WASHINGTON, Jun 15, 2016 - The Farm Credit System (FCS), the government-chartered complex of lending agencies owned by farmers and their cooperatives, is celebrating its first century this week with a series of events in Washington. FCS traces its origin to President Woodrow Wilson’s signing on July 17, 1916, of the Federal Farm Loan Act that created a mechanism for farm real estate mortgage loans.
The system experienced several bumps in the road to today’s nearly $305 billion in combined assets – enough, if it were a single entity, to be the ninth largest bank in the United States. Its history tracks closely to the travails and triumphs of the U.S. agricultural sector to which it is inextricably tied – crises in the 1930s and 1980s that brought forth federal financial aid.
To its early authority for long-term farm mortgage lenders, Congress added a network of local lending associations beginning in 1923 to make short-term operating loans to farmers and ranchers and broadened its reach in subsequent years to finance farmer cooperatives, housing, utilities and many other agribusiness ventures. Federal investment in FCS was repaid in 1968.
Creation of the Farm Credit Administration (FCA) in 1933 was “the first of a number of rapid actions taken by the president and Congress to solve the desperate credit crisis which faced American farmers,” the late USDA historian Wayne D. Rasmussen told Congress in 1985. His testimony came as Congress developed a new rescue plan after many FCS lenders were hit hard by the collapse in commodity prices and agricultural land values in the early 1980s.
Over time, the system had grown to more than 1,000 local lending associations – some serving no more than a single county – financed and supervised by 37 regional wholesale banks that raised capital in the bond market. Following the farm crisis of the 1980s and congressional action to restore its financial soundness, the system has consolidated into four banks that finance 78 multistate lending associations with authority to finance a wide range of agricultural activities.
Through the 1980s, Congress tackled the farm credit crisis with several bills, one of which changed FCA from an adjunct of FCS governed by a board of directors representing the system’s regional banks to an arms-length regulatory agency led by a three-member board. The legislation also allowed the system to borrow from the Treasury to cover short-term needs. The federal investment, like that from the 1930s, was repaid with interest and ahead of schedule.
A decade ago, the system’s Farm Credit Council (FCC) trade association published a sweeping “Farm Credit Horizons” report describing the dramatic change in rural America. “Globalization and technology continue to drive change in the food system and in rural communities, which increasingly depend on non-agricultural, non-traditional industries,” it said. The report chafed at “statutory and regulatory limitations” that precluded it from some investments and financing.
Only two years before, it had survived a threat to break up the system when the board of Farm Credit Services of America, the second-largest FCS lending association with 51,000 borrowers in Iowa, Nebraska, South Dakota and Wyoming, agreed to sell the Omaha-based lender to a U.S. subsidiary of the Netherlands-based Rabobank. A report at the time said the deal faced “cascading opposition from farm groups, members of Congress and virtually the entire Farm Credit System.” As a result, the FCSA board canceled its agreement with Rabobank.
Through the years, Farm Credit and the nation’s commercial banking system have had a love-hate relationship that often played out before Congress. “Historically, in most areas of the country, the Federal Land Banks have had relatively good relationships with the commercial banks,” the late W. Gifford Hoag wrote in a 1976 history of FCS. “The experience of their ever-growing business relationships has fostered mutual respect between them.”
Although many commercial banks and FCS lenders frequently work amicably, their national trade associations have had pitched battles. The American Bankers Association (ABA), mostly spurred by member banks in Iowa, Nebraska, Kansas and South Dakota, has complained loudly that FCS is able to compete unfairly because they enjoy tax and regulatory favoritism.
For at least the last three decades, FCC has battled allegations by ABA-commissioned financial consultant Bert Ely that dire consequences would ensue if FCS practices were allowed to persist. In November 1990, he warned that a 1980s-like farm financial crisis would be brought about by reckless FCS lending. In 1999, he warned of major problems because of the “growing aggressiveness” of FCS. Among Ely’s criticisms: “Hobbyist farmers” and “wealthy weekenders” who borrow from FCS are not the intended beneficiaries of federal tax benefits and sponsorship that, he calculated at the time, confers a $1 billion annual benefit to FCS. He recommended privatizing FCS.
In November 2006, ABA published a 40-page Ely study that repeated his contention that Congress intended FCS to lend only to farmers and ranchers, strictly for agricultural production with a focus on beginning and small-scale producers. FCC said that he ignored the Farm Credit Act of 1971 authority to finance “other entities upon which farming operations are dependent.”
ABA’s criticism shows no sign of abating but also seems to have failed to generate significant traction in Congress. Its CEO, Frank Keating, last year called for abolition of FCS (see Agri-Pulse, May 6, 2015, page 7). Former Rep. Marlin Stutzman, R-Ind., echoed ABA talking points with claims that “taxpayers could be on the hook for a bailout in the near future” and that “small lenders across Indiana” say FCS is “able to undercut local lenders with lower rates.” Kansas banker Leonard Wolfe, before the Senate Agriculture Committee last month, stopped short of Keating’s proposal to abolish the system but called for reform.
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