WASHINGTON — The Senate is poised to vote on a massive, five-year farm bill this week that includes several provisions important for community bankers and agricultural lenders.

The $956 billion legislation is the product of a compromise worked out late last month between House and Senate lawmakers. It passed the House last week and is expected to be approved by the Senate on Tuesday afternoon. The White House has indicated that it will sign the bill into law if it passes.

After more than two years of heated debate over the farm bill, perhaps the biggest boon for farmers and bankers that serve them is the increased certainty of having an agricultural policy in place in the near term.

"We've been sitting in limbo, not knowing what would happen," said Matt Williams, president of Gothenburg State Bank in Gothenburg, Neb. "At least now we know what the farm bill is — that term certainty is really important to us."

Critically, the legislation significantly expands crop insurance by $5.7 billion, which Williams called "the number one issue on the minds of most of our producers."

Crop insurance is important for bankers because it provides some security around the funding provided to farmers.

"A farmer with a 1500-acre corn and soybean farm might be borrowing as much as $1 million to grow and harvest those crops. This provides security to a banker if a crop is wiped out," said John Blanchfield, senior vice-president at the American Bankers Association's Center for Agricultural and Rural Banking, who called the program "the centerpiece of agricultural risk management" for the industry.

The enhanced program comes as lawmakers cancel controversial direct payments, fixed amounts sent to farmers regardless of crop prices and whether or not they were even planted. Such payments cost the government more than $4.5 billion per year. Those funds will now go toward new subsidy programs that will help farmers deal with price swings, along with traditional crop insurance.

Direct payments "became politically untenable," said Mark Scanlan, senior vice president of agricultural and rural policy at the Independent Community Bankers of America. "A lot of that got shifted into crop insurance, and the crop insurance program will be a lot stronger thanks to that money."

The crop insurance program is also being expanded to include a larger variety of crops, though the program will require some new land conservation requirements for farmers.

Another benefit for bankers is the removal of term limits on certain operating loan guarantees backed by the Department of Agriculture. The guarantee program, which can be likened to the Small Business Administration's 7(a) program, began in 1992 and included a cap of 15 annual loans in a farmer's career.

"It's always been an issue for us, and it became much more of an issue after 2007, because that's when the 15-year period matured," said Blanchfield.

Scanlan estimated the removal of term limits could help "several thousand" farmers per year.

"It allows community banks to keep those farms as their customers," he said, adding that the legislation also includes additional flexibility for accessing operating loans and other types of guaranteed loans.

The farm bill, meanwhile, has also dusted up longstanding tensions between rural bankers and the Farm Credit System. The legislation includes language that sends the FCS's regulator, the Farm Credit Administration, back to the drawing board over its say-on-pay rule adopted in the fall of 2012. The rule requires a non-binding shareholder vote on compensation if the chief executive's pay or the aggregate of other executives' pay is changed by more than 15% or if more than 5% of shareholders call for a vote. It was never implemented, however, after the Farm Credit Council, the FSC's trade group, filed a petition against the rule that December.

Under the new legislation, the agency would have 60 days to "review its rules to reflect Congressional intent that a primary responsibility of the boards of directors of Farm Credit System institutions, as elected representatives of their stockholders, is to oversee compensation practices."

While the legislative provision doesn't affect bankers directly, it has drawn their ire. Blanchfield and others have warned it could effectively kill the say-on-pay rule. The Dodd-Frank Act included a similar provision for public companies, including banks, which was executed by the Securities and Exchange Commission. It requires shareholders to get a non-binding vote on compensation at least every three years.

"One thing the banking industry complains about is that there isn't a level playing field in terms of regulations," said Blanchfield. "This is a $260 billion, complicated and sophisticated financial services institution getting a pass here."

But Ken Auer, president and chief executive of the Farm Credit Council, argues instead that FCA "sought to impose on Farm Credit System institutions a requirement from which Congress had explicitly excluded Farm Credit under the Dodd-Frank Act.

"The inclusion of this language in the farm bill shows that lawmakers agree that requiring shareholders to vote on matters that are the purview of the board of directors is inconsistent with the Farm Credit Act and with cooperative principles and undermines the role of elected directors in representing the interests of System shareholders," Auer said in a statement to American Banker.

ICBA's Scanlan added that he's hopeful there will still be opportunity for the regulator to put some kind of say-on-pay provision in place.

"They're supposed to issue new regulations recognizing the board as primary determinants — but that wouldn't negate the ability to have local votes on say-on-pay," said Scanlan. "Hopefully that will be open for comment, and we'll be suggesting strongly that they allow the grassroots [shareholders] to have a voice."

 

Victoria Finkle is American Banker's Capitol Hill reporter.