in Lewiston, Idaho
Mr. Chairman,
Good afternoon. My name is Steve Koehler and I am a Regional Vice President for Northwest Farm Credit Services. I supervise Farm Credit's lending activites in the Palouse grain region in Eastern Washington and Northern Idaho. As you are well aware, farming in the small grain industry in 1998 is bleak with little optimism for improvement next year. The problems are real and will have a significant adverse financial effect on grain producers. As an example, Farm Credit Services measures its loan portfolio risk with a credit quality classification system. The credit quality classification of "Substandard" represents operations that have serious operational issues that will impact long term survival if not corrected. Today, Farm Credit's wheat portfolio consists of 9% substandard accounts; our substandard wheat accounts are projected to increase to 14% next year and to 20% in the year 2000. These statistics represent the significant adverse impact that a prolonged poor wheat market is expected to have on our group of wheat producers.
Farm Credit does not have a magic solution that will solve the major problems causing the wheat industry problems, however, it is prepared to work with its wheat producers on a constructive and proactive basis. Attached to my testimony is an internal paper, "Lending in a Changing Grain Environment", that Northwest Farm Credit Services has adopted which sets forth a long term philosophy in working within the grain industry.
As a lender with over 75 years of agricultural lending history, Farm Credit has taken the long term view of lending in agriculture. Today's poor income and bleak short term outlook will be replaced by better times, consequently, a lender should take a balanced approach in lending during the good and bad times. Specifically, during these adverse times, we are prepared to take lending risks with producers who have a realistic farm plan and have demonstrated the skill and management ability to successfully adapt to change.
Farm Credit has taken a proactive stance in addressing the current problems associated within the grain industry. We know that the seeds for survival during tough times are planted during the seasons of good times. Since the last major farm crisis in the 1980's, Farm Credit Services has actively counseled farm producers to make the operational adjustments during the good times that will help them withstand adversity. Farm Credit has helped producers develop comprehensive farm plans which include strategies for marketing, building working capital, creating sound debt structures, and using appropriate risk reducing strategies in marketing and production. In recent years, Farm Credit has held various small group producer seminars to discuss and promote better business planning, commodity marketing skills, financial management techniques, and overall risk reducing alternatives. We have developed computer modeling programs to run "What if" scenarios that stress test a producer's operation to identify risk areas for our producers. Many of our producers have used these programs to make changes in the last few years that will increase their chances to survive major market downturns. Having a future plan is especially urgent considering that in a few years the government support payments go away and our producers lose that safety net.
Early detection of financial stress and implementing a timely solution is essential for a producer's and Farm Credit's success. If you get to the problem too late, the problem becomes unsolvable. Farm Credit has emphasized a communication system with our customers with the goal to identify and discuss individual producer risks, and develop strategies well in advance of problems.
We believe a lender should have a structured system to constructively work with producers who find themselves in financial difficulty. This system should include restructure and workout programs that can be tailored to fit a variety of individual producer circumstances and designed to maximize his potential to recover. Farm Credit has a troubled account program in place and staffed by trained and experienced staff.
A lender should also recognize that overlending in times of adversity is as devastating to producers as unreasonable credit restrictions. Some producers, for a variety of reasons, will not recover from these adverse income years. A lender should help producers make successful transitions out of agriculture and have programs to make these transitions graceful, dignified, and capable of conserving as much producer equity as possible.
From a legislative perspective, Farm Credit Services supports the strengthening of risk management programs that enable producers to effectively manage operational risk. There are a variety of national legislative programs proposed by the National Association of Wheat Growers, Farm Credit Council and other farm groups in the areas of crop insurance, commodity futures trading, and rural lending authorities that should be studied, refined and implemented to give producers effective tools to reduce the volatility in the grain industry.
In summary, Farm Credit intends to remain a long term provider of credit to wheat producers, providing sound and constructive financing in good and bad times. It recognizes that to be successful in the future, it must quickly adapt to the changing market conditions and must provide programs that help producers manage their financial risk. These adverse times require creative and innovative approaches and good communications between producers, lenders, other suppliers of agricultural services and our congressional leadership. We appreciate your willingness to listen to our farm community and your efforts to find effective solutions that give our grain producers the opportunity to succeed.