to diversify our rural economies to also strengthen our farm economy, we believe that providing more funds for the B&I program could be a very cost-efficient approach to strengthen the rural safety net and the farm economy. Remember that the lenders are the ones providing the funding, the government's expense comes only in cases of a loan default.
We would also suggest that the B&I program significantly target small businesses to ensure smaller rural projects receive the same consideration for funding as larger rural projects.
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 apparently intends to implement this through a regulatory change since USDA believes a legislative change is not necessary. 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 greater for the businesses. Many community banks will be unable to absorb these new, burdensome costs, especially at a time when agriculture and our rural economies are struggling.
The FY 2002 proposed budget for SBA suggested new fees on the SBA 7(a) loan program. Currently, both the borrowers and the lenders pay significant fees to the SBA to help offset what is perceived to be the credit subsidy cost necessary to underwrite the program. The Fiscal Year 2002 budget seeks to increase the fees paid by borrowers and lenders to offset the need for an annual appropriation.
We're aware of OMB's interest in making these programs self-financing. However, existing fees already offset the cost of the 7(a) program. The net result of increasing fees as proposed would be to drive both the small business borrowers and the lenders from the program. Every year, more than 40,000 small business applicants turn to the 7(a) program for their critical financing needs. These small businesses are unable to obtain comparable credit elsewhere. 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. We are also hearing complaints about the 50 basis point annualized servicing fee, which is applied to the outstanding balance of SBA's guaranteed portion of the loan and charged to lenders.
Obviously, in the next budget cycle, new and higher fees could again be proposed. To deal with some of these issues on a more permanent basis a few suggestions would be:
We point out that some of the demand for small business loans in rural areas is limited due to high fees. Eliminating these fees 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 through SBA, thus increasing SBA's potential for losses.
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. In my community of Cando, our economic development council believes that our future rests with our ability to compete in the new economy. We need the technological infrastructure to line up at the starting gate.
Establishing New Programs
Mr. Chairman, the Center for the Study of Rural America, headquartered in the Federal Reserve Bank of Kansas City, is a national rural outreach committed to illuminating the issues and challenges facing rural America. In their recent national conferences, the Center has begun exploring the need to outline a broader rural policy that goes beyond farm policy.
One issue in particular the Center has examined is the need to bring more sources of equity capital to rural America to complement the debt financing offered by private-sector lenders. In 1999, the Center issued a report on the proceedings of their national conference entitled "Equity for Rural America - from Wall Street to Main Street."
Some of the conclusions of this conference were summarized as follows:
Rural Equity Fund -- The ICBA has worked with a coalition of organizations on legislation that would create a "rural equity fund" to help spur business development in these rural communities. There are about 3,000 rural banks considered by the Federal Reserve to be "agricultural banks" and many others that don't meet the definition of an "agricultural" bank are located in rural areas and make a considerable number of loans to consumers and small businesses on Main Street. Rural community banks need to be a part of the rural development equation.
The purpose of the "rural equity fund" again should be to encourage private investment in value-added agriculture enterprises and small business start-ups and expansions. Not all rural businesses will be "value-added" in terms of enhancing farm income from processing their commodities into food and other uses. 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.
The legislation would create a public/private partnership designed to attract equity investment into cooperative and other business ventures in rural America. The Fund would provide equity financing to help complement loan packages put together by the private sector and projects brought to the attention of the Fund by sponsors, including cooperatives, lenders and community development groups.
The fund would be capitalized by investments from private sector institutions and the government would match these monies up to a specified level. Investments made by this fund will provide off-farm income, additional markets for agricultural products and new business opportunities in rural communities. However, again we contend that any new or existing rural development program needs to be targeted primarily to truly rural communities based on population so we can diversify rural America's economic base.
By investing in an equity fund, rather than individual projects, private sector lending institutions would also avoid the mixing of banking and commerce, which is prohibited by Federal law.
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. ICBA and its Agriculture-Rural America Committee look forward to working with the Congress to accomplish these goals. Thank you.