FARM CREDIT
With today ’ s economy , teamwork essential to keeping agriculture afloat
There are several commercial sources of agricultural credit available to farmers and ranchers . These include dealer / supplier credit , USDA ’ s Farm Service Agency , life insurance companies ( primarily for mortgage loans ), commercial banks and the associations of the Farm Credit System . It is fortunate and sometimes critical that agricultural producers have several options , particularly in times of financial stress in the agricultural sector .
This article will focus on the history , current status and future of the Farm Credit System . It is not intended to diminish the importance of the other credit providers . In fact , competition among them better serves the producer and keeps the lenders on their toes and in a continuous improvement mode .
The Farm Credit System began in 1916 with the creation of the Federal Land Bank System . There were 12 geographic districts and 12 Federal land Banks . From that point , local farmers organized local Federal Land Bank Associations to extend the lending authority of the Federal Land Banks out across the country . The FLBA ’ s were cooperative owned by their borrowers and provided mortgage credit . Essentially , they were the direct lending arm of the district Land Bank . The Land Banks were created primarily because commercial banks have no way to match fund land loans over a long enough time to make repayment terms workable . Because the System was originally funded with government funds , its status as a government sponsored entity ( GSE ) allowed it to issue bonds and debentures in the national markets with maturities long enough to match 10-30 year mortgages .
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By Dr . Danny Klinefelter Texas A & M University Professor
In 1923 , legislation created the 12 Federal Intermediate Credit Banks to discount short and intermediate term loans originated by commercial banks . When the Great Depression hit , new legislation was passed which allowed the creation of Production Credit Associations , local cooperatives that were able to make short and intermediate term loans to farmers and ranchers that they discounted with the FICBs . The same legislation also created 12 district Banks for Cooperatives to provide credit for farmers cooperatives and also a Central Bank for Cooperatives to participate with the district BCs on loans that exceeded their lending capacity . An executive order by President Franklin D . Roosevelt placed all Farm Credit organizations under the supervision of a new regulator , the Farm Credit Administration . In 1987 , legislation merged the district FLBs and FICBs into a single Farm Credit Bank in each district . It also permitted PCAs and Federal Land Credit Associations ( FLCAs , the former FLBAs ) to merge to form Agricultural Credit Associations , which could be full service agricultural lenders . The act also created the Farm Credit Insurance Corporation to insure the investors in the System ’ s bonds and the Federal Agricultural Mortgage Corporation ( Farmer Mac ) to establish a secondary market for agricultural mortgages and rural home mortgages .
Since then , the institutions of the Farm Credit System , both Farm Credit Bank and Agricultural Credit Associations have continued to merge similar to what has happened in commercial banking . All the Banks for Cooperatives have merged with the Central Bank for Cooperatives to create CoBank , which is an Agricultural Credit Bank , with the authority of a Farm Credit Bank and a Bank for Cooperatives . The district Farm Credit Banks have also merged so that in addition to CoBank , there are now just 3 other FCBs , the Farm Credit Bank of Texas , AgFirst and AgriBank . Mergers of the associations have also occurred so that there are now fewer than 80 nationwide .
Because of economies of scale , greater use of and advances in technology , consolidating borrowers , the need for specialized lenders and the increasing cost of regulatory compliance , I expect the number of associations to be down to around 40 in 10 years . There will also likely be additional mergers of the FCBs .
The Farm Credit System is now wholly borrower owned . There is no longer any government capital involved . The last of the government assistance was paid off in 2005 . It had been paid out once before in 1978 , but the farm credit crisis of the 1980s required government assistance . Interestingly , the GAO found that the System had lost as much on mismatching funding during the 1980s as they did on the losses . The reason was they had been pool pricing , charging the average cost of funds in the funding pool , rather than basing new loan pricing on the current cost of funds . That problem was corrected in the 1980s . As of December 31 , 2015 , Farm Credit System held $ 235 billion in loan volume to 500,000 different borrowers .
With the declining population of rural communities and deteriorating rural infrastructure , both rural commercial banks and Farm Credit need to be working together to fund many of the projects that will be necessary to make a difference . Also , with the current economic downturn in the agricultural economy , they both need to be there to be available for farmers , ranchers and rural businesses . This is particularly true if the Farm Credit Association or the commercial bank itself start experiencing financial or regulatory problems .