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Congress Evaluates Health of Farm Credit System

March 31, 2017

Dallas P. Tonsager, Board Chairman and CEO of the Farm Credit Administration, testifying before the House Agriculture Committee. Photo credit: House Agriculture Committee.

This week, the House Agriculture Committee held its 14th hearing in a marathon of hearings this month leading up to the Committee’s initial work on the 2018 Farm Bill. The scope of the hearing was to review the health of the Farm Credit System, especially in light of the recent economic downturn in the farm economy. The House Agriculture Appropriations Subcommittee held a similar hearing earlier this month.

Testifying at this week’s hearing were representatives from several Farm Credit institutions, along with the Farm Credit Administration – the regulatory body overseeing the national network of regional Farm Credit Institutions.

In his opening statement, Committee Chairman Michael Conaway (R-TX), stressed the importance of the health and soundness of the Farm Credit System: “As farm incomes continue to decline, credit availability remains vital to producers, new and old. In our view, a diversified, well capitalized system is a healthy Farm Credit System that can function and service clients independently.”

Ranking Member Collin Peterson (D-MN) highlighted in his opening statement not only the importance of credit to our nation’s farmers, but also his disappointment with the President’s first budget proposal which gutted programs aimed at rural communities:

“There’s no question that access to credit is necessary for farmers to stay in business, but access to capital is also necessary for ag businesses and rural communities… We have also seen a budget submission that seems to overlook the continuing infrastructure needs in rural America, from basic drinking water to the state of the art hospital facilities that rural areas deserve.”

Several key themes emerged from yesterday’s panel discussion, and all those who testified agreed that Farm Credit:

  • Plays an important role in supporting credit access for young, beginning and small farmers
  • Lending goes beyond the farm gate and plays an important role in rural infrastructure and development
  • Offers robust, but fair competition to commercial banks
  • Maintains sound health in this time of economic uncertainty and is “as strong as it’s ever been”

Additional insight on these key discussion topics is summarized below. Visit the Committee’s website to review witness testimony or watch a recording of the hearing.

Young, Beginning, and Small Farmers 

The Farm Credit system was established over 100 years ago in order to ensure access to agricultural credit to farmers, with a statutory focus on providing capital to young, beginning, and small (YBS) farmers. Within the Farm Credit system, “YBS” includes farmers who are 35 or younger (“young”), have been farming for 10 years or less (“beginning”), and whose gross annual farm sales are less than $250,000 (“small”). For more information on recent farm lending trends, see our previous blog post.

Several witnesses mentioned the importance of Farm Credit programs specifically targeting their YBS borrowers. Doug Stark, President of Farm Credit Services of America, based in Omaha, said that “YBS is an important part of what we do every day.”

Representative Peterson pressed the panel about specific ways that Farm Credit is tailoring their loan programs to meet the needs of beginning farmers, especially since, as Ranking Member Peterson mentioned, most young farmers have little if any land, equity, or assets, and are especially vulnerable in these tough economic times.

And Representative Kuster (D-NH) asked the panel how we can incentivize more young people to pursue a career in agriculture. In response, several witnesses offered to follow up on specific farm bill recommendations targeted toward beginning farmers. Similar to the appropriations hearing a few weeks earlier, several witnesses mentioned specific programs such as Farm Credit East’s Farm Start program that targets loans and additional services to beginning farmers.

Loan Limits

Another topic that came up for debate in yesterday’s hearing, was whether or not the individual limits on Farm Service Agency (FSA) loans need to be raised in the next Farm Bill. While it’s true that Congress doesn’t appropriate any taxpayer dollars to directly support the Farm Credit System, FSA guaranteed loan programs allow lenders like Farm Credit to extend credit to riskier borrowers – including YBS farmers.

Congressman Bost (R-IL) asked the panel pointedly if they believe that FSA loan limits need to be raised. All who responded agreed that Congress should consider raising them in the next farm bill. Some cited the rising cost of farmland and inflation rates, while others spoke of the rising equipment costs.

It’s no surprise that Representative Bost broached this question as he has introduced legislation on this very topic and will likely be a key proponent of increasing loan limits in the next farm bill.

And while it may make sense to adjust limits for specific loan programs, any policy changes proposed relating to the appropriate cap on federal loan amounts should be measured against current program usage and demand, historical funding levels, and performance targets.

The loan limits on Direct Farm Ownership Loans, for example, have not been adjusted since 2008, while farmland real estate values have increased 40 percent over that same time. Taken together with the fact that FSA has not obligated all of the available funding for these loans in recent years, it would make sense for Congress to look more closely as increasing these limits.

However, doubling loan limits for all FSA loan programs, direct and guaranteed, across the board will have devastating effects on the ability of young, beginning, small and socially disadvantaged farmers to obtain the credit they need to sustain their farms. Especially with the recent economic downturn in the farm economy, loan demand currently exceeds available funding at current loan limits. Demand for FSA loan funding was especially high in 2016, and required an additional emergency appropriation to address the significant backlog of farmers seeking FSA financing to cover year-end operating expenses. If loan limits were doubled across the board to accommodate the credit needs of larger operations who are unable to secure loans of up to $2.5 million from a private lender, countless small and mid-sized farmers would be squeezed out of FSA loan programs with nowhere else to turn.

Crop Insurance and Beginning Farmers

In addition to discussing credit needs, yesterday’s witnesses also spoke about the federal crop insurance program.

Crop insurance is an important tool for beginning farmers; however, it does not currently do all it can to help them, and in some cases even harms their ability to succeed.

Many beginning farmers have no appropriate crop insurance options and the special benefits provided in the 2014 Farm Bill for beginning farmers are only available for the first five years of farming, which is half the time (10 years) that USDA defines as the period someone is a beginning farmer. And, while there are over 100 crops covered by crop insurance, for most of those crops, coverage is only available in a few states. For example, coverage for strawberries is only available in one state; and coverage for fresh market beans is only available in three.

Moreover, the fact subsidies are uncapped and not means tested puts beginning farmers at a disadvantage to their more established larger neighbors when bidding for land. Established farmers can capitalize their crop insurance returns to increase the price they can pay for land, while beginning farmers often have no land base to leverage. A crop insurance program that addresses these issues would be a stronger program.

Next Up?

Both the House and Senate Agriculture Committees will continue to hold hearings throughout the spring as the 2018 Farm Bill debate heats up. Next up in the House are two hearings on April 4, the first on farm commodities and risk management and the second on farm credit beyond the Farm Credit System. On April 5, the House Committee will hold a hearing on agriculture and tax reform. Stay tuned for more coverage from NSAC in the coming weeks.

Categories: Beginning and Minority Farmers, Commodity, Crop Insurance & Credit Programs, Farm Bill

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