The most likely scenario would be consumer avoidance of a product thought to be unhealthy, such as the concern raised by the chemical Alar, which was used to produce apples and grapes in the early 1990s. Complicating the picture for producers is the fact that Federal crop insurance is authorized only for drought, floods, and other "natural disasters as determined by the Secretary." Hence, acts of terrorism are not currently covered by policies underwritten by the Federal Crop Insurance Corporation. Producers and their lenders are, therefore, exposed to the market risks associated with terrorism and consumer reaction to such threats.

Biotechnology's Rewards and Risks Biotechnology provides the opportunity to introduce beneficial traits into crops and Livestock breeds or remove undesirable traits in order to create more nutritional products, better yields, and lower use of chemicals and energy inputs. It is a formidable tool for farmers to assist them with their mission of producing food and

fiber for a growing world population. At the same time, it can potentially improve the environment and enhance biodiversity.

Despite its promises, biotechnology also raises many questions regarding production practices, market structure, food safety, financing, property rights, government regulation, and trade measures. Producers and lenders must remain vigilant about biotechnology risks, such as restricted outlets or reduced value for their biotech products as a result of consumer rejection. Farmers could also face forfeiture if they violate the terms of their agreement with seed companies, as well as be subjected to lawsuits from other farmers if their crop causes environmental contamination through cross pollination. Institutions financing these operations must ensure that farmers take the necessary steps to mitigate production and marketing risks through strict compliance with seed manufacturers' guidelines, the use of futures contracts, and the purchase of crop or peril insurance.

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24. FCA, in approving the ACA parent/subsidiary

structure, views the ACA and its wholly owned operating subsidiaries as a single entity for most satutory regulatory, and examination purposes based on their common ownership and control and cross guarantees between and among the entities, with each entity responsible for the debts of the others and their capital and assets com bined to absorb any losses.

25. As of October 1, 2000, the FCS was composed of only direct-lende: associations. All Federal Land Bank Associations became FLCAS o: consoli dated with PCAs to form ACAs by October 1,

Farm Credit System's Changing Corporate Structure

In FY 2001, the Farm Credit System's structure continued to change dramatically as more FCS associations adopted the new corporate structure -- that of an Agricultural Credit Association with wholly owned Production Credit Associa tion and Federal Land Credit Association subsidiaries which many associations had adopted the previous year. The ACA parent/subsidiary structure," approved in 1999, is proving to be a more effective way of conducting business. The structure enables the assocation to use its capital more efficiently, helps diversify the loan portfolio, and can improve financial performance by reducing operating costs. The ACA with subsidiaries is now the most common structure in the FCS and accounted for 58 percent of all associations on September 30, 2001. Only nine ACAs have not yet adopted the new structure and just 15 PCAs and 25 FLCAS remain in the System, having not yet set up ACAS. We anticipate most will eventually transition to the new structure.

Summary of Activity

The pace of corporate activity set in 2000 continued in 2001. In 2001, we analyzed and approved the following 69 applications compared with 59 applications processed during 2000:

25 consolidations of unlike associations to form ACAS, which then restructured to establish a PCA and an FLCA as wholly owned subsidiaries of the ACA; ⚫ 20 restructurings of ACAs to establish a PCA and an FLCA as wholly owned subsidiaries of the ACA;

⚫ 13 charter conversions of PCAs and

FLCAs to ACAs with subsidiaries
(associations that converted had no
merger partner);

⚫ two consolidations of ACAs with
subsidiaries;

⚫ one merger of a PCA and an FLCA into an ACA with subsidiaries;

one merger of two PCA subsidiaries owned by an ACA;

⚫ creation of a service corporation owned by a bank and its affiliated associations; two association headquarters' moves, and

⚫ four association name changes.

Corporate activity in 2001 resulted in a decrease in the number of associations from 158 on October 1, 2000, to 118 on September 30, 2001-a decline of 25 percent. However, the number of ACAS increased by 33, or 73 percent, from 45 to 78 in the same period, and the number of ACAs with subsidiaries more than quadrupled, from 16 to 69. Figure 7 depicts the chartered territory of each FCS bank. More details about specific corporate applications in 2001 are available on FCA's Web site at www.fca.gov.

Focal Point of Corporate Activity The new association structure that of an ACA parent with a PCA and an FLCA as its wholly owned subsidiaries — was the preferred choice for associations that filed corporate applications lest year. Under this structure, the ACA parent and its subsidiaries operate with a common board of directors and joint employees and are obligated on each other's debts and liabilities. The new ACA structure takes advantage of the tax-exempt status of the FLCA subsidiary, which provides the long-term mortgage credit. The structure also enables customers to be

25. Single title associations are either PCAs, authorized to provide short- and intermediate-term credit, or FLCAs, authorized to provide longterm credit. On the other hand, an ACA, operating through its PCA and FLCA subsidiaries, can offer short, intermediate- and long-term credit to its metr ber-borrowers.

27 Under section 7.6 of the Act, an FIBA, upon merging with a PCA, receives the supervisory bank's direct-lending authority in the FLBA's territory. Thus, es an ACA subsidiary, the com

stockholders of one entity -the ACA and borrowers from either or both subsidiaries. This arrangement provides the ACA and its subsidiaries with greater flexibility for serving its customers and allows more efficient delivery of credit and services to member-borrowers.

An ACA is formed when a PCA and a Federal Land Bank Association or an FLCA consolidate and FCA issues a new charter for the resulting ACA. The new ACA parent/subsidiary structure is formed in one of three ways.

(1) An existing ACA may restructure by requesting FCA to organize and charter a subsidiary PCA and a subsidiary FLCA. Last year, 20 ACAs established subsidiaries in this manner.

(2) A PCA and an FLCA may consolidate to form an ACA yet continue their corporate identities as subsidiaries of the newly formed ACA. By September 30, 2001, 25 groups of jointly managed PCAS and FLCAs had obtained FCA's approval to consolidate and form ACAs with subsidiaries. Same consolidations involved PCAs and FLCAS whose territories were not identical. Where permitted by the Farm Credit Act, the charters we issued allowed the ACAS and their subsidiaries to offer short-, intermediate-, and long-term credit to their customers throughout the ACA's chartered territory. These charters resulted in two or more System associations having the authority to offer similar credit in some areas.

(3) A single title association" may ask FCA to convert its charter to an ACA. In this situation, FCA first charters a companion association - either a PCA or an FLBA with which the single title association consolidates to form an ACA. The single title association and its companion association" then continue as the PCA and FLCA subsidiaries of the ACA. We allowed six PCAs and four FLCAS whose territory is also served by a new ACA to become an ACA using this approach. We also approved applications from two PCAs and one FLCA to convert their charters to ACAS even though they were not overchartered by other ACAs. These associations without identifiable merger partners-wished to provide fullservice lending (short-, intermediate-, and long-erm) and related services to customers within their territory rather than be limited to a single type of lending.

FCB Activity

In August 2001, the boards of directors of the Farm Credit Bank of Wichita (PCBW), Wichita, Kansas, and Western Farm Credit Bank (WPCB), Sacramento, California, signed a letter of intent outlining how they plan to pursue a joint management agreement, which they expect will lead eventually to a merger. Currently, the WFCB and AgAmerica, FCB are jointly managed; however, they plan to terminate their joint management as soon as possible. The FCBW and the WFCB will maintain their separate corporate headquarters in Wichita and Sacramento, respectively. However, Wichita will serve as the location for the banks' combined

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Review of the System's Continuing Structural Evolution,

1988-2001

The Banks

The Agricultural Credit Act of 1987 (1987 Act) sowed the seeds for the present-day restructuring of the PCS. In 1988, mandated consolidations of Federal Land Banks and Federal Intermediate Credit Banks formed Farm Credit Banks. FCA chartered FCBs in 11 of the 12 Farm Credit districts."

Next, stockholders of 10 of 12 district Banks for Cooperatives (BCs) and the Central Bank for Cooperatives agreed to consolidate under one of the voluntary options in the 1987 Act to form the National Bank for Cooperatives (NBC). PCA chartered the NBC on January 1, 1989. The two remaining district BCs, in Springfield, Massachusetts, and St. Paul, Minnesota, continued as separate entities for several more years. In 1995, the two Farm Credit banks in the Springfield district the BC and the FCB consolidated with the NBC to form CoBank, ACB the only Agricultural Credit Bank (ACB) in the FCS. In 1999, the St. Paul BC merged into the ACB as well.

In 1993, under terms of the 1992 Amendments, the Federal Intermediate Credit Bank of Jackson merged into The Farm Credit Bank of Columbia. From 1992 to 1995, eight more FCBs merged or consolidated, reducing their number to six. These six FCBs and the ACB are the funding banks for the 118 retail lenders that serve the member-borrowers of the FCS. The ACB is also a retail lender under Title III of the Farm Credit Act.

The Associations

Against this backdrop of bank activity, Farm Credit associations used the 1987 Act's restructuring opportunities to merge or consolidate. This activity reduced the number of associations from 377 on January 1, 1988, to 118 on September 30, 2001 - a decrease of nearly 69 percent. The 232 FLBAS that existed on January 1, 1988, either consolidated with PCAs to create ACAs or, under an option of the 1987 Act, received a transfer of long-term lending authority from their FCBs and became direct-lender FLCAs. By October 1, 2000, all FLBAS had transitioned to direct lender associations.

The 1987 Act also required stockholders of PCAs and FLBAs that shared "substantially the same" geographic territory to vote on whether to merge the associations. These mergers, known as section 411 mergers, created the first ACAs in the FCS. Some of these mergers involved PCAs and FLBAs with "substantially the same" but not identical territory.

To carry out section 411, we adopted a policy that allowed the ACAS formed under such circumstances to have full lending authority throughout the combined territories of the merging associations. We also permitted PCAs and FLBAS (or FLCAs) whose territory was included in the charter of a section 411 ACA to convert their charters to ACAs, enabling them to compete with ACAs that operated within their territory. During 1989-1991, several associations converted their charters to ACAs, creating competition among FCS associations in some geographic areas (i.e., intra-System competition). However, after the FCA Board implemented the requirements of section

28. In May 1988, the FCA placed the Federal Land

Bank of Jackson (FLRT) in receivership. Them fore, the FLBJ was unavailable to merge with the Federal Intermediate Credit Bank of Jackson (FICBI) under section 410 of the 1987 Act. The Farm Credit Banks Safety and Soundness Act of 1992 (1992 Amandments) required the FICB1 to merge with an FCB no later than Jane 30, 1993, or be required to merge with the FCB of Texas The FCA granted a statutorily permitted onetime extension of the deadline to October 31, 1993. On October 1, 1993, the FICB) merged into the FCB of Columbia, which is now kno