SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2452 words

COMMITTEE: SENATE AGRICULTURE, NUTRITION AND FORESTRY

HEADLINE: 2002 FARM BILL

TESTIMONY-BY: JACK CASSIDY, SENIOR VICE PRESIDENT OF

AFFILIATION: COBANK

BODY:
AUGUST 2, 2001

STRENGHTENING RURAL AMERICA - RECOMMENDATIONS FOR THE RURAL DEVELOMENT TITLE OF THE FARM BILL

TESTIMONY PRESENTED BY JACK CASSIDY SENIOR VICE PRESIDENT OF COBANK

BEFORE THE UNITED STATES SENATE COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY

Mr. Chairman and members of the Committee, my name is Jack Cassidy. I'm the senior vice president for board and corporate relations at CoBank. In response to the Committee's invitation, we are pleased to testify on initiatives to enhance rural economic opportunities and rural communities for your consideration in conjunction with the Farm Bill.

With $24 billion in assets, CoBank is the largest bank in the Farm Credit System. We provide financial services to about 2,600 customers, who are also our member-owners. These member-owners include farmer-owned cooperatives, rural telecommunication companies, and electric systems. We also provide financing to support the export of agricultural products. CoBank's business is entirely focused on rural America and in working with small, mid- sized and large cooperatives that are an important and integral part of the fabric of rural America. CoBank's lending portfolio includes $10.3 billion in agribusiness loans primarily to farmer-owned cooperatives and Farm Credit associations, $5.8 billion in communications and energy loans to rural electric cooperatives and communications companies, $2.5 billion in agricultural export financing loans and $900 million in leases to farmers, cooperatives and other rural businesses through our affiliate Farm Credit Leasing. CoBank operates on a cooperative basis and returns a significant portion of bank earnings to the bank's customer-owners in the form of patronage refunds.

It is important to note that CoBank also works with many other financial institutions including commercial banks through syndicating and purchasing loans. These alliances with other financial institutions help us meet the growing needs of many of the businesses we serve. In the past 18 months, CoBank has acted as the agent for $4 billion in loans sold to other lenders. We also purchased $2.5 billion in loans from other lenders.

This partnership with commercial banks and other lenders brings new sources of capital to meet the needs of rural businesses while at the same time spreading risk. We consider the development of these alliances with other lenders as critical and have plans to place even greater emphasis on this area in the future.

Unfortunately, many rural communities have not shared in the prosperity of the 1990s that benefited many urban and suburban areas. It has been difficult for many rural businesses to obtain the necessary equity capital to grow and create new market opportunities and new employment. In addition, rural communities often do not have access to the technology and communications systems that are vital to economic growth.

Various studies have shown that while the on-farm credit needs of producers are largely being served, there are gaps in financing for other rural businesses. In particular start-up companies and farmer-owned cooperatives have difficulty raising equity capital. Venture capital is scarce for these projects as most investors seek higher returns than most rural projects have been able to offer. In addition, financing for product sales into international markets presents special challenges to cooperatives and other rural businesses.

CoBank looks to address the opportunities and challenges in rural America through our focused commitment and expertise on rural businesses, making better use of technology to deliver financial services, structuring new alliances and partnerships with other financial institutions-- thereby increasing the bank's capacity to carry out our mission. Most recently, for example, we announced the formation of a business services unit to provide technical assistance for start-up and existing cooperatives. Our Board of Directors, which is comprised of farmers and managers of cooperatives, along with management is committed to ensuring that our customers have access to the financial services they need-- either directly through CoBank or through alliances with other parties.

I would like to comment on four areas for policy recommendations:

(1) The important role that cooperatives play in advancing the economic interests of rural America and steps that can be taken to strengthen cooperatives and enhance value-added agricultural initiatives;

(2) Adjustments to CoBank's authorities that would better enable us to serve rural America;

(3) Making equity capital more available in rural America; and

(4) Improvements to the USDA Business and Industry Loan program (B&I) to make it more useful for rural cooperatives.

Value-Added Initiatives and Enhancing USDA Programs in Support of Cooperatives

For decades CoBank customers have been leaders in marketing and processing agricultural products to obtain a greater share of the consumer food dollar for the American farmer. We believe strongly, as do our member-owners, that value-added initiatives are one of the keys to a prosperous farm sector. We also know that there are limitations and challenges to successful value- added enterprises.

The keys to success for value-added entities include strong management, a reliable source of raw product and member commitment, a strong understanding of the marketplace, a comprehensive business plan and proper capitalization. In order to encourage value-added business development, USDA programs that enhance the ability of farmers to join together successfully in cooperative efforts need to be revitalized and strengthened. Farmers must have better tools available through USDA programs. Recommendations include:

- CoBank supports expansion of the Value-Added Technical Assistance Grants Program to help farmers capitalize on new market opportunities.

- We support making a separate agency in USDA called the Farm Business Cooperative Service that is dedicated and focused in support of farmer cooperatives.

- As part of a revitalized Farm Business Cooperative Service, we support funding for research, education and technical assistance programs for farmers and their cooperatives. We recommend not less than $6 million annually for cooperative grants provided by the Farm Business Cooperative Service.

- CoBank has joined with a long list of commodity and export organizations in recommending legislative improvements to USDA's Supplier Credit Guarantee Program. In particular, lengthening the authorized program tenors from 6 months to 1 year, increasing guarantee coverage, and reducing program fees will enhance the effectiveness of this program in assisting cooperatives and rural businesses to market their products in international markets.

Adjustments to CoBank's Authorities

We have three specific recommendations that we think would promote a modest amount of economic development in rural areas.

(1) As noted earlier, we work with many commercial lenders to sell and purchase interests in loans. By law, loans purchased by CoBank but originated by commercial lenders must be to companies very similar to the types of marketing and processing entities served directly by CoBank. This excludes some transactions involving companies where food or fiber operations may be only part of a larger enterprise. CoBank has been unable to participate in such loan syndications when asked to do so by commercial banks. By allowing CoBank to participate in such transactions, we could strengthen our existing partnerships with commercial lenders, bring an additional source of capital to companies that are in an agricultural business and further spread risk within the financial community.

(2) Under current law, CoBank may provide financing to communication companies that are eligible to borrow from the Rural Utility Service. However, many of the communications companies interested in providing Internet, broad band and other types of advanced communications services to rural communities today do not borrow from the RUS and therefore are not eligible to borrow from CoBank. By financing such companies, we could help ensure that rural communities are afforded greater access to the technology that will be vital to their future.

(3) Under current law, CoBank can finance the export of farm machinery and other farm-related products that are used on the farm in foreign countries. This "on-farm" requirement limits our ability to finance the sale of some U.S. agricultural related products simply because the foreign purchaser plans to use them some place other than on a farm. For example, we can only help a cooperative sell its used packaging or processing equipment if the foreign purchaser is going to use that equipment on a farm. For a cooperative trying to get the best price for outdated equipment, there is little concern about whether the equipment will be used on farm or somewhere else.

Availability of Venture/Equity Capital for Rural Businesses

One of the major limiting factors for rural development is the ability of existing and new companies, including cooperatives, to access equity capital. Lack of equity capital is a problem that hinders economic growth and the business expansion for many of our customers. The reality is that cooperatives often are unable to go to financially stressed farmers to seek equity capital for projects that would open new markets and create economic opportunities in rural areas. New and improved approaches involving public-private sector partnerships are needed to foster the flow of equity capital to rural America.

CoBank and other Farm Credit System lenders are working with a coalition consisting of the American Bankers Association, the Independent Community Bankers Association, the National Cooperative Business Association, the National Cooperative Bank, and the National Rural Electric Cooperative Association to support a proposed National Rural Business and Cooperative Equity Fund. This bill introduced last year by Chairman Harkin and Senator Larry Craig and others provides the necessary framework to help generate venture capital for rural America.

The Harkin/Craig bill (S. 3242 in the 106th Congress) would establish a fund to raise equity capital and invest it in support of cooperatives, value-added agricultural enterprises and other businesses in rural America. The fund is designed to harness the financial power of the U.S. capital markets and direct it to building the job base and production capacity of our rural economy. Ultimately the fund, through its investment in rural business, will enhance farm and rural incomes, increase opportunities for small and minority businesses, and generate greater economic vitality and business innovation in rural communities.

Key provisions in the proposal include:

- Authorizes private sector investors to establish a venture capital fund to make equity investments in rural cooperatives and other rural businesses.

- Authorizes USDA to match private investments into the Fund to a specified level. Authorizes USDA to guarantee securities issued by the fund to maximize the amount of capital available to invest in rural businesses.

- Encourages private sector investments in the Fund from a broad range of financial institutions and other institutional investors.

- Requires the Fund to set aside a portion of its earnings to pay for technical assistance necessary to facilitate projects.

- Requires cooperatives and other businesses that receive an equity investment from the fund to invest a substantial amount of their own capital in the project.

It is our view that a program with appropriate incentives to help bring venture capital to rural America should be an important component to the new farm bill. We strongly support the Harkin/Craig bill and urge the committee to include it in the farm bill.

Enhancements to USDA's Business and Industry Loan Guarantee Program

Earlier this year CoBank participated in a task force of the National Council of Farmer Cooperatives (NCFC) to develop initiatives to strengthen farmer-owned cooperatives and increase economic opportunities in rural America. As a result of that effort, NCFC has proposed a number of initiatives, which we support, to modernize and strengthen the USDA Business and Industry Loan program. With revisions, the B&I program can be an important tool of cooperatives and other rural businesses. Changes that need to be made include:

- Eliminate the current $25 million maximum loan guarantee for farmer cooperatives. The investment required to compete in the global economy and ensure effective operations are often much greater than $25 million.

- Provide minimum loan guarantees of 90% in the case of farmer cooperatives, with additional authority for higher guarantees in some situations.

- Eliminate the geographic restriction in the case of farmer- owned, value-added projects.

- Eliminate the 2 percent loan origination fee, which simply adds to the cost of using this program.

- Modify the current authority providing guaranteed loans to farmers for the purchase of stock in a farmer-owned cooperative for value added purposes to include existing as well as new start- up farmer-owned cooperatives.

CoBank and the Farm Credit System - Building a Stronger Rural America

As part of the Farm Credit System, CoBank is a key link in channeling private sector funds from the nation's money markets to businesses operating in rural America. In recent years, Congress through various initiatives has greatly expanded the authorities of commercial banks and provided them with virtually unlimited access to funding from GSEs through the Federal Home Loan Banks and the Federal Agricultural Mortgage Corporation (Farmer Mac). Congress took these actions as part of an effort to make more capital available to rural America.

Congress has an opportunity with this Farm Bill to take additional steps to make capital more available by providing needed updates to Farm Credit's charter and considering innovative ways to facilitate the ability of lenders to work together to meet the needs of our rural communities.

In closing, CoBank is committed to rural America. Our slogan: "CoBank - Rural America's Cooperative Bank", is more than words to CoBank. Our business is rural America and we look forward to working with the Committee to find ways to strengthen rural communities and foster successful rural business opportunities as part of the new Farm Bill.

Thank you for the opportunity to testify. I look forward to your comments and questions.



LOAD-DATE: August 8, 2001