GSM PROGRAMS BENEFIT U.S. AGRICULTURE

AND THE RURAL ECONOMY

Mr. Chairman, my name is Otis Molz. I'm a farmer and rancher from Deerfield, Kansas, and chairman of the board of CoBank. I am accompanied today by Candace Roper, a CoBank vice president and division manager. Ms. Roper has just returned to the U.S. after a three and one-half year stint as head of CoBank's Singapore-based Asia Regional Office. In that capacity, Ms. Roper worked extensively with foreign purchasers of U.S. agriculture products, exporters, foreign banks and the U.S. Department of Agriculture's GSM programs.

We appreciate this opportunity to provide testimony on the importance of the GSM export loan guarantee programs. Trade is critical to the agricultural economy and trade financing is a key part of CoBank's business.

I will summarize my testimony but ask that the entire text of my statement be made part of the record.

Historically, CoBank has been the most significant financial institution participating in the GSM loan guarantee programs--accounting for nearly one-half of all the guarantees issued. With $24 billion in assets, CoBank is the largest bank in the Farm Credit System, although we are a small institution when compared to our international competitors. We provide fina ncial services to about 2,300 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.

Since 1982, the bank has provided about $25 billion in loans to support the export of agricultural products. About 90 percent of this financing was provided in connection with a GSM loan guarantee.

CoBank has offices in Singapore, Mexico City, and Buenos Aires as well as throughout the United States. We have correspondent banking relationships with more than 500 banks in 80 countries and have financed the export of about 45 different agricultural products--everything from apples to wheat and chicken feet to recycled telephone poles. Additional information about CoBank's international banking operations can be found in the attached fact sheet.

In one important respect, CoBank is different from every other bank that operates in the international marketplace. We are involved in a transaction only when a foreign purchaser wants to acquire an U.S. agricultural product. Our competitors in the financial services industry--including U.S. banks--do not necessarily care if the transactions they finance result in the sale of U.S. products. International banks will aggressively pursue the opportunity to finance a country's purchase of a product without regard to the origin of the product. CoBank is unique because we are in the business of matching foreign purchasers with only U.S. sellers. That is the reason we have provided far more financing under the GSM programs than all other U.S. banks combined.

Today I would like to comment on four topics: (1) the importance of the GSM programs in opening foreign markets to U.S. products; (2) GSM program changes; (3) the value of the GSM programs from the perspective of a foreign purchaser; and (4) the need for trade sanction reform.

The GSM Programs Open and Develop Markets--The GSM program continues to be a critical tool in opening and maintaining markets for U.S. agricultural products. The world market for agricultural products tends to move in cycles much like the agricultural economy itself. As economic and weather conditions change, the users of the program change to reflect those new conditions.

For example, ten years ago Korea was a major user of GSM loan guarantees. It was the GSM program that was instrumental in introducing Korean consumers to U.S. food products. As the Korean economy grew, that nation began making cash purchases of imported food--the volume and value of U.S. products being purchased was increasing and the need for financing was decreasing. However, the recent Asian financial crisis has caused Korea to once again begin making use of the GSM program. The point is the GSM program has been a critical tool for ensuring access for U.S. exports to this important market, no matter where that country is in the economic cycle.

Another example of the benefits of being a reliable trade partner is Mexico. Mexico was one of CoBank's first international customers. Some of our oldest international correspondent banking relationships are with Mexican banks.

With the help of the GSM programs, CoBank and our customers have been able to sell products in Mexico as that country has weathered some fairly serious economic conditions. During some of those downturns in the business cycle, other banks and countries abandoned the Mexican market. CoBank, with the help of GSM, has always stayed in the market--in good times and in bad.

The result is that Mexican banks and food purchasers have a high degree of loyalty and confidence in CoBank and U.S. food exporters. It's difficult to put a dollar value on that kind of relationship. However, we know with certainty that Mexico, and many other countries, when all other things are equal will choose to do business with sellers and a lender who see benefit in long-term relationships.

A country's purchase of food differs from the purchase of other goods. Ensuring an adequate food supply for its citizens is one of the most critical responsibilities of any nation. A country with a starving populace is certain to experience a great degree of instability. As a consequence, a nation looks differently upon a trading partner that helps feed people as compared to providing other types of goods.

For these reasons, the GSM program is an important tool we need to have available at all times--regardless of the economic cycle. It would be very short sighted to curtail the program or bargain away its key benefits to U.S. agriculture and exporters during trade negotiations because of market conditions at a particular point in time. Market conditions and needs change, sometimes rapidly, and the availability of the GSM programs is an important tool that gives us much needed flexibility at minimum cost.

The Value of the GSM Program to Purchasers--Recently, the U.S. has had to defend the GSM program in trade negotiations. In particular, some of our competitors have been calling for a maximum tenor for export credit guarantees (ECGs) on all commodities (especially grains) of 180 days.

We are concerned that there is not a good understanding on the part of our trade negotiators and agricultural groups in the U.S. on the importance of tenor (i.e., the duration of the loan) as a consideration on the part of the foreign purchaser. In many cases, the tenor of the financing is the factor that determines who will ultimately make the sale. Tenor of the financing is often more important than the price of the product, which is set in the world marketplace or the interest rate on the loan.

The maximum three-year tenor of GSM financing is critical to the program's success. GSM provides for tenors that are typically unavailable in the market and this is a crucial strength of the program. Shortening the tenor of GSM-supported financing substantially decreases its economic benefit and the attractiveness of U.S. products. Limiting GSM to shorter tenors undermines the value of the program by removing the economic incentive for a foreign bank and its customers. The current two-year tenors in Mexico and Korea and other markets already adversely affect export volumes to these markets and the contemplated reduction in tenors to markets such as Turkey will have the same effect.

GSM Program Changes--Last month, USDA officials announced a number of ideas being considered to make the GSM programs more effective. We commend the Department of Agriculture for taking this initiative. However, we are concerned about one change being discussed that will reverse a reform implemented several years ago to help ensure the integrity of the program.

Current GSM program rules prohibit a single entity from both issuing a letter of credit and being the beneficiary of the CCC's payment guarantee. The USDA is considering a proposal to end that prohibition. Effectively, this will mean that a single or related financial institution could be on both sides of the same export transaction--largely removing the checks and balances that exist when one bank has a vested interest in making certain that the counter party is making every effort to meet its obligations.

This change could lead to abuse of the program by banks that have operations in many countries. The change would make it possible for a bank with branches in two countries to receive payment twice--once from the purchaser in the foreign country and once from the U.S Treasury when the foreign branch fails to make payment to its related institution in the U.S.

Presumably, USDA would not allow such abuse to occur more than once. However, this reform which was implemented several years ago to ensure the integrity of the program and the arms-length relationship between lenders should be retained.

We have shared with the Department of Agriculture several other suggestions for improving the operation and utilization of the GSM programs. I will mention a few of those suggestions for the committee to consider as well.

The current level of loan guarantee authority should be maintained as a minimum level, if not expanded.

The amount of loan guarantee available should be restored in a revolving fashion for credit guarantees repayable within 12 months.

The program should be expanded to cover 100 percent of the fee and freight charges to be capitalized into the gross invoice value/contract price covered by the guarantee, as is now permitted in some special cases.

The guarantee fee structure should be modified to directly relate to the differentiated risks of individual borrowers and terms of the credit, with the sliding scale price structure tied to the risk exposure of the CCC.

A special program should be established for Economies in Transition or Emerging Markets which would provide enhanced GSM guarantees in support of commercial financial transactions for countries undergoing IMF and/or Paris Club approved structural reforms.

USDA should establish an advisory forum that meets regularly to exchange information between lenders, exporters, governmental officials and potential users of the program. Such a forum would help USDA and exporters keep abreast of changing market conditions and the competitive environment.

Trade Sanctions Reform--Mr. Chairman, I would be remiss if I didn't take this opportunity to comment on the need for trade sanction reform. I'm not qualified to provide advice on our nation's foreign policy positions with regard to specific countries. However, as a general observation, it seems to me our government is too quick to impose sanctions on too many countries.

From my perspective as a producer who knows that almost 40 percent of what I raise must be sold to foreign purchasers, I'm troubled that I'm locked out of markets that are being served by my competitors in other countries. And, we know from experience that once we cut ourselves off from a market it's difficult to re-establish the U.S. as a reliable source of products.

I also have a perspective on this matter as an ordinary citizen who cherishes the freedom we enjoy in the U.S. I've had the good fortune to travel to many parts of the world. As a result of my travels, I'm convinced that through trade we can share our culture and values with people who live in countries that do not enjoy our freedoms. By doing so, we plant the seeds for democracy and the free enterprise system. When we turn our backs on those countries, we miss an opportunity to demonstrate the benefits of our political and economic systems.

Mr. Chairman, I appreciate the opportunity to appear here today. I'd be pleased to respond to any questions.