On April 14, Rep. Jeff Fortenberry (R-Nebraska), chairman of the House Agriculture Committee’s Subcommittee on Department Operations, Oversight and Credit, held a public hearing to review credit conditions in rural America. A number of institutions provide credit to our nation’s farmers, ranchers and rural constituents. Members of the subcommittee heard from two panels of witnesses that provided insight into the availability of credit for producers and the potential risks. Here are excerpts of testimony presented during the hearing:

“Activity in FSA’s farm loan programs indicates that a significant number of farmers continue to be unable to obtain commercial credit under current conditions … In early FY 2009, loan demand surged to levels that had not been seen since the early 1980s.

"Demand for farm loan program assistance in FY 2009 and FY 2010 reached its highest levels since FY 1985. Demand has continued at, and in some programs increased above, those near-record FY 2009 levels.

“Over the past 2½ years, an unusually high number of direct operating loan applications have been received from new customers. Normally, about 20 percent of direct operating loan applications are from farmers who do not have FSA loans.

"Since 2009, over 40 percent of direct operating loan applications have been from farmers who are not FSA borrowers. As of April 4, 2011, 43 percent of the direct operating loans made in FY 2011 were to customers who did not have existing FSA operating loans.”

Val Dolcini
Acting administrator, Farm Service Agency, U.S. Department of Agriculture

“Agriculture lending has slowed but is stable. Volatile commodity prices, high input costs and a slow general economy will continue to impact the borrowing needs of producers. As a result of that and the pressure on the lending industry to strengthen their financial position, we have seen solid growth at Farmer Mac.

"Since late 2008, our focus has been on assuring the strength of our business, mitigating the risk on our balance sheet and enhancing our capital position so that we may further serve rural America. We have made significant progress. That progress has resulted in a renewed interest in products that help rural lenders meet the needs of America’s farmers, ranchers and rural communities.”

Michael A. Gerber
President and chief executive officer, Federal Agricultural Mortgage Corporation (Farmer Mac), Washington, D.C.

“Access to credit is obviously critical for all types of new and beginning farmers, including smaller-scale and more locally-oriented farms like mine … The greatest hill to climb for a new beginning farmer is the initial start-up cost. It is hard for someone with few assets to secure a loan for agricultural land.

"It is critical therefore to retain the Farm Service Agency direct loan programs. As the lender for those who cannot find credit elsewhere other than resorting to credit cards, FSA creates new farming opportunities and helps regenerate American agriculture.

"I believe Congress was correct in the last four Farm Bills to target a majority of FSA direct real estate loans to beginning farmers as well as a substantial amount of direct operating loans. These loans, in a very real sense, help slow down the aging of American agriculture, and it is my hope that Congress will continue to ensure strong targeting to beginners and robust funding overall for both direct and guaranteed loans.

"The future for the next generation of farmers, like the ones before it, depends on it.”

Matt Starline
Owner, Starline Organics, LLC, Athens, Ohio

“Farm input costs have continued to increase. Landlords are demanding more for cash rent, while seed, fertilizer and, of course, fuel also have increased notably. This has driven a considerable increase in the need for capital to operate these farms.

"In many situations, grain producers are finding that they need to capitalize and fund portions of three years of production: They must finance their investment in the carryover of last year’s crop while it is being marketed; they have the ongoing investment in the present crop being planted and grown; and even before this year’s crop has matured or been harvested, they are expected to make commitments and prepay such things as seed, fertilizer and chemicals for the coming year.

"To effectively market their crops, many farmers also set up marketing loans to fund margin calls to cover their marketing program positions. We have estimated that the capital requirements for a typical Midwest corn producer to be nearly four times what it was in 2005.

“To be successful in these volatile times, farmers need profitability so that they can increase their equity stake in their own operations. But as the credit needs of these farmers has continued to increase, lenders have had to continue to build capital so that they can keep up with increased loan demand while maintaining appropriate capital levels.

"We have seen that some local financial institutions had neither the financial capacity nor the experienced personnel to deal with this rapidly changing and volatile environment. This becomes apparent when we see an increase in loan requests from producers whose need for credit has outgrown their local lender’s financial capacity, or who are in need of an immediate loan because volatile prices led to calls for immediate increased margins in their hedge accounts.”

Doug Stark
President and chief executive officer, Farm Credit Services of America, on behalf of the Farm Credit System, Omaha, Nebraska

“Both the Farm Credit System and Farm Credit Administration learned much during the crisis of the 1980s, and those lessons helped build a much stronger Farm Credit System, as well as a stronger regulator. As the arm’s length regulator of the FCS, the agency will continue to focus on ensuring that the system remains safe and sound by promulgating regulations, providing appropriate guidance and maintaining strong and proactive examination and supervisory programs.

"With the dynamics and risks in the agricultural and financial sectors today, FCA recognizes that FCS institutions must have the appropriate culture, governance, policies, procedures and management controls to effectively identify and manage risks. Today the system is a dependable provider of credit to agriculture and rural America as intended by Congress.”

Leland A. Strom
Chairman and chief executive officer, Farm Credit Administration, McLean, Virginia

“Banks will continue to be the source of financial strength in their communities by meeting the financial needs of farms, businesses and individuals. Banks in every state in the country are actively looking for good farm and ranch loans.

"Since the financial crisis, the banking industry stepped up and increased their share of farm and ranch lending from year-end 2007 to year-end 2010 by over $13 billion. During the same period, farmers and ranchers have reduced their total indebtedness by nearly $6 billion.

“In response to what we know lies ahead, ABA and our members have been telling farmers and ranchers that they have to improve their business practices including their marketing plans, their capital expenditure planning and their risk management practices, to name a few. Overall, many producers have responded positively to these messages, and they have stepped up their game to meet the challenges of this period.

"Proven cash flow, and being able to demonstrate the ability to repay a loan, continues to be a bedrock principle of agricultural lending by banks. Again, the regulators have made it very clear to the bankers that they expect bankers to stick to the basics, and that demand is being followed by the bankers I know.”

Matthew H. Williams
Chairman and president, Gothenburg State Bank, on behalf of the American Bankers Association, Gothenburg, Nebraska

“With a resurgent farm economy, agricultural loan demand is shifting. The most dramatic shift has emerged from the decline in farm operating loans. With strong cash flows at the end of 2010, farmers, especially crop producers, paid off operating loans.

"In addition, many pre-paid a large portion of their input costs at the end of last year, curtailing loan demand. Based on Federal Reserve surveys, commercial bankers across the nation reported higher loan repayment rates and fewer extensions and renewals for operating loans, with loan volumes falling more than 22 percent below year-ago levels in the first quarter of 2011.

“In contrast, commercial banks expanded lending to livestock producers. With higher costs for feed and feeder cattle straining livestock profits, loan demand from livestock enterprises increased. Even in the face of tighter credit standards and rising delinquency rates, commercial banks expanded loan volumes for livestock approximately 15 percent last year. In the first quarter of 2011, commercial bank lending for livestock held near last year’s elevated levels.

“Going forward, agricultural lenders appear to be in position to meet the credit needs of farmers. Agricultural bankers report having ample funds for farm loans and continue to lend to farmers at historically low interest rates. Bankers are beginning to ease collateral requirements on farm loans after stronger repayment rates trimmed delinquencies on farm loans.

“Still, questions surrounding the availability of credit and collateral requirements persist. The most pressing concerns and stringent requirements have likely emerged for livestock producers struggling with profitability and for smaller farm operations owned by young and beginning farmers with less equity.

"Our research at the Federal Reserve Bank of Kansas City indicates that these operations are more likely to struggle with debt repayment and be denied credit.”

Jason Henderson
Vice president, Federal Reserve Bank of Kansas City