Order Code RS21977
Updated September 14, 2006
CRS Report for Congress
Received through the CRS WebJanuary 24, 2007
Agricultural Credit: Institutions and Issues
Jim Monke
Analyst in Agricultural Policy
Resources, Science, and Industry Division
Summary
The federal government has a long history of providing credit assistance to farmers
by issuing direct loans and guarantees, and creating rural lending institutions. These
institutions include the Farm Credit System (FCS), which is a network of borrowerowned lending institutions operating as a government-sponsored enterprise, and the
Farm Service Agency (FSA) of the U.S. Department of Agriculture (USDA), which
makes or guarantees loans to farmers who cannot qualify at other lenders. When loans
cannot be repaid, special bankruptcy provisions help family farmers reorganize debts
and continue farming (P.L. 109-8 made Chapter 12 permanent and expanded eligibility).
Legislation proposed in the 109th Congress for agricultural credit includes S. 238
and H.R. 399 (the Rural Economic Investment Act), which would exempt commercial
banks from paying taxes on profits from farm real estate loans, thus providing similar
benefits as to the Farm Credit System. The Administration proposed raising user fees
charged by USDA to commercial banks that issue guaranteed farm loans, but Congress
is rejecting the idea in appropriations legislation (H.R. 5384). This report will be
updated.
Lending Institutions
Five types of lenders make credit available to agriculture, the first two of which are
more or less affiliated with the federal government: the Farm Credit System (FCS),
USDA Farm Service Agency (FSA), commercial banks, life insurance companies, and
individuals and others. Creditworthy farmers generally have adequate access to loans,
mostly from the largest suppliers — commercial banks, FCS, and merchants and dealers.
Figure 1 shows that commercial banks lend the largest portion of the farm sector’s
total debt (40%), followed by the Farm Credit System (31%), individuals and others
(21%), life insurance companies (6%), and the Farm Service Agency (3%). Ranked by
type of loan, the FCS has the largest share of real estate loans (38%), and commercial
banks have the largest share of non-real estate loans (49%). Although FSA has a 3%
share of the market through its direct lending program, it guarantees loans made by other
(commercial) lenders accounting for approximately another 4%-5% of the market.
Congressional Research Service ˜ The Library of Congress
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Figure 1. Market Shares of Farm Debt, by Lender, 2005
Total ($214 billion)
Banks
40%
FSA
3%
Life insurers
6%
FCS
31%
Others
21%
Real estate (56%)
Non-real estate (44%)
FCS
38%
Banks
34%
FSA
2%
Life insurers
10%
Others
16%
Banks
49%
FSA
3%
Others
26%
FCS
22%
Source: CRS, using USDA Economic Research Service data at
[http://www.ers.usda.gov/Briefing/FarmIncome/Data/Bs_t6.htm].
Commercial Banks and Other Nongovernmental Lenders. Commercial
banks provide most of the loans to farmers through both small community banks and large
multi-bank institutions.1 Another important category of lenders is “individuals and
others.” This category consists of seller-financed and personal loans from private
individuals, and the growing business segment of captive financing by equipment dealers
and input suppliers (e.g., John Deere Credit and Pioneer Hi-Bred Financial Services).
Life insurance companies historically also have looked to farm real estate mortgages for
diversification.
Service Agency (FSA) of the U.S. Department of
Agriculture (USDA), which makes or guarantees loans to farmers who cannot qualify
at other lenders, and the Farm Credit System (FCS), which is a network of borrowerowned lending institutions operating as a government-sponsored enterprise.
The 110th Congress is expected to address agricultural credit through both
appropriations and authorizations bills. Appropriators will consider funding for FSA’s
farm loan programs, and the agriculture committees may consider changes to FSA and
FCS lending programs. The 2007 farm bill is expected to be the venue for many of the
authorizing issues, although stand-alone legislation may be used for extensive reforms.
This report will be updated.
Background
The federal government has a long history of providing credit assistance to farmers.
USDA’s Farm Service Agency (FSA) issues direct loans and offers guarantees on loans
made by commercial lenders. The direct and guaranteed loans are intended to assist
farmer borrowers who do not qualify for regular commercial loans. Therefore, FSA is
called a lender of last resort. The Farm Credit System (FCS), second only to commercial
banks as a holder of farm debt, is chartered by the federal government as a cooperatively
owned commercial lender to serve only agriculture-related borrowers. FCS makes loans
to creditworthy farmers much like commercial banks, and is not a lender of last resort.
Statutory authority for both the FSA and FCS lending programs is permanent, but
omnibus farm bills, such as the expected 2007 farm bill, often make adjustments to the
eligibility criteria and operations of the loan programs.
Other sources of credit for agriculture include commercial banks, life insurance
companies, and individuals, merchants, and dealers. Figure 1 shows that commercial
banks lend the largest portion of the farm sector’s total debt (37%), followed by the Farm
Credit System (30%), individuals and others (21%), and life insurance companies (5%).
The Farm Service Agency provides 3% of the debt through direct loans, and guarantees
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another 4% of the market (through loans issued by commercial banks and FCS). Ranked
by type of loan, the FCS has the largest share of real estate loans (38%), and commercial
banks have the largest share of non-real estate loans (49%).
Figure 1. Market Shares of Farm Debt, by Lender
Total: $214 billion in 2005
Farm Credit System
30%
Commercial banks
37%
Farm Service
Agency
Direct
3%
Guaranteed
4%
Life insurers
5%
Individuals and others
21%
Source: CRS, using USDA-ERS and FSA data at
[http://www.ers.usda.gov/Briefing/FarmIncome/Data/Bs_t6.htm]
Credit is an important input to agriculture, with all lenders holding about $214
billion in outstanding farm loans in 2005. Yet only about 66% of farmers have any debt
(farm or nonfarm), and only 38% have farm debt. The types of farms holding the most
debt include the larger commercial farms that produce most of the output, and mediumsized family farms.
Creditworthy farmers generally have adequate access to loans, mostly from the
largest suppliers — commercial banks, FCS, and merchants and dealers. According to
reports from lenders, credit conditions are good, and default rates have been trending
lower to levels not seen since before the credit crisis of the 1980s. Overall, USDA data
show that debt-to-asset ratios for the farm sector have been stable or slightly declining
over the past decade, indicating that the sector is not highly leveraged with debt. Recent
strength in farm income has given farmers more capacity to repay their loans or borrow
new funds. Farm equity has been rising because increases in debt typically have been
more than offset by larger gains in land values.
Nonetheless, despite the relatively strong farm economy in recent years, some
farmers continue to experience financial stress due to individual circumstances, and may
be unable to qualify for loans. Agriculture is also prone to business cycles that may pose
financial difficulties. Thus, many interests in production agriculture continue to see some
need for federal intervention in agricultural credit markets.
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Farm Lending Institutions
Commercial Banks, Life Insurers, and Individuals. Together, commercial
banks, life insurance companies, and individuals and others provide 63% of total farm
debt without federal support or mandate. Commercial banks provide most of the loans
to farmers through both small community banks and large multi-bank institutions.1 Life
insurance companies historically also have looked to farm real estate mortgages for
diversification. Another important category of lenders is “individuals and others.” This
category consists of seller-financed and personal loans from private individuals, and the
growing business segment of “captive financing” by equipment dealers and input
suppliers (e.g., John Deere Credit and Pioneer Hi-Bred Financial Services).
Farm Credit System (FCS).2 Congress established the Farm Credit System in
1916 to provide a dependable and affordable source of credit to rural areas at a time when
commercial lenders avoided farm loans. Operating as a government-sponsored enterprise,
FCS is a network of borrower-owned lending institutions. It is not a government agency
or guaranteed by the U.S. government. FCS is not a lender of last resort; it is a for-profit
lender with a statutory mandate to serve agriculture.
Statute and oversight by the agriculture committees determine the
scope of FCS
activity, and provide benefits such as tax incentives. Funds are raised
exemptions. The system is regulated by the
Farm Credit Administration (FCA). The program has permanent authority under the Farm
Credit Act of 1971, as amended (12 U.S.C. 2001 et seq.). Major amendments generally
have been enacted as stand-alone legislation, but Congress has used omnibus farm bills
to make minor adjustments to the law.
Funds are raised through the sale of FCS bonds and notes on Wall Street. Five large
banks allocate these
funds to 96 credit associations that, in turn, make loans to eligible creditworthy borrowers.
For more about FCS, see CRS Report RS21278, Farm Credit System.
1
Commercial bank issues are summarized by the American Bankers Association at [http://www.
aba.com/Industry+Issues/issues_ag_menu.htm] and the Independent Community Bankers of
America at [http://www.ibaa.org].
2
Farm Credit System institutions are described at [http://www.fca.gov/FCS-Institutions.htm].
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creditworthy borrowers. FCS does not receive an annual appropriation, but is privately
funded. Appropriators in recent years, however, have placed a limit on the size of the
FCA’s budget, which is funded by assessments on FCS institutions. For more about FCS,
see CRS Report RS21278, Farm Credit System, by Jim Monke.
USDA’s Farm Service Agency (FSA).3 The USDA Farm Service Agency
(FSA) is a lender of last resort because it makes direct loans to family-sized farms that are
unable to obtain commercial credit.4 FSA also guarantees timely payment of principal and
and interest on qualified loans made by commercial lenders such as banks and the Farm Credit
Credit System. The programs have permanent authority under the Consolidated Farm and Rural
Rural Development Act (CONACT, 7 U.S.C. 1921 et seq.). However, Congress frequently uses
omnibus farm bills to make changes to the terms, conditions, and eligibility requirements
of these programs.
FSA makes farm ownership (FO) and operating loans (OL) to operators of
family-sized farms. The maximum direct loans are $200,000 per borrower, while the
maximum guaranteed loans are $852,000 per borrower (adjusted annually for inflation).
Emergency (EM) loans are available for qualifying natural or other disasters. Some
guaranteed loans have a subsidized (below-market) interest rate. To qualify for an FSA
guaranteed or direct loan, farmers must demonstrate enough cash flow to make payments.
Some funds are reserved for beginning farmers. Seventy percent of the amount for
direct farm ownership loans and 35% of direct operating loans are reserved for the first
11 months of the fiscal year (until September 1). Twenty-five percent of the amount for
guaranteed farm ownership loans and 40% of guaranteed operating loans are reserved for
the first six months of the fiscal year (until April 1). Funds are also targeted to “socially
disadvantaged” farmers based on race, gender, and ethnicity.
Changes in the 2002 Farm Bill. Title V of the 2002 farm bill (P.L. 107-171)
authorized funding levels for FSA loans for FY2003-FY2007 and expanded access to
loans for beginning farmers. The 2002 farm bill also increased the percentage that USDA
may lend for real estate loan down-payments and extended the duration of eligible loans.
It created a pilot program to guarantee seller-financed land contracts, available to five
contracts per year in each eligible state (originally implemented in Indiana, Iowa, North
Dakota, Oregon, Pennsylvania, and Wisconsin; in 2005, the program expanded to include
California, Minnesota, and Nebraska).
FSA Appropriation for Farm Loans. FSA receives an annual appropriation
(loan subsidy) to cover interest rate discounts and anticipated loan defaults. The amount
of loans that can be made (loan authority) is many times larger. The enacted FY2006 loan
subsidy is $151.3 million to support loans totaling $3.785 billion (Table 1).
For the pending FY2007 appropriation, the Senate-reported bill (H.R. 5384) would
provide $146.2 million to subsidize the cost of making an estimated $3.427 billion in
direct and guaranteed FSA loans. This represents an 8.5% decrease in loan authority from
FY2006, but equals the Administration’s request. The House-passed version of H.R.
5384 would provide $3.552 billion of loan authority, $124 million less than the Senate.
Most of the overall decrease in loan authority in both bills from FY2006 is for guaranteed
farm ownership loans, down 13%. USDA asserts that there is less demand for the
program. Neither bill provides new funds or authority for emergency loans, citing
sufficient carryover. The Senate bill includes language (Sec. 753) to expand eligibility
for farm loans to “commercial fisherman” by modifying the CONACT.
3
USDA Farm Service Agency loan programs are described at [http://www.fsa.usda.gov/dafl].
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Table 1. FSA Loan Appropriations, FY2006
Loan Subsidy
Loan Authority
Implicit
FSA Loan Program
(million $)
(million $)
multiplier
Farm Ownership Loans (FO)
Direct
10.7
208
20
Guaranteed
6.7
1,400
208
Farm Operating Loans (OL)
Direct
64.7
650
10
Unsubsidized Guaranteed
34.8
1,150
33
Subsidized Guaranteed
34.3
275
8
Indian Tribe Land Acquisition
0.1
2
25
Emergency Loans (EM)
0
0
—
Boll Weevil Eradication
0
100
—
Total
151.3
3,785
25
Subtotal: Direct loans
75.4
960
13
Subtotal: Guaranteed loans
75.9
2,825
37
Source: CRS, based on H.Rept. 109-255 to accompany H.R. 2744 (P.L. 109-97)
Farmers’ Balance Sheets
Debt levels vary greatly among farmers. Only 66% of farmers have any debt (farm
or nonfarm), and only 38% have farm debt. USDA expects total farm debt to rise by
1.1% in 2006 to $216.5 billion.4 Total farm assets are expected to rise by 6.3% in 2006,
reaching $1.9 trillion. Thus, farm equity has been rising because increases in debt have
been offset by larger gains in land prices. Farm land values rose by 16% in 2005 and are
expected to rise 7.7% in 2006. Economists attribute much of the continued growth in
land values to subsidies, although prices near cities also rise from development potential.
USDA economists estimate that the farm sector will use about 62% of its debt
repayment capacity in 2006 (measured as the actual debt relative to the maximum
feasible debt), up from a 53% average over 1995-2004. As usage of debt capacity rises,
financial risk in the sector rises. Although credit conditions are good overall, some
farmers may experience financial stress due to individual circumstances (10%-20% of
commercial- and intermediate-sized farms).
Farm Bankruptcy: Chapter 12
In response to the farm financial crisis of the early 1980s, Congress added Chapter
12 to the Bankruptcy Code in 1986 (P.L. 99-554). It has special provisions for farmers
compared with other bankruptcy chapters, strengthening farmers’ bargaining position with
creditors. Chapter 12 is more about reorganization of debt than bankruptcy because it
allows secured debts to be written down to the fair-market value of the collateral and
repaid at lower interest rates over extended periods. Chapter 12 is seen by many as a
policy response to the social stigma attached to family farm failures during the Great
4
Economic Research Service, at [http://www.ers.usda.gov/Briefing/FarmIncome/wealth.htm].
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Depression. It gives struggling farmers another chance to reorganize and repay their
debts, rather than forcing them into liquidation and off the farm.
Chapter 12 has succeeded in keeping some farmers in business and has encouraged
informal lender-farmer settlements out of court. But it has increased costs to society by
encouraging inefficient farmers who would otherwise liquidate to remain in business, and
allowing efficient farmers who could otherwise continue to farm to charge off part of their
debts. Bankruptcy costs include legal fees and the efficiency costs from continuing to use
labor and capital in otherwise inefficient enterprises.5
Chapter 12 was enacted with an initial sunset provision of October 1, 1993.
Congress renewed the law 11 times with temporary extensions and made it permanent in
2005 under Title X of the Bankruptcy Abuse Prevention and Consumer Protection Act,
P.L. 109-8. The act expands eligibility by raising the debt limit, lowering the percentage
of debt that must come from farming, and extending benefits to family fisherman.6
Policy Issues for Congress
FSA Fees for Guaranteed Loans. The Administration’s FY2007 budget
request proposed to increase the user fee that commercial lenders pay to FSA in order to
receive the federal guarantee. The level of the fee is not stated in statute, but is set through
regulations. Currently, the fee is 1% of the guaranteed portion of the loan (7 CFR
762.130(d)(4)(ii)). The Administration proposed increasing the fee to 1.5%, and
calculated that the increase would offset $30 million in appropriations. Both the House
and Senate agriculture appropriations bills reject the fee increase with identical bill
language.7 Separate from appropriations, this issue was discussed at a Senate Agriculture
Committee hearing in June 2006 that reviewed agricultural credit issues.8
Exempting Taxes on Agricultural Loans for Commercial Banks. In the
109th Congress, S. 238 and H.R. 399 (the Rural Economic Investment Act) would exempt
5
For more background and analysis on farm bankruptcies, see the USDA Economic Research
Service at [http://www.ers.usda.gov/Briefing/Bankruptcies] and CRS Report RS20742, Chapter
12 of the U.S. Bankruptcy Code, by Robin Jeweler.
6
A”family farmer” includes an individual and spouse, or a family-owned partnership or
corporation, with debts of less than $3,237,000, 50% of which arise from the farming operation.
The debtor must derive at least 50% of gross annual income from farming. A “family fisherman”
is an individual and spouse, or a family-owned partnership or corporation, engaged in a
commercial fishing operation whose debts are less than $1,500,000, 80% of which arise from the
fishing operation. The debtor must derive at least 50% of gross annual income from fishing.
7
House-passed and Senate-reported version of H.R. 5384: “Provided further, That none of the
funds appropriated or otherwise made available by this Act shall be used to pay the salaries and
expenses of personnel to collect from the lender an annual fee on unsubsidized guaranteed
operating loans, a guarantee fee of more than one percent of the principal obligation of
guaranteed unsubsidized operating or ownership loans, or a guarantee fee on subsidized
guaranteed operating loans administered by the Farm Service Agency.”
8
Senate Agriculture Committee, “Review USDA Farm Loan Programs,” June 13, 2006, at
[http://agriculture.senate.gov/Hearings/hearings.cfm?hearingId=1940].
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commercial banks from paying taxes on profits from agricultural real estate loans. The
definition would include residential loans in rural areas with fewer than 2,500 people.
Proponents, including the American Bankers Association, say the bill would boost
rural development and give commercial banks equal treatment for tax exemptions long
available to the Farm Credit System (12 U.S.C. 2098). Critics say such exemptions are
not warranted (for commercial banks or the FCS) since agriculture no longer faces a credit
constraint and other industries do not receive such preferential treatment.
Farm Credit System Authority. In recent years, the FCS sought to expand its
lending authorities beyond traditional farm loans and into rural housing and non-farm
businesses. FCS also generally desires to update the Farm Credit Act of 1971, which last
was amended comprehensively in 1987. In early 2006, the FCS released a report titled
Horizons, which highlights perceived needs for greater lending authority.9 Some see
Horizons as a precursor to legislative action, possibly in the 2007 farm bill debate.
Commercial banks oppose expanding FCS lending authority, saying that commercial
credit in rural areas is not constrained and that FCS’s government-sponsored enterprise
(GSE) status provides an unfair competitive advantage. FCS responds to this debate by
asserting its statutory mandate to serve agriculture (and by extension, rural areas) through
good times and bad, unlike commercial lenders without such a mandate.
Termination/Buyout of FCS Associations. The controversy over GSE status
and lending authority was highlighted in 2004 when a private bank, Netherlands-based
Rabobank, tried to purchase an FCS association. The board of directors of Omaha-based
Farm Credit Services of America initially voted for the sale, indicating to some that FCS
may no longer need government sponsorship. Although Congress had no direct statutory
role in the buyout process, the House held hearings on the implications,10 and Senators
Daschle and Johnson introduced S. 2851 in the 108th Congress to require public hearings
and a longer approval process.
In 2004, FCS asked Congress to eliminate the provision (12 U.S.C. 2279d) allowing
institutions to leave the System. Commercial bankers say that institutions should be
allowed to leave FCS if they want more lending authorities than currently allowed. It is
not clear whether Congress, in 1987, intended the provision to be used by outside
companies to purchase parts of the System.
In July 2006, the Farm Credit Administration, the federal regulator of FCS, amended
the rules governing how an FCS bank or association may terminate its charter (71 FR
44409, August 4, 2006). The changes allow more time for FCA to review the request,
more communication, and more shareholder involvement. For further background, see
CRS Report RS21919, Farm Credit Services of America Ends Attempt to Leave the Farm
Credit System, by Jim Monke.
9
The Horizons report is available at [http://www.fchorizons.com].
10
House Agriculture Committee, “Review the Farm Credit System and its Provisions for
Associations to Exit the System,” at [http://agriculture.house.gov/hearings/108/10838.pdf]
1
Commercial bank issues are summarized by the American Bankers Association at [http://www.
aba.com/Industry+Issues/issues_ag_menu.htm] and the Independent Community Bankers of
America at [http://www.icba.org].
2
Farm Credit System institutions are described at [http://www.fca.gov/FCS-Institutions.htm].
3
USDA Farm Service Agency loan programs are described at [http://www.fsa.usda.gov/dafl].
4
Historically, the USDA’s lending agency was the Farmers’ Home Administration (FmHA),
created in 1945. A reorganization in 1995 moved the farm lending programs into FSA.
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frequently uses omnibus farm bills to make changes to the terms, conditions, and
eligibility requirements of these programs.
FSA makes farm ownership and operating loans to operators of family-sized farms.
The maximum direct loans are $200,000 per borrower, while the maximum guaranteed
loans are $852,000 per borrower (adjusted annually for inflation). Emergency loans are
available for qualifying natural or other disasters. Some guaranteed loans have a
subsidized (below-market) interest rate. To qualify for an FSA guaranteed or direct loan,
farmers must demonstrate enough cash flow to make payments.
Since the 1980s, the emphasis within the FSA farm loan program has gradually
shifted toward making relatively fewer direct loans and issuing more in guarantees. This
lessens farmers’ reliance on direct federal lending, and helps leverage federal dollars since
guaranteed loans are cheaper to subsidize. In the late 1990s, about 30% of USDA farm
loan authority was for direct loans. That ratio dropped to about 21% in FY2003, before
rising again to about 25% in FY2004-FY2006.
Certain portions of the FSA farm loan program are reserved for beginning farmers
and ranchers (7 U.S.C. 1994 (b)(2)). For direct loans, 70% of the amount for farm
ownership loans and 35% of direct operating loans are reserved for beginning farmers for
the first 11 months of the fiscal year (until September 1). For guaranteed loans, 25% of
the amount for farm ownership loans and 40% of farm operating loans are reserved for
such farmers for the first six months of the fiscal year (until April 1). Funds are also
targeted to “socially disadvantaged” farmers based on race, gender, and ethnicity (7
U.S.C. 2003).5
As an example of the type of statutory changes made in a farm bill, Title V of the
2002 farm bill (P.L. 107-171) authorized funding levels for FSA loans for FY2003FY2007 and expanded access to loans for beginning farmers. The 2002 law also increased
the percentage that USDA may lend for real estate loan down-payments and extended the
duration of eligible loans. It created a pilot program to guarantee seller-financed land
contracts, available to five contracts per year in each eligible state (originally implemented
in Indiana, Iowa, North Dakota, Oregon, Pennsylvania, and Wisconsin; in 2005, the
program expanded to include California, Minnesota, and Nebraska).
Authorizations and Appropriations for Farm Loans. The 2002 farm bill
authorized a maximum loan authority of $3.796 billion for direct and guaranteed loans
for each of fiscal years 2003-2007 (7 U.S.C. 1994(b)(1)). Also, the law specified how this
would be divided between direct and guaranteed loans, and within each of these
categories how much could be used for ownership loans versus operating loans. The farm
bill further instructed that not more than $750 million of the guaranteed operating loan
amount may be used for the interest assistance (subsidized) guaranteed loan program (7
U.S.C. 1999), which reduces the interest rate on the loan by 4%.
5
Further background on FSA programs and delivery mechanisms are available in a USDA report
to Congress, “Evaluating the Relative Cost Effectiveness of the Farm Service Agency’s Farm
Loan Programs,” by Charles Dodson and Steven Koenig, at [http://www.fsa.usda.gov/
Internet/FSA_File/farm_loan_study_august_06.pdf]
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Although the farm bill authorizes the multi-year “loan authority,” appropriators
control the annual discretionary appropriation to FSA that covers the federal cost of
making loans (the “loan subsidy”). This loan subsidy is directly related to any interest
rate subsidy provided by the government, as well as a projection of anticipated loan
losses. The actual amount of lending that can be made (the appropriated loan authority)
is several times larger than the appropriated loan subsidy.
For FY2006, $150 million in total loan subsidy supported the $3.7 billion in loan
authority. This results in an effective “multiplier” of 25 ($25 dollars of loan authority for
each $1 of loan subsidy). Guaranteed loans have higher multipliers than direct loans, and
farm ownership loans have higher multipliers than operating loans. The highest multiplier
in FY2006 is 208, for guaranteed farm ownership loans. The lowest is eight, for
subsidized guaranteed operating loans, which have a 4% interest rate subsidy.
Appropriations for salaries and expenses of the FSA personnel administering the loan
program were $310 million in FY2006. For FY2007, FSA is operating under a continuing
resolution until the 110th Congress enacts a year-long measure.6
Policy Issues for Congress
Farm Service Agency. Authority for the size of FSA’s farm loan program is
specified in the 2002 farm bill and expires at the end of FY2007. The 2007 farm bill is
seen as a vehicle to set new loan authorization levels for FSA, although actual funding
would continue to be set by annual appropriations acts.
Some have expressed a desire to increase the $200,000 limit per farmer on direct
farm ownership and operating loans.7 These limits were set in 1984 for direct farm
ownership loans, and in 1986 for direct operating loans, and have not kept pace with
inflation. (Limits for guaranteed loans were raised in 1998 and indexed for inflation.)
Another potential issue is the “term limits” set in statute for farmer eligibility.
Currently farmers are limited to receiving direct operating loan eligibility for seven years,
and guaranteed operating loans for 15 years (7 U.S.C. 1949). A provision in the 2002 farm
bill (Sec. 5102 of P.L. 107-171) suspended application of the 15-year limit through the
end of 2006, and P.L. 109-467 extends the suspension provision until September 30,
2007. An increasing number of farmers are reaching their term limits, and may face
financial collapse if they are not able to “graduate” to commercial credit. Term limits are
intended to prevent chronically inefficient farms from continuing to receive federally
subsidized credit, but the political and social consequences of letting these family farms
fail are sometimes unpleasant. Thus, there will be pressures to again extend the eligibility
allowance or revisit the purpose of the term limits requirement.
Farm Credit System. In recent years, FCS has expanded its lending, to a limited
degree, beyond traditional farm loans and into more rural housing and non-farm
6
For more on appropriaitons, see CRS Report RL33412, Agriculture and Related Agencies:
FY2007 Appropriations, coordinated by Jim Monke.
7
Glenn Keppy (Associate Administrator, USDA-FSA), testimony before Senate Agriculture
Committee hearing, “Review USDA Farm Loan Programs,” June 13, 2006, at
[http://agriculture.senate.gov/Hearings/hearings.cfm?hearingId=1940].
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businesses. FCS also generally desires to update the Farm Credit Act of 1971, which last
was amended comprehensively in 1987. In early 2006, FCS released a report titled
Horizons, which highlights perceived needs for greater lending authority to serve a
changing rural America.8 Some see Horizons as a precursor to legislative action to
expand lending authorities, possibly in the 2007 farm bill, or to more regulatory changes
expanding the allowed scope of lending.9
The scope of lending authority could grow under an October 2006 proposed rule to
expand eligibility for farm processing and marketing loans (71 FR 60678, October 16,
2006). The intent appears to be to allow financing for larger value-added farm processing
firms that are being built with more outside capital and involvement than in previous
decades. Opponents fear that the regulation could allow more non-agriculture financing.
Selected FCS institutions also have begun investing in “agricultural and rural
community bonds” as a pilot project, with the approval of FCA. The bonds, issued by
private or public enterprises, are assets to the FCS institution with structured payment
terms. The bonds effectively result in loans to businesses and communities, some of
which may not otherwise qualify for FCS loans. For the FCS institution, the bonds are
treated as an investment and thus not subject to loan eligibility regulations.
Commercial banks oppose expanding FCS lending authority, saying that commercial
credit in rural areas is not constrained and that FCS’s government-sponsored enterprise
(GSE) status provides an unfair competitive advantage. Commercial banks assert that,
with financial deregulation and integration, there is no credit shortage for agriculture and
the federal benefits for FCS are no longer necessary. FCS counters this by asserting its
statutory mandate to serve agriculture (and by extension, rural areas) through good times
and bad, unlike commercial lenders without such a mandate.
The controversy over GSE status and lending authority was highlighted in 2004
when a private bank, Netherlands-based Rabobank, tried to purchase an FCS association.
The board of directors of Omaha-based Farm Credit Services of America (FCSA) initially
voted for the sale, indicating to some that FCS may no longer need government
sponsorship. A general outcry led FCSA to withdraw from the deal.10 Commercial
bankers say that institutions should be allowed to leave FCS if they want more lending
authorities. In 2004, FCS asked Congress to eliminate the provision allowing institutions
to leave the system (12 U.S.C. 2279d). It is not clear whether Congress, in 1987, intended
the provision to be used by outside companies to purchase parts of FCS. In 2006, the
Farm Credit Administration amended the rules governing how an FCS institution may
terminate its charter (71 FR 44409, August 4, 2006). The changes allow more time for
FCA to review the request, more communication, and more shareholder involvement.
8
The Horizons report is available at [http://www.fchorizons.com].
9
Bert Ely, “The Farm Credit System: Lending Anywhere but on the Farm,” at [http://
www.aba.com/NR/rdonlyres/E1577452-246C-11D5-AB7C-00508B95258D/45256/Horizons
2006ELYFINAL.pdf].
10
For further background, see CRS Report RS21919, Farm Credit Services of America Ends
Attempt to Leave the Farm Credit System, by Jim Monke.