Francisco Scott, an economist for the Kansas City Federal Reserve just released a report titled “How Mergers in the Farm Credit System Have Affected Ag Banks”.
The reports begins with a brief history of the Farm Credit System. Created in 1916, it is a federally chartered set of cooperatives that holds the legal status of a government-sponsored enterprise (GSE). There are certain tax benefits to this structure, plus an implied federal loan guarantee.
In today’s environment this likely leads to lower loan borrowing costs for FCS banks versus regular Ag Banks who now have to pay interest to borrowers. Before last year, Ag banks may have had lower borrowing costs than FCS banks since they were not paying interest on deposits (to me .001% is not paying interest), whereas FCS banks did not have much deposits and if they had deposits, they paid higher interest rates than Ag banks.
In 2000, Ag banks had about a 46% share of ag loans, whereas FCS banks only had a 28% share. During the last 20 years, FCS share of ag loans have increased to 44% while Ag banks share is only 36%.
Most of the growth by FCS banks relates to ag real estate loans. Ag banks continue to hold the largest share of operating loans, but this share has been declining since 2017.
FCS banks also appear to be much more efficient in their loan operations. The efficiency ratio for Ag banks has been around 65% while the FCS banks efficiency ratio typically has ranged between 40 and 45%. The lower the number, the better the results in general.
The report has a lot of interesting details and charts that we can’t fully review here. I would highly suggest reading the report.
