Pub. 9 2014-2015 Issue 3

September | October 2014 13 Extraordinary Service for Extraordinary Members. For more information, contact Jeff Makovicka at Kutak Rock LLP at (402) 346-6000 or jeff.makovicka@kutakrock. com. Makovicka is amember of Kutak Rock LLP’s Banking & Finance practice where he concentrates on bank matters. of federal regulatory jurisdiction, adoption of a broad defini- tion could expand the reach of the CWA. Under the Proposed Rule, the agencies would expand their jurisdiction to include all waters and wetlands adjacent to a traditional navigable water, impoundment, or tributary. Moreover, “other waters” determined to have a significant nexus to traditional navigable waters also could be considered “waters of the United States.” Ag groups such as the American Farm Bureau Federation (AFBF) are opposed to the Proposed Rule as they believe it extends the reach of the CWA to cover jurisdictional tribu- taries and ephemeral waters, waters that are neighboring or adjacent to jurisdictional waters, and the suspicious category of “other waters.” 8 If as many additional “waters” are consid- ered jurisdictional, as the AFBF suspects, then the additional burden of getting permits for certain activities, especially pesticide application, “on, near, or around” these waters could be an added burden to ag operators. Banks should closely monitor developments regarding the Proposed Rule as it may impact their ag borrowers’ bot- tom line by increasing compliance costs. Ag producers and their industry groups have reason to be concerned with this Proposed Rule, but this is also an opportunity to produce a final rule that is minimally harmful. In the coming weeks and months, the EPA will be hearing from a broad range of stakeholders seeking to influence the proposal. The final rule may be published as soon as the end of 2014. 2014 Farm Bill After years of negotiations, the Agricultural Act of 2014 (Farm Bill) passed and was signed into law by the President in Feb- ruary 2014. The Farm Bill, among other things, changes the Supplemental Nutrition Assistance Program, ends direct pay- ments to producers, andmodifies the crop insurance program. Many Farm Bill implementation details have yet to be determined and, with the elimination of direct payments, crop producers will need to choose between several programs that provide income support under adverse price or yield conditions. As such, banks should monitor implementation of the Farm Bill and discuss with ag borrowers how it will affect their operations. Business Transition Issues The Family Business Institute estimates only 30 percent of small businesses survive their transition to the next genera- tion, 9 and “many examinations of small business transitions list communications problems between the primary and successor generations, coupled with a lack of opportunities for successors to ‘grow into’ their roles, as critical factors in transition failures.” 10 Farm families should create a true “business succession” plan that transfers both ownership and control of a viable business gradually over time before the death of the farmer. Personal decisions regarding the division of assets and business continuity will affect the business, the credit, and the bank. If available, banks should document ag business suc- cession plans as a section of their loan narrative. Changing demographics and family business transition are potential business killers and should be viewed as risks to repayment, similar to weather, global markets, and risk management.  1 See Prudent Management of Agricultural Credits Through Economic Cycle, FDIC Financial Institution Letter, FIL-39-2014 (July 16, 2014) (the “FIL”). The FIL states that the FDIC’s supervisory expectations previously expressed in a 2010 financial institution letter continue. 2 “Notwithstanding the current strength of the agricultural industry, the USDA forecasts higher borrowing costs, moderation in the growth of farmland values, and a decline in net farm income (of approximately 27 percent) in 2014.” FIL at pg. 2 citing U.S. Department of Agriculture, Economic Research Service, Farm Sector Income and Finances, February 11, 2014, available at www.ers. usda.gov/topics/farm-economy/farm-sector-income-finances.aspx. 3 The FIL also notes that smaller farms and ranches rely on the personal wealth and resources of the owners, including off-farm wages. A universal review of the financial strength of the credit is required. 4 The FIL also refers banks to other FDIC issuances which may be adapted to lending relationships in the ag sector: Interagency Statement onMeeting the Credit Needs of Creditworthy Small Business Borrowers, February 12, 2010 (FIL-5-2010); Interagency Policy Statement on Prudent Commercial Real Estate Loan Workouts, October 30, 2009 (FIL-61-2009); and Interagency Statement on Meeting the Needs of Creditworthy Borrowers, November 12, 2008 (FIL-128-2008). 5 Neil Hamilton, Trends in Environmental Regulation of Agriculture, in In- creasing Understanding of Public Problems and Policies, 108 (Farm Found. ed. 1994). 6 33 U.S.C. §§ 1251–1387 (2006). 7 See 79 Fed. Reg. 22188 (April 21, 2014) (“Proposed Rule”). 8 “[T]he proposed rule is designed to allow the federal government to regulate every place water flows when it rains, including small and remote ‘waters’ and ephemeral drains and ditches.” Don Parrish, Senior Director of Regulatory Relations at the American FarmBureau Federation, EPAGrabs for Dry Land - #DitchTheRule, Marshall Democrat-News (August 27, 2014). “The EPA pro- posal poses a serious threat to farmers, ranchers, and other landowners,” said American FarmBureau Federation President Bob Stallman. “Under EPA’s new rule, waters—even ditches—are regulated even if they aremiles from the near- est ‘navigable’ waters.” Statement by Bob Stallman, President, American Farm Bureau Federation, Regarding EPA’s Proposed “Waters” Rule (April 1, 2014). 9 Family Business in Transition: Data and Analysis, Family Business Insti- tute (2007). 10 Ferrell, Shannon L., Future of Agricultural Law: A Generational Shift, 18 Drake J. Agric. L. 107 (2013).