Order Code RS21278
September 20, 2006
CRS Report for Congress
Received through the CRS Web
Farm Credit System
Analyst in Agricultural Policy
Resources, Science, and Industry Division
The Farm Credit System (FCS) is a nationwide financial cooperative lending to
agricultural and aquatic producers, rural homeowners, and certain agriculture-related
businesses and cooperatives. Established in 1916, this government-sponsored enterprise
(GSE) has a statutory mandate to serve agriculture. Farmer Mac is a related but separate
secondary market for agricultural loans. Federal oversight provides for the safety and
soundness of FCS institutions. The FCS would like to expand its lending authorities for
rural housing and non-farm businesses, as highlighted in its 2006 “Horizons “ report, but
commercial banks oppose this effort. This report will be updated.
What Is the Farm Credit System?
A Rural Lender. The Farm Credit System (FCS) was created to provide a
permanent, reliable source of credit to American agriculture. When Congress enacted the
Federal Farm Loan Act in 1916, credit was frequently unavailable or unaffordable in rural
areas. Many lenders avoided such loans due to the inherent risks of agriculture. Statutory
authority is in the Farm Credit Act of 1971, as amended (12 U.S.C. 2001 et seq.). The
most comprehensive recent changes were enacted in the Agricultural Credit Act of 1987.
The FCS is authorized to lend to farmers, ranchers, and harvesters of aquatic
products. Loans may also be made to finance the processing and marketing activities of
these borrowers, for home ownership in rural areas, certain farm- or ranch-related
businesses, and agricultural, aquatic and public utility cooperatives.
As of June 2006, FCS had $113 billion in loans outstanding, of which about 51%
was in long-term agricultural real estate loans, 28% in short- and intermediate-term
agricultural loans, 16% in loans to cooperatives, 2% in export financing, and 3% in rural
home loans. The System holds about 31% of the farm sector’s total debt (second to the
40% share of commercial banks) and has the largest share of farm real estate loans (38%).
A Government-Sponsored Enterprise (GSE). As a GSE, FCS is a privately
owned, federally chartered cooperative designed to provide credit nationwide , and limited
to serving agriculture. Each GSE is given certain benefits such as implicit federal
Congressional Research Service ˜ The Library of Congress
guarantees or tax exemptions, presumably to overcome barriers faced by purely private
markets. 1 FCS is a direct lender, unlike the housing GSEs, which are secondary markets.
A Cooperative Business Organization. FCS associations are owned by the
borrowers who purchase stock, typically as part of their loan. FCS stockholders elect the
boards of directors for banks and associations. Each has one vote, regardless of the loan
size. Most directors are members, but federal law requires at least one from outside.
If an association is profitable, the directors may choose to retain the profits to
increase lending capital, or distribute some of the net income through dividends or
patronage refunds, which are proportional to the size of loan. Patronage refunds
effectively reduce the cost of borrowing. Some associations tend to regularly pay
patronage while others prefer to retain their earnings or charge lower interest rates.
A National System of Banks and Associations. FCS is composed of 5
regional banks that provide funds and support services to 96 smaller Agricultural Credit
Associations (ACAs), Federal Land Credit Associations (FLCAs), and Production Credit
Associations (PCAs). These associations in turn, provide loans to eligible borrowers.
The most common operating structure (due to favorable tax and regulatory rules) is a
“parent ACA” with FLCA and PCA subsidiaries. FLCA subsidiaries are exempt from
federal income taxes (12 U.S.C. 2098). There are 86 ACAs and 10 stand-alone FLCAs.2
One of the regional banks, CoBank, has a nationwide charter to finance farmerowned cooperatives and rural utilities. It finances agricultural exports and provides
international services for farmer-owned cooperatives through three international offices.
Capitalized with Bonds and Stock, not the U.S. Treasury. The Federal
Farm Credit Banks Funding Corporation ([http://www.farmcredit-ffcb.com]) uses capital
markets to sell FCS bonds and notes. These debts become the joint and several liability
of all FCS banks. The funding corporation allocates capital to the banks, which provide
funds to associations, which lend to borrowers. Profits from loans are used to repay
FCS also raises capital through two other methods. Borrowers are required to pay the
lesser of $1,000 or 2% of the loan amount and become a cooperative stockholder. FCS
also retains profits that are not returned as patronage to borrowers.
With the exception of seed money that was repaid by the 1950s and a temporary U.S.
Treasury line of credit in the 1980s, 3 FCS operates without any direct federal money. FCS
banks and associations do not take deposits like commercial banks.
There are five GSEs: Federal National Mortgage Association (Fannie Mae), Federal Home Loan
Mortgage Corporation (Freddie Mac), Federal Home Loan Bank System, Federal Agricultural
Mortgage Corporation (Farmer Mac), and FCS. For more on GSEs, see CRS Report RL30533,
The Quasi Government: Hybrid Organizations with Government and Private Characteristics.
For a directory of institutions in the Farm Credit System, and a map of the five regional banks,
see the Farm Credit Administration website at [http://www.fca.gov/apps/instit.nsf].
The Financial Assistance Corporation (FAC) borrowed $1.26 billion from Treasury following
the farm financial crisis of the 1980s. On June 10, 2005, the last of these bonds was repaid on
schedule, and interest was repaid to the U.S. Treasury. The FAC will be dissolved by June 2007.
What the Farm Credit System Is Not
FCS is not a government agency and its debt instruments and loans are not explicitly
guaranteed by the U.S. government.4 FCS is a GSE with certain tax benefits and a
mandate to serve agriculture. FCS is not a lender of last resort. FCS is a commercial, forprofit lender. Borrowers must meet creditworthiness requirements similar to those of a
commercial lender. (The USDA Farm Service Agency (FSA) is a lender of last resort for
borrowers who are unable to get a loan from another lender.5)
Types of Loans and Borrowers
FCS provides three types of loans: (1) operating loans for the short-term financing
of consumables such as feed, seed, fertilizer, or fuel; (2) installment loans for
intermediate-term financing of durables such as equipment or breeding livestock; and (3)
real estate loans for long-term financing (up to 40 years) of land, buildings, and homes.
Since FCS has a statutory mandate to serve agriculture and rural America, borrowers
must meet certain eligibility requirements in addition to creditworthiness. Eligible
borrowers and their scope of their financing can be grouped into four categories.
Full-time farmers. For individuals with over 50% of their assets and
income from agriculture, FCS can lend for all agricultural, family, and
non-agricultural needs (including vehicles, education, home
improvements, and vacation expenses).
Part-time farmers. For individuals who own farmland or produce
agricultural products but earn less than 50% of their income from
agriculture, FCS can lend for all agricultural and family needs. However,
non-agricultural lending is limited.
Farming-related businesses. FCS can lend to businesses that process
or market farm, ranch or aquatic products if more than 50% of the
business is owned by farmers who provide at least some of the
“throughput.” FCS also can lend to businesses that provide services to
farmers and ranchers (but not aquatic producers), such as crop spraying
and cotton ginning. The extent of financing is based on the amount of
the business’ farm-related income.
Rural homeowners. FCS can lend for the purchase, construction,
improvement, or refinancing of single family dwellings in rural areas
with populations of 2,500 or less.
Because of the significant role of GSEs in the U.S. economy, most investors feel the federal
government will not allow a GSE to fail. Thus, an implicit, albeit not statutory, guarantee exists.
For more information about other agricultural lenders, see CRS Report RS21977, Agricultural
Credit: Institutions and Issues, by Jim Monke.
The number of banks and associations has been declining for decades through
mergers and reorganizations. This consolidation accelerated, however, in 1999 when the
Farm Credit Administration (FCA), the system’s regulator, approved the “parent ACA”
structure and the Internal Revenue Service declared FLCA subsidiaries tax-exempt. In
the mid-1940s, there were over 2,000 lending associations, nearly 900 in 1983, fewer than
400 by 1987, 200 in 1998, and only 96 in 2006. The system operated with 12 districts
into the 1980s, 8 districts in 1998, and 5 regional banks (districts) since 2004.
Twenty years ago, the typical FCS association covered several counties and
specialized either in land or farm production loans. Today, the typical FCS association
covers a much larger region, delivers a wide range of farm and rural credit programs and
services, and has an extensive loan portfolio. FCS benefits when consolidation creates
more diversified portfolios. Customers may benefit if greater institutional efficiency is
passed along through lower interest rates. However, consolidation may weaken the
original cooperative concept of local borrower control and close many local offices at
which farmers had established relationships.
Each association within FCS has a specific “charter territory.” If an association
wants to lend outside its charter territory, it first must obtain approval from the other
territory’s association. For example, associations within U.S. AgBank’s region (the
southern Plains and West) can compete for loans, but associations in the AgFirst region
(the East and Southeast) cannot. Charter territories help ensure that borrowers are served
locally and maintain local control of the association. Charter territories and any changes
must be approved by FCA.
In 2001, FCA proposed allowing national charters so that associations would not be
restricted by geographical boundaries. The FCA board later dropped the idea after
opponents raised concerns that national charters would weaken FCS’s mission by pitting
associations against each other for prime loans and reducing commitments to local areas.
Congressional Oversight. Congressional oversight of FCS is provided by the
House and Senate Agriculture Committees. Most recently, the House held hearings on
Farmer Mac on June 2, 2004, and over the proposed sale of an FCS association on
September 29, 2004.
Farm Credit Administration (FCA). The FCA ([http://www.fca.gov]) is an
independent agency and the federal regulator responsible for examining and ensuring the
safety and soundness of all FCS institutions. Regulations are published in 12 C.F.R. 600
et seq. FCA’s operating expenses are paid through assessments on FCS banks and
associations. Even though FCA does not receive an appropriation from Congress, the
annual agriculture appropriations act in recent years has put a limit on FCA’s
administrative expenses ($44.25 million in FY2006).
FCA is directed by a three-member board nominated by the President and confirmed
by the Senate. Board members serve a six-year term and may not be reappointed after
serving a full term or more than three years of a previous member’s term. The President
designates one member as Chairman, who serves until the end of that member’s term. 6
Other FCS Entities
Federal Agricultural Mortgage Company (Farmer Mac). Farmer Mac
([http://www.farmermac.com]) was established in the Agricultural Credit Act of 1987 to
serve as a secondary market for agricultural loans — purchasing and pooling qualified
loans, then selling them as securities to investors. However, Farmer Mac continues to
hold most of the loans it purchases, a potentially more profitable activity for the company,
but also more risky. Farmer Mac increases the capacity for agricultural lenders to make
more loans; for example, if a lender makes a 30-year loan and sells it to Farmer Mac, the
proceeds can be used to make another loan.
Although Farmer Mac is part of FCS and regulated by FCA, it has no liability for the
debt of any other FCS institution, and the other FCS institutions have no liability for
Farmer Mac debt. Farmer Mac is organized as an investor-owned corporation, not a
member-owned cooperative. Voting stock may be owned by commercial banks, insurance
companies, other financial organizations, and FCS institutions. Nonvoting stock may be
owned by any investor. The Board of Directors has 15 members: five elected from the
FCS, five elected from commercial banks, and five appointed from the public at-large.
Farmer Mac operates two programs: Farmer Mac I (loans not guaranteed by USDA)
and Farmer Mac II (USDA-guaranteed loans).
A majority of Farmer Mac I volume comes from the sale of “long-term
standby purchase agreements” (LTSPC). Farmer Mac promises to
purchase specific agricultural mortgages, thus guaranteeing the loans
against default risk while the participating lender retains interest rate risk.
Under Farmer Mac II, the company purchases the portion of individual
loans that are guaranteed by USDA. On these purchases, Farmer Mac
accepts the interest rate risk but carries no default risk.
Farm Credit System Insurance Corporation. The Insurance Corporation
([http://www.fcsic.gov]) was established by statute in 1988 to ensure timely payment of
principal and interest on FCS debt securities. The FCA Board comprises its board of
directors. Annual premiums are paid by each bank through an assessment based on loan
volume until the secure base amount of 2% of total outstanding loans is reached.
Farm Credit Council. The Farm Credit Council ([http://www.fccouncil.com]) is
the national trade association of FCS. FCC has offices in Washington, DC, and Denver,
CO, and lobbies on behalf of FCS. FCC also provides support services.
FCA board members are Nancy C. Pellett (chairman since May 22, 2004), appointed in 2002
for a term that ends in May 2008; Douglas L. Flory, appointed in 2002 for a term that ends in
October 2006; and Dallas Tonsager, appointed in 2004 for a term that ends in May 2010.
Policy Issues for Congress
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 was
last amended comprehensively in 1987. In early 2006, the FCS released a report titled
“Horizons,” which highlights perceived needs for greater lending authority.7 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,8 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 are currently allowed.
It is not clear whether Congress, in 1987, intended the provision to be used by outside
companies to purchase parts of the FCS.
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.
Farmer Mac Risk Exposure. In 2003, the Government Accountability Office
recommended that Congress establish clearer goals for Farmer Mac (GAO-04-116). GAO
was concerned with risk management practices (including geographic concentration), lack
of secondary market development, and corporate governance. On June 2, 2004, the House
Agriculture Committee held a hearing. Questions have also arisen whether a certain type
of swaps are reducing insurance premiums paid to the insurance corporation without any
reduction in risk exposure.
The Horizons report is available at [http://www.fchorizons.com].
House Agriculture Committee, “Review the Farm Credit System and its Provisions for
Associations to Exit the System” [http://agriculture.house.gov/hearings/108/10838.pdf].