The Farm Credit System Begins Its Second Century
Apr 07, 2017
From time to time, I write about institutions and programs that form the public foundation for the U.S. agricultural sector, that helps make our economy one of the most productive in the world. The Farm Credit System (or FCS), which has served U.S. farmers and agribusinesses since it was established as a government-sponsored enterprise (GSE) under the Federal Farm Loan Act of 1916, is one of the pillars of that foundation. The Farm Credit Administration (FCA) was established as a federal agency to oversee the System in 1971. The three member FCA board is nominated by the President and confirmed by the Senate.
One of the unique features of the Farm Credit System is that farmers themselves are owners in the system, through a cooperative structure. The law requires that all borrowers in the System own stock or participation certificates in one of its member institutions. The Farm Credit System receives no direct federal funding, although it is exempt from most federal taxes under law, which is obviously a financial benefit.
Like the rest of agriculture, the Farm Credit System was hit hard by the farm financial crisis of the mid-1980’s. Due to cascading farm bankruptcies across the country, the System suffered losses totaling $4.6 billion in 1985 and 1986. Congress stepped in to help with the Agricultural Credit Act of 1987, authorizing up to $4 billion in federal assistance to the most vulnerable FCS member institutions. The Act also enabled structural changes within the system by consolidation of FCS institutions within the same territory.
Today, 71 agricultural credit associations (ACA’s), found in every state plus the Commonwealth of Puerto Rico, lend money to farmers for operating and intermediate purposes, as well as farm real estate purchases. The ACA’s in turn borrow from four Farm Credit Banks, which acquire funds by selling bonds in the debt capital market. The System also benefits from the operation of the Federal Agricultural Mortgage Corporation (Farmer Mac), which provides a secondary market for certain types of longer term loans that the ACA’s make, in order to help share risk with other willing investors. Farmer Mac, a publicly traded company, was established as part of the reforms of the Agricultural Credit Act of 1987.
According to testimony provided to a hearing of the House Agriculture Committee on March 29, 2017 by Dallas Tonsager, Chairman of the FCA Board, at the end of fiscal year 2016, there were more than 1.3 million outstanding loans in the System with a gross value of $242 billion. These loans were made on a capital base of $52.4 billion, up more than 7 percent from the previous year.
In 2015, FCS institutions accounted for 41 percent of farm lending, and were the largest farm real estate lender in the country. Commercial banks provided loans accounting for 42 percent of farm debt, and were the largest source of operating loans for farmers. USDA’s Farm Service Agency, through its direct loan program, provides 2.1 percent of all agricultural lending, with loans going to farmers who do not otherwise qualify for commercial loans, and guarantees about 5 percent of farm loans provided through either FCS or commercial lenders. Individuals (like family members of farmers) and other non-bank sources provide about 9 percent of farm lending.
Although it does not receive annual funding from the U.S. government, the Farm Credit System Insurance Corporation did obtain access to a $10 billion line of credit with the U.S. Treasury in 2013, against the possibility of a severe liquidity crisis that could adversely affect U.S. agriculture. Prior to that development, the FCS was the only GSE without a backup credit facility.
However, not everyone is a fan of the Farm Credit System. Trade associations which represent rivals to FCS members in agricultural lending, such as the American Bankers Association (for large banks) and the Independent Community Bankers of America (for smaller banks), regularly call on Congress to modify the terms under which the System operates. Their concerns focus on the tax status of FCS member banks, which they see as an unfair advantage by reducing FCS members’ operating costs, ‘cherry picking’ of the most lucrative loans, and FCS entities making loans to companies outside of the agricultural sector.
The most prominent example cited of FCS venturing outside of agriculture was a decision by CoBank, one of the four FCS banks, to participate in a loan consortium for the large telecommunications company Verizon, in 2013. CoBank was responsible for $725 million of a loan package totaling $12 billion, justifying its role based on Verizon’s contribution to rural telecom access. After receiving significant criticism for this lending decision, including from some members of Congress, CoBank sold out its portion of the Verizon loan package.