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Testimony of the 107th Congress
New Farm Bill and Farm Credit Initiatives
Senate Agriculture Committee
May 16, 2001
Thank you, Chairman Lugar and other distinguished members of this committee for the opportunity to present the views of the Independent Community Bankers of America (ICBA) on the credit title of the 1996 Farm Bill and our recommendations for future farm and credit related policies.
I am John Evans, Jr. the CEO of D.L. Evans Bank located in Burley, Idaho, a small community of less than 10,000 residents in the heart of potato, sugar beet, small grain, and livestock country. Ours is a family-owned bank that has served out community for nearly 100 years. The bank has survived agricultural disasters, the Great Depression and, more recently, the downturn in the farm economy. We are a $225 million asset bank heavily involved in ag lending and in terms of our bank’s services, almost everything is based on agriculture including operating lines of credit, farm real estate loans and commercial loans.
I am also serving this year as the Vice-Chairman of ICBA’s Agriculture-Rural America Committee. ICBA is the only national trade association that exclusively represents the interests of community banks.
This hearing is very timely for a couple of reasons. First, obviously, is the need to rewrite the Farm Bill during the 107th Congress since the current bill expires in 2002 and there is great uncertainty about the future for many farm families. Unfortunately, farmers today face the ‘triple whammy’ of despairingly low prices, sharply rising energy and input costs and an unlevel playing field in the international trade arena.
The hearings are also timely because ICBA’s Agriculture-Rural America committee, which consists of over twenty-five bankers from across the nation, will be meeting in a few days in Washington D.C. At that time we will be discussing in detail some of the farm policy and farm credit related issues being reviewed here today. A few years ago ICBA’s Agriculture-Rural America committee sent Congress our “Comprehensive Proposal to Strengthen the Farm Safety Net” and we’re pleased that several of the items we called for have either been acted upon or are about to be acted upon.
On December 15th, of last year, ICBA sent President Bush and the new Congress a special report titled "Community Banking's Issues & Answers Brief for the Bush Administration & the U.S. Congress,” to offer guidance to the incoming administration and the 107th Congress on policy issues and solutions that would help preserve and strengthen the community banking industry. A number of recommendations were made to strengthen the farm and rural economy and these are included in my testimony today. A few of our suggestions may go beyond pure farm bill policy, but we believe they are important considerations for this committee given its focus on both agriculture and rural America.
We also plan to have several bankers involved as part of a special “Farm And Rural Credit Policy Task Force”, reviewing a number of these issues and we plan to present further details and recommendations to the congressional agriculture committees in the near future.
A Farm Aid Package
Our first recommendation today is to continue the recent series of farm aid packages to help producers offset the impact of extremely low farm prices. ICBA has supported these farm aid packages because we believe they are necessary to prevent an agricultural credit crisis that could have developed in the absence of such assistance. We recognize that ultimately farmers need to earn their income from the market to be viable, but a number of factors outside the control of farmers, including events in the broader economy and on the world stage, coalesced to drive down farm prices and dramatically reduce our farm exports. We have also recognized that many of the farm trade issues, so important to agriculture’s health, will take considerable time to work out as part of the world trade negotiations.
USDA’s recent supply and demand figures indicate it will be another tough year for many farmers. Farm prices for many commodities will remain low as carryover levels for most major commodities will be high. A number of experts will be discussing these projections in detail so I will simply say that even with a farm aid package this year, a number of farmers will likely leave farming. But another round of economic assistance is necessary to help stem this tide.
We were pleased that the new Budget provides roughly $80 billion to agriculture’s baseline over the next decade and a minimum of $12.5 billion for the 2001 and 2002 crop years. Last March, when ICBA testified to the House Agriculture Committee on farm policy ideas, one of our recommendations was to include counter-cyclical payment mechanisms in the next farm bill to provide producers income assistance during periods of extremely low prices. We also suggested congress could establish a special fund as part of a multi-year budget that would provide increased money to agriculture in low-price years. We believe the new “reserve fund” outlined in the budget is consistent with what we recommended and is a good way to provide flexibility in the next farm bill for a counter-cyclical approach to boosting farm income in low-price years.
Predictability Is Key
I believe what everyone, including both farmers and their lenders, is trying to achieve is a greater degree of predictability so that farmers and their lenders don’t have to rely on annual, ad-hoc disaster packages. That wasn’t a good recipe for crop insurance and it isn’t a good recipe for farm financing either. More predictability will allow lenders and their farm customers to make timely business and financing decisions and to have a better grasp – earlier – of the cash flow statements. Producers and their lenders need to have the ability to make three to five year crop projections based on the known amount of income available.
Strengthening The Farm Safety Net
Obviously, both short-term and long-term solutions are necessary on a number of fronts. For example, we must focus considerable efforts towards boosting farm exports in the long-term and enhancing trade opportunities to help raise farm prices, reduce government expenditures and ensure the long-term viability of American agriculture.
New Farm Policy Income Mechanisms – In terms of the new farm bill, ICBA believes Congress should consider legislation that provides greater income to farmers when market prices decline. The structure could include not only a fixed payment mechanism, such as the current AMTA payments, but also counter-cyclical mechanisms that would include supplemental income payments when farm prices fall, and tax-deferred, individual savings accounts that create a “Farmer 401(k)” plan.
For example, we note there is strong support for the Farm, Fish and Ranch Risk Management (FFARRM) accounts which would allow producers to defer taxes on up to 20 percent of their net income for up to five years. Perhaps the committees should consider how this or other special savings accounts could be more intricately incorporated into future farm bill safety nets rather than being stand alone accounts separate from any farm bill policy mix.
One goal of such accounts should be to ensure maximum participation and minimizing any limitations that could severely limit the number of farmers using them. Therefore, possible provisions could include allowing a portion of government payments to go into these accounts, rather than limiting them to just contributions from farmers’ net income. We recommend maximizing the time limitation, for example, much longer than five years as that is too short to allow for the accumulation of assets. We believe the general goal of such accounts, especially given the recent levels of federal outlays to the farm sector, should be the accumulation of assets over a long period of time.
Therefore, another consideration would include limiting withdrawals from the accounts to hardship needs or simply minimizing the amount that could be withdrawn. This would allow a “Farmer 401K” program that would allow farmers to strengthen their long term financial position and allow them to eventually transition away from heavy government dependence. The safety and soundness of these accounts should also be assured which can best be accomplished by directing participation to insured depository institutions since these are savings accounts.
Therefore, we suggest six general goals for this type of savings account program:
Mr. Chairman, in addition to the above, there will need to be additional income support provisions in the new farm bill that could be both of a fixed nature and counter-cyclical to help farmers cope with low prices. Additional questions will need to be answered including how to set a “base” period or production amount on which to determine future levels of payments. Planting flexibility should continue in the next farm bill. would be glad to work with the committee to provide our thoughts on these matters.
Increase Risk Management Tools – Mr. Chairman, we are pleased that the new crop insurance program has been substantially enhanced. Although not part of the next farm bill policy debate, I mention it here because it is an important cornerstone to a strong farm safety net. From a lender’s standpoint, crop insurance is especially important because it better enables producers to repay their loans and withstand economic adversity when major weather disasters strike. The goal of enhancing the farm safety net needs to include a sound and viable crop insurance program. The program needs to be attractive enough to sustain high levels of farmer participation so Congress does not feel inclined to pass annual ad hoc disaster programs, which only further detracts from participation.
The new crop insurance reform law clearly caused more growers to buy crop insurance and at higher coverage levels. For example, Crop Revenue Coverage [CRC] participation increased by over 95,000 policies, or a 23 percent increase. Revenue Assurance [RA] increased by over 26,000 policies, or more than double 2000 sales. In addition to buying higher coverage levels, it appears that many growers switched from yield guarantees to the revenue insurance products. This sizeable increase in crop insurance participation on the hard red winter wheat crop means the hard red winter wheat crop in the 5 state region of Kansas, Oklahoma, Texas, Colorado and Nebraska will have over $1 billion in coverage for the 2001 crop. In addition, wheat producers insuring above CAT coverage levels increased from 62.0% to 70.4% of the planted acres. The HRW wheat crop is one of the few major commodities where production will be down significantly, largely due to weather conditions, and producers will have greater protection thanks to the new crop insurance program.
Similarly, we’re told cotton producers opted for higher coverage levels and increased their adoption of revenue insurance. Participation in higher coverage levels of Multi-Peril Crop Insurance (MPCI-H), with coverage equal to or greater than 65 percent increased by over 13,000 policies, which represents a 21.5 percent increase in policies sold in 2001. There was 51% increase in CRC cotton policies, an increase of over 5,000 policies.
I mention these statistics to simply enforce that producers will buy crop insurance if it is perceived as a good “investment” and is sold by a private insurance network. A good crop insurance program not only helps farmers and provides more security for lenders, it will lessen the need for future government bailouts and thereby decrease government outlays.
In fact, Congress could consider making crop insurance participation mandatory for those producers receiving government payments. This would put pressure on Congress, producers and the industry to improve the program as needed to lessen the prospects of future large multi-billion dollar bailouts. You could therefore add a “crop insurance compliance” section to existing statute, similar to the “conservation compliance” requirements that exist today.
Provide Sufficient Funding and Flexibility For FSA Guarantees – Mr. Chairman, it became apparent to us with the downturn in the farm economy in the late 1990’s that lower commodity prices would lead to a rapid escalation in demand for FSA loan guarantees and that more funding would be necessary. Indeed, Congress acted twice to pass supplemental appropriations bills to provide more funds for FSA loan guarantees because funding literally “dried up”. Farmers were complaining to bankers because they couldn’t get their production loans and bankers were being told that there was no more funding available until Congress and the President agreed to supplemental appropriations legislation, which at times becomes embroiled in non-related issues.
We believe that one of the most cost-effective programs in the government’s farm safety net arsenal should be a fully funded FSA loan guarantee program. The FSA loan portfolio has witnessed improved performance with direct loan delinquency down to its lowest level in more than two decades. And, importantly from the standpoint of lenders, is the loan delinquency for guaranteed loans is at an all-time low of 1.83 percent.
It is important for Congress to keep in mind that with the guaranteed loan programs, Congress can get a sizeable “bang for the buck” because private sector lenders are providing the loan funds, not the government. However, when these programs run out of money it severely undermines their credibility and increases frustration in the countryside. This should never have to be the case. FSA guaranteed loan programs can be a useful public-private partnership and they need a sound financial footing for the long haul and made more flexible to administer.
One of our recommendations for the next farm bill is to include language in the credit title that provides a “cushion” against running out of appropriated funding. One way this could be accomplished is to provide for a back-up line of credit to the Treasury for $10-$20 million that could be tapped by the Secretary if the Chairman and Ranking Members of the House and Senate Agriculture and Appropriations committees agree that allocation of the funds are necessary. A second alternative would be to appropriate a permanent and small pool of additional funds that can be used in the event the appropriated amounts are spent. This small funding investment would provide well over $1 billion of credit to farmers in times of need.
We offer the following recommendations for FSA loan programs:
Mr. Chairman, while we’re discussing guaranteed lending, I also want to recommend that Congress legislate a guaranteed lending program for on-farm storage in addition to the existing direct loan program. On farm storage needs in some areas will remain high with the rising carryover levels of major commodities and the government should not be tackling this effort alone, especially when direct loans are much more costly than guaranteed loans. I also want to emphasize the importance of continuing to allocate funding for low interest FSA disaster loans. In my area of southern Idaho, farmers are really struggling. We estimate we’ll lose 10 percent of our farmers this year. The disaster declaration last year was critical in keeping many farmers going. If not for these government loans, we would probably be losing 25% of our farmers this year. And as you know, this also hurts the main street economy in our small rural towns. We continue to face drought problems and now face sharp rises in energy costs.
Enhance Conservation Initiatives & the CRP – ICBA believes that conservation should continue to be an important cornerstone of new farm policy. In this regard we believe that more producer choice should be provided to farmers in terms of choosing the length of their Conservation Reserve Program (CRP) contracts. Producers should be allowed to choose between three-year, five-year, and seven-year contracts so that land does not have to be idled for 10-year periods, which may cause too much economic disruption.
Addressing Food Aid & World Hunger Needs – It is also important that we continue our focus on efforts to aid hungry and malnourished people in other countries in a constructive and positive way. Food aid commitments to needy foreign nations should be increased, and the functionality of these programs should be reviewed to assess ways to improve cost efficiencies.
We believe the private sector, including the World Bank and regional development banks such as the Inter-American and Asian Development Banks can help assist in developing the infrastructure necessary to allow efficient food transportation to hungry people in poor countries. Proper monitoring and oversight mechanisms also should be established to help ensure that food shipments get to the people in needy countries and are not diverted. Another example of the types of initiatives that would be of additional assistance is the George McGovern-Robert Dole International Food for Education and Child Nutrition Act introduced recently.
Improving Access to Foreign Markets – ICBA supports boosting U.S. agricultural trade so that family farmers can receive a profit from the market and be viable in the long term. The new administration and Congress should pursue several initiatives including exempting agriculture from unilateral economic trade sanctions; eliminating unfair export subsidies and trade tariffs of competitors through World Trade Organization negotiations; pursuing ongoing transparency and eventual elimination of State Trading Enterprises and passing trade negotiating authority as soon as possible. We also urge the administration’s to continue aggressive efforts to ensure that international regulation of genetically modified food products are based on sound science, not politics.
In regards to passing trade negotiating authority, we are quite concerned about the consequences of losing out on trade agreements due to the lack of trade negotiating authority as mentioned in comments recently by USTR’s Ambassador Zoellick.
Ambassador Zoellick indicates the U.S. is currently only party to two of the 130 free trade agreements that now exist. Given the state of American agriculture, we cannot afford to be shut out of preferential trade and investments agreements while allowing our trade competitors to reap the benefits.
Diversifying Rural America
Mr. Chairman, one important aspect of strengthening the farm safety net involves helping rural communities diversify their sources of income and their local economies. More and more farm families appear to be relying on off-farm income to support the farming enterprise. USDA statistics indicate that 90 percent 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 which 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 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, 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.
We Offer the Following Suggestions to Help Diversify our Rural Communities.
Increase Deposit Insurance & Index it to Inflation -- Rural banks are losing more deposits than are being created. There are a number of factors at play, but many consequences resulting from these factors could be substantially reduced by doubling deposit insurance coverage and indexing it to inflation. American agriculture is undergoing dramatic changes resulting in fewer and larger farms as well as larger corporate and agribusiness interests. These larger farms and larger agribusinesses, especially at the local level, deal with considerably larger and larger sums of money on a routine basis. Yet, deposit insurance hasn’t been raised since 1980 and its value has been eroded in half.
As we all know, millions of retirement accounts have grown well beyond $100,000. Doubling FDIC deposit insurance and indexing it to inflation will help ensure it keeps up with the savings needs of rural Americans, including farmers who will be looking to retire. In addition, the depositors of many rural banks are older and when they die, their deposits are typically inherited by their children who now live in larger cities. Thus, these funds leave our rural communities.
The result is that money which could have served as lendable funds for business investments and other loans in the community is gone. This only exacerbates the cycle—less investment and opportunity in rural communities and more population flight. New funding sources must therefore be found by the community bank to make up for this loss of depositors and deposits. 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 for survival.
Increasing funding for USDA’s Business and Industry program – We were pleased that congress last year provided the USDA 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 districts with populations of less than 50,000 people, including gas stations, factories, and other local businesses. USDA business loans reportedly saved or created more than 29,000 jobs last year.
This is good news for banks in their efforts to help slow-growing rural markets. We are told that approximately 400 banks are currently taking part in the program and more are trying to get in. The main problem is that the B&I program is still under funded as last year almost $1 billion in guaranteed loans, for 376 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.
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 only farm policy. Diversifying our rural economies is a key challenge in the 21st Century.
An additional issue 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. We believe one way to accomplish this would be through the creation of a private-sector driven Rural Equity Fund that would have some initial start-up capital provided by the government and matched by the private sector. The fund would be able to approve equity financing for private sector rural business projects that need equity capital to complete their financing needs. Such a fund would provide new ways for rural community banks to access adequate equity capital for rural business start-ups and expansions. Additionally, 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.
Mr. Chairman, we appreciate the Committee’s efforts on behalf of American agriculture and rural America. Strengthening the farm safety net by passing a new farm bill that includes counter-cyclical income support mechanisms and greater business investment opportunities in our rural areas are essential ingredients to a viable future for many farm families. Additional longer-term solutions involving successful trade negotiations will also be very important to rural America’s future. ICBA and its Agriculture-Rural America Committee looks forward to working with you Mr. Chairman and other committee members to accomplish these goals.