.
Agricultural Credit: Institutions and Issues
Jim Monke
Specialist in Agricultural Policy
February 7, 2013April 8, 2015
Congressional Research Service
7-5700
www.crs.gov
RS21977
CRS Report for Congress
Prepared for Members and Committees of Congressc11173008
Agricultural Credit: Institutions and Issues
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Summary
The federal government provides credit assistance to farmers to help assure adequate and reliable
lending in rural areas, particularly whenfor farmers who cannot obtain loans elsewhere. Federal farm loan
loan programs also target credit to beginning farmers and socially-disadvantaged groups.
The primary federal lender to farmers, though with a small share of the market, is the Farm
is the Farm Service Agency (FSA) in the U.S. Department
of Agriculture (USDA). It issues direct Congress funds FSA loans
with annual discretionary appropriations—about $79 million of budget authority and $315
million for salaries—to support $6.4 billion of new direct loans and guarantees. FSA issues direct
loans to farmers who cannot qualify for regular credit, and
guarantees the repayment of loans
made by other lenders. FSA thus is called a lender of last resort.
Of about $250318 billion in total
farm debt, FSA provides about 2.3% through direct loans, and
guarantees about another 4%-5% of
loans.
Another federally related lender is the Farm Credit System (FCS), a cooperatively owned but
federally chartered lender with a statutory mandate to—cooperatively owned and
funded by the sale of bonds in the financial markets. Congress sets the statutes that govern the
FCS banks and lending associations, mandating that they serve agriculture-related borrowers. FCS
FCS makes loans to creditworthy farmers, and is not a lender of last resort. FCS accounts for nearly
43
42.5% of farm debt. and is the largest lender for farm real estate.
Commercial banks are the other primary agricultural lender, holding slightly
more less than FCS with over 43
40.1% of total farm debt. Commercial banks are the largest lender for farm production loans.
Generally speaking, the farm sector’s balance sheet has remained strong in recent years. While
delinquency rates on farm loans increased from 2008 into 2010, farmers and agricultural lenders
did not face credit problems as severe as those of other economic sectors. Since 2010, loan
repayment rates have improved. But appropriations for the FSA loan program—and the ability of
FSA to meet demand for its loans and guarantees—have been constrained during an era of tight
federal budgets.
Statutory authority for FSA and FCS is permanent, but periodic farm bills often make adjustments
to eligibility criteria and the scope of operations. In the 112th Congress, both the Senate-passed
farm bill (S. 3240) and the House-reported farm bill (H.R. 6083) would have made relatively
small policy changes to USDA’s credit programs in Title V. Term limits on the number of years
that borrowers may remain eligible for loans may be an issue, as well as expanding existing loan
programs to serve non-traditional farm producers, such as producers for local and regional food
systems. In 2013, USDA created a microloan program to expedite small operating loans to
nontraditional agricultural producers. Finally, efforts to expand Farm Credit System activities into
new mission areas using regulatory powers may continue.
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Contents
Current Situation .............................................................................................................................. 1
Major Players and Market Shares.............................................................................................. 1
The Farm Balance Sheet ............................................................................................................ 3
Agricultural Lending Situation and Challenges Delinquency Rates on Farm Loans ............................................................................................ 5
Description of Government-Related Farm Lenders ......................................................................... 7
USDA’s Farm Service Agency (FSA) .......................................................................................... 7
Farm Credit System (FCS) ........................................................................................................ 7
Farmer Mac ............................................................................................................................... 8
Issues for Congress .........Recent Congressional Issues ................................................................................................................. 8
Credit Title in the Next Farm Bill.............................................................................................. 8
Term Limits on USDA Farm Loans .......................................................................................... 8
Farm Operating Loans......................................................................................................... 9
Farm Ownership Loans ....................................................................................................... 9
Loans to Small and Local and Regional Food Producers ........................................................ 10
Farm Credit Administration Proposed Rule on Investments ................................................... 11
Background on FCS Proposals for Expansion .................................................................. 11
Mission-Related Investments ............................................................................................ 11 8
Competition Between Farm Credit System and Commercial Banks ......................................... 8
Credit Title in the 2014 Farm Bill ............................................................................................. 8
Term Limits on USDA Farm Loans .......................................................................................... 9
Figures
Figure 1. Market Shares by Lender of Total Farm Debt, 1960-20112013 ............................................... 2
Figure 2. Market Shares of Real Estate Farm Debt, 1960-20112013 ...................................................... 2
Figure 3. Market Shares of Non-Real Estate Farm Debt, 1960-20112013 .............................................. 2
Figure 4. Farm Assets, 1960-20122015 ................................................................................................... 4
Figure 5. Farm Debt, 1960-20122015 ..................................................................................................... 4
Figure 6. Debt-to-Asset Ratio, 1960-20122015 ....................................................................................... 4
Figure 7. Net Farm Income, 1960-20122015........................................................................................... 4
Figure 8. Net Farm Income and Government Payments, 1960-20122015 .............................................. 4
Figure 9. Debt-to-Net Farm Income Ratio, 1960-20122015 ................................................................... 4
Figure 10. Delinquency Rates on Loans at Commercial Banks, 1990-2012 Commercial Bank Loans, 1990-2014......................................... 6
Figure 11. Nonperforming Farm Loans, 1990-20122014 ........................................................................ 6
Tables
Table 1. Term Limits on Farm Service Agency Loans..................................................................... 9
Contacts
Author Contact Information............................................................................................................. 9
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Current Situation
Major Players and Market Shares
The federal government has a long history of assisting farmers with obtaining loans for farming.
This intervention has been justified at one time or another by many factors, including the
presence of asymmetric information among lenders, asymmetric information between lenders and
farmers, lack of competition in some rural lending markets, insufficient lending resources in rural
areas compared to more populated areas, and the desire for targeted lending to disadvantaged
groups (such as small farms or socially disadvantaged farmers).1
Several types of lenders make loans to farmers. Some are government entities or have a statutory
mandate to serve agriculture. The one most controlled by the federal government is the Farm
Service Agency (FSA) in the U.S. Department of Agriculture (USDA). It lends directly to farmers
and also issuesreceives federal
appropriations to make direct loans to farmers and to issue guarantees on loans made by
commercial lenders to farmers who do not qualify
for regular credit. Therefore, FSA is called FSA is a lender of last resort. Because FSA,
but also of first opportunity because it targets loans or
reserves funds for disadvantaged groups, it also is called a lender of first opportunity.
The lender with the next-largest amount of government intervention is the Farm Credit System
(FCS). It is a cooperatively owned, and funded—but federally chartered, —private lender with a statutory
statutory mandate to serve agriculture-related borrowers only. FCS makes loans to creditworthy
farmers,
and is not a lender of last resort, but is a government-sponsored enterprise (GSE). Third
is Farmer
Mac, another GSE that is privately held, and provides a secondary market for
agricultural loans.
FSA, FCS, and Farmer Mac are described in more detail later in this report.
Other lenders do not have direct government involvement in their funding or existence. These
include commercial banks, life insurance companies, and individuals, merchants, and dealers.
Figure 1 shows that commercial banks and the FCSthe FCS and commercial banks provide most of the farm credit (43.4%, and
42.842.5% and
40.1%, respectively), followed by individuals and others (6.09.4%), and life insurance companies
(5.34.2%). FSA provides about 2.53% of the debt through direct loans. FSA also guarantees about
another 4%-5% of the market through loans that are made by commercial banks and the FCS.
The total amount of farm debt ($254318 billion in 20112014) is concentrated relatively more in real estate
debt (5758%) than in non-real estate debt (4342%). FCS is the largest lender for real estate, although
(49%),
although both commercial banks’ and FCS’s shares have grown as others’ shares have decreased
(Figure
2). Commercial banks are the largest lender for non-real estate loans (49%), although
FCS has gained
share in recent years as the share by individuals and shares by others hashave decreased (Figure 3).
As the figures show, market shares among these lenders have changed over time. Commercial
banks held relatively little farm real estate debt through 1985, but now hold a sizeable amount
(Figure 2). The share of loans from “individuals and others” has steadily decreased over time,
with fewer private contracts for farm real estate and relatively less dealer financing in operating
credits. FSA held a much larger share of farm debt during the farm financial crisis of the 1980s,
but that ratio declined as the farm economy improved through the 1990s (Figure 3).
1
USDA-FSA, Evaluating the Relative Cost Effectiveness of the Farm Service Agency’s Farm Loan Programs, report to
Congress, August 2006, pp. 11-17, at http://www.fsa.usda.gov/Internet/FSA_File/farm_loan_study_august_06.pdf.
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Figure 1. Market Shares by Lender of Total Farm Debt, 1960-2011
Source: CRS, using USDA-ERS data at http://www.ers.usda.gov/data-products/farm-income-and-wealthstatistics.aspx.
Notes: FSA shares in the graph are for direct loans only. FSA-issued guarantees on about 4-5% of farm loans are
not shown separately but are included in the shares of commercial banks and the Farm Credit System.
Figure 2. Market Shares of Real Estate
Farm Debt, 1960-2011
Figure 3. Market Shares of Non-Real
Estate Farm Debt, 1960-2011
(57% of total farm debt in 2011)
(43% of total farm debt in 2011)
100%
100%
90%
80%
70%
60%
50%
40%
30%
90%
Life ins. co.
USDA-FSA
70%
Commercial
banks
50%
10%
1970
1980
1990
Source: CRS, using USDA-ERS data.
Congressional Research Service
Individuals
and others
80%
USDA-FSA
60%
Commercial
banks
40%
30%
Farm Credit
System
20%
0%
1960
Individuals
and others
20%
Farm Credit
System
10%
2000
2013
100%
9.4%
Individuals and
others
90%
4.2%
2.3%
80%
Life ins. co.
70%
USDA-FSA
40.1%
60%
50%
1.4%
Commercial banks
40%
30%
Farmer Mac
20%
42.5%
Farm Credit System
10%
0%
1960
1970
1980
1990
2000
2010
Source: CRS, using USDA-Economic Research Data (ERS) data at http://www.ers.usda.gov/dataproducts/farm-income-and-wealth-statistics.aspx.
Notes: Shares in the graph are for direct loans; guarantees issued on other lenders’ loans are not shown.
USDA-FSA issued guarantees on about 4%-5% of farm loans that are not shown separately but are included in
the shares of commercial banks and the Farm Credit System. ERS began publishing data on Farmer Mac in 2002.
Figure 2. Market Shares of Real Estate
Farm Debt, 1960-2013
Figure 3. Market Shares of Non-Real
Estate Farm Debt, 1960-2013
(58% of total farm debt in 2013)
(42% of total farm debt in 2013)
100%
100%
Individuals
and others
90%
70%
Life ins. co.
70%
60%
USDA-FSA
60%
50%
Commercial
banks
50%
90%
80%
40%
80%
Farmer Mac
30%
Farm Credit
System
20%
10%
0%
1960
1970
1980
1990
2000
Source: CRS, using USDA-ERS data.
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Individuals
and others
USDA-FSA
Commercial
banks
40%
30%
20%
Farm Credit
System
10%
2010
0%
1960
1970
1980
1990
2000
2010
Source: CRS, using USDA-ERS data.
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The Farm Balance Sheet
As a whole, farm sector assets have remained strong despite pressure on other real estate sectors.
The value of farm assets contracted only in 2008 and has since returned positive growth. Farm
assets reached a reached a new high in 2011, a total of $2.4 trillion, and were expected to rise
6.5% in 2012 has grown steadily since the end of the 1980s, particularly since 2003.
At the end of 2014, farm assets reached nearly $3 trillion, though the rate of growth has slowed
(Figure 4). These highs in total farm assets now exceed the previous peak from
1980 in inflation-adjusted terms.2 Real estate is about 84 1980 in inflationadjusted terms,2 but inflation-adjusted assets are forecasted to decline slightly in 2015. Real estate
is about 82% of the total amount of farm assets;
machinery and vehicles are the next-largest
category at about 69% of the total.3
Farm debt reached a historic high of $254318 billion at the end of 20112014 (Figure 5). Debt wasis
forecasted to rise 4.53% in 20122015. In inflation-adjusted terms, however, this level of debt—though
still rising—still is is still
well below the peak debt levels of the 1980s.
Debts and assets can be compared in a single measure by dividing debts by assets—the debt-toasset ratio. A lower debt-to-asset ratio generally implies less financial risk to the sector than a
higher ratio. Farm debt-to-asset ratio levels have declined fairly steadily since the late 1980s after
the farm financial crisis, and reached a historic low of 10.46% in 20072014. When farm asset growth
paused in 2008-2009, the debt-to-asset ratio rose to nearly 1212.5% (Figure 6). However, byBy 2012,
the debt-to-asset
ratio had returned to historically low levels. AsIn 2015, the debt-to-asset ratio is forecasted to
increase slightly to 10.9%. But as a whole, farms are not as highly
leveraged as they were in the
farm financial crisis of the 1980s.
Net farm income has become more variable, especially since 2000. After reaching historic highs
in 2004, net farm income fell by a third in two years, through 2006 (Figure 7). After peaking
again in 2008 at
$85 billion, net farm income fell by one-quarter in one year to $63 billion in
2009. New highs were set in 2011 and 2012. Despite the severe declines in farm income in 2006
and 2009, the relative recent lows in net farm income are still higher than the inflation-adjusted
lows from the farm financial crisis of the 1980s. New highs were set in 2011 and
2013, but net farm income is expected to decline by 43% in two years into 2015. The relatively
low net farm income forecasted for 2015, however, still is within 20% of the 10-year average.4
Government payments to farmers also have risen from decades ago, but do not always offset the
variability in net farm income. Fixed direct payments that arewere not tied to prices or revenue are the
were
the primary form of government payments in recent years; these payments support farm supported farm
income but
do did not necessarily help farmers manage risks. Figure 8 shows that more of net farm
income is
coming from the market rather than the government, compared to the 1980s.
Another indicator of farmers’ leverage compares debt to net farm income. A lower debt-to-income
ratio (with the ratio expressing the number of years of current income that debt represents)
implies less financial leverage and risk. The farm-debt-to-net-farm-income ratio is more variable
than the debt-to-asset ratio because of the variability of net farm income. It reached a 35-year low
of 2.13 in 2004 and rose to 3.84.3 in 2009 before falling again to 2.2 in 2011 (Figure 9). These levels,
while more variable than in the 1990s, are roughly within 50-year historical levels between 2 and
4, and are certainly less than from 1976 to 1986 (a period surrounding the 1980s financial crisis).
2
Comparisons are made to conditions in the 1980s because that was the last major financial crisis in agriculture.
USDA, Economic Research Service. “Farm Sector Income Forecast,” January 28, 2011, at http://www.ers.usda.gov/
Briefing/FarmIncome/Data/Bs_t5.htm.
4
For more information on farm income expectations, see CRS Report R40152, U.S. Farm Income, by Randy Schnepf.
3
4 in 2013. However, the expected
decline in net farm income in 2014-2015 has caused this measure to rise to a forecasted level not
seen since 2009, 2002, and 1986—a level outside the 50-year historical range of 2 to 4 (Figure
9).
2
Comparisons are made to conditions in the 1980s because that was the last major financial crisis in agriculture.
USDA, Economic Research Service, Farm Income and Wealth Statistics, at http://www.ers.usda.gov/data-products/
farm-income-and-wealth-statistics.aspx.
4
CRS Report R40152, U.S. Farm Income Outlook for 2015.
3
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Figure 4. Farm Assets, 1960-2015
Billion dollars
3,500
Billion dollars
450
Farm assets
3,000
Figure 5. Farm Debt, 1960-2015
in 2015 dollars
in 2015 dollars
350
2,500
300
2,000
250
1,500
200
150
1,000
100
500
0
1960
Farm debt
400
50
1970
1980
1990
2000
2010
0
1960
Source: CRS, using USDA-ERS data.
Notes: 2015 forecast.
1970
1980
1990
2000
2010
Source: CRS, using USDA-ERS data.
Notes: 2015 forecast.
Figure 6. Debt-to-Asset Ratio, 1960-2015
Figure 7. Net Farm Income, 1960-2015
25%
Billion dollars
140
20%
120
Net farm income
in 2015 dollars
10-year average
100
15%
80
60
10%
40
5%
20
0%
1960
1970
1980
1990
2000
2010
0
1960
Source: CRS, using USDA-ERS data.
Notes: 2015 forecast.
1990
2000
2010
Figure 9. Debt-to-Net Farm Income
Ratio, 1960-2015
14
Net farm income
120
12
Government payments
10
100
80
8
60
6
40
4
20
2
0
1960
1970
1980
1990
2000
Source: CRS, using USDA-ERS data.
Notes: 2015 forecast.
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1980
Source: CRS, using USDA-ERS data.
Notes: 2015 forecast.
Figure 8. Net Farm Income and
Government Payments, 1960-2015
Billion dollars
140
1970
Congressional Research Service
2010
0
1960
1970
1980
1990
2000
2010
Source: CRS, using USDA-ERS data.
Notes: 2015 forecast.
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Delinquency Rates on Farm LoansFigure 4. Farm Assets, 1960-2012
Source: CRS, using USDA-ERS data at http://www.
ers.usda.gov/data-products/farm-income-and-wealthstatistics.aspx. 2012 forecast.
Figure 6. Debt-to-Asset Ratio, 1960-2012
Source: CRS, using USDA-ERS data at http://www.
ers.usda.gov/data-products/farm-income-and-wealthstatistics.aspx. 2012 forecast.
Figure 8. Net Farm Income and
Government Payments, 1960-2012
Source: CRS, using USDA-ERS data at http://www.
ers.usda.gov/data-products/farm-income-and-wealthstatistics.aspx. 2012 forecast.
Congressional Research Service
Figure 5. Farm Debt, 1960-2012
Source: CRS, using USDA-ERS data at http://www.
ers.usda.gov/data-products/farm-income-and-wealthstatistics.aspx. 2012 forecast.
Figure 7. Net Farm Income, 1960-2012
Source: CRS, using USDA-ERS data at http://www.
ers.usda.gov/data-products/farm-income-and-wealthstatistics.aspx. 2012 forecast.
Figure 9. Debt-to-Net Farm Income
Ratio, 1960-2012
Source: CRS, using USDA-ERS data at http://www.
ers.usda.gov/data-products/farm-income-and-wealthstatistics.aspx. 2012 forecast.
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Agricultural Credit: Institutions and Issues
Agricultural Lending Situation and Challenges
While the global financial crisis was slower to affect the balance sheets of farmers and
agricultural lenders than the housing market, its presence was observed in agricultural lending.
Credit standards were tightened (more documentation and oversight of loans was required) and
lenders sometimes made less credit available to producers. As the lender of last resort, the USDA
Farm Service Agency experienced significantly higher demand for its direct loans and guarantees.
In 2007, 2008, and 2010, farm commodity prices were particularly high, supporting farm income
at above-average levels. But in 2006 and 2009, net farm income fell by about one-third (Figure
7), reducing some farmers’ ability to repay loans, particularly in some farm sectors such as dairy,
hogs, and poultry. Recent strong farm income has improved most farmers’ ability to repay loans.
Delinquency rates on residential mortgages began to rise in 2005, and for all loans particularly in
2007. Delinquencies include loans that are 30 days or more past due and still accruing interest, as
well as those in nonaccrual status. The delinquency rates on residential mortgages and all loans
appear to have reached a peak in mid-2010 (11.3% for residential mortgages and 7.34% for all
commercial bank loans, Figure 10). The delinquency rates for agricultural loans did not begin to
rise until mid-2008, after continuing to fall to historic lows while delinquencies were rising in
residential mortgages and other loans. Moreover, the rate of increase in delinquencies on farm
production loans at commercial banks has not been as sharp as in the non-farm sectors, and
appears to have and
peaked in SeptemberJune 2010 at 3.53%. Delinquency rates on farm production loans
at commercial banks
have since returned to near-historic lows below 21%.5
A more severe measure of loan performance is nonperforming loans. Nonperforming loans
include nonaccrual loans and accruing loans 90 days or more past due. These loans are more in
jeopardy than delinquent loans, and represent a smaller subset of loans. Within the agricultural
loan portfolio, FCS nonperforming loans rose from 0.45% at the beginning of 2008 to a near-term
peak of 2.8% on September 30, 2009, before decreasing again to about 1.70.9% as of September 30,
2012December 31,
2014 (Figure 11).6 Nonetheless, theThe FCS nonperforming loan rate remains at a level not seen
since the 1990s whenhas returned to levels of the 2001-2007
period after the system had finally recovered from the farm financial crisis of the 1980s.
Nonperforming farm loans at commercial banks also have risenrose but have declined to more normal
levels. Nonperforming farm real estate
loans at commercial banks rose from a low of 0.7% in
December 2006 to 2.9% in March 2011,
before declining to 21.2% as of September 30, 2012. 2014.
Nonperforming farm production loans rose
from a low of 0.6% in December 2006 to 2.4% in
March 2010, before declining to 1.3again to 0.6% as of
September 30, 20122014 (Figure 11).7
5
Federal Reserve Bank, “Delinquency Rates on Loans at Commercial Banks” (seasonally adjusted), at http://www.
federalreserve.gov/releases/chargeoff.
6
Federal Farm Credit Banks Funding Corporation, “First Quarter 2010 Quarterly Information Statement of the Farm
Credit System,” p. 9, May 10, 2010, at http://www.farmcredit-ffcb.com/farmcredit/serve/public/finin/quarin/report.pdf?
assetId=155241Farm Credit System, Annual and Quarterly Information Statements, at http://www.farmcreditfunding.com/ffcb_live/
financialInformation.html?tab=statements.
7
Federal Reserve Bank, Agricultural Finance Data Book, Tables B.2 and B.4, at http://www.kansascityfed.org/
research/indicatorsdata/agfinance/index.cfm.
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Figure 10. Delinquency Rates on Loans at Commercial Banks, 1990-2012Commercial Bank Loans, 1990-2014
12%
10%
Single-family
residential
8%
6%
All loans
4%
2%
Farm production
loans
0%
1990
1995
2000
2005
2010
2015
Source: Compiled by CRS. Data through September 30, 2012December 31, 2014, using Federal Reserve Bank, “Delinquency Rates
on Loans at Commercial Banks” (seasonally adjusted), at http://www.federalreserve.gov/releases/chargeoff.
Notes: Delinquencies include loans that are 30 days or more past due and still accruing interest, as well as those
in nonaccrual status. The amounts are percentages of end-of-period loans.
Figure 11. Nonperforming Farm Loans, 1990-20122014
5%
4%
Commercial bank
farm real estate
3%
Farm Credit
System
2%
1%
0%
1990
Commercial bank
farm production
1995
2000
2005
2010
2015
Source: Compiled by CRS. Federal Farm Credit Banks Funding Corp. data through September 30, 2012December 31, 2014, at
http://www.farmcredit-ffcb.com. Federal Reserve Bank, Agricultural Finance Data Book, Tables B.2 and B.4, through
September 30, 20122014, at http://www.kansascityfed.org/research/indicatorsdata/agfinance/index.cfm.
Notes: Nonperforming loans include nonaccrual loans and accruing loans 90 days or more past due. The
amounts are percentages of total loans.
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Description of Government-Related Farm Lenders
USDA’s Farm Service Agency (FSA)
USDA’s Farm Service Agency is considered a lender of last resort because it makes direct farm ownership
ownership and operating loans to family-sized farms that are unable to obtain credit elsewhere.8
FSA also
guarantees timely payment of principal and interest on qualified loans made by commercial
lenders such as
commercial banks and the FCS. Permanent authority exists in the Consolidated Farm
and Rural
Development Act (CONACT, 7 U.S.C. 1921 et seq.). and is usually modified in periodic farm bills.
Prior to the banking crisis in
2008, FSA usually made and guaranteed about $3.5 billion of farm
loans annually. Supplemental
appropriations during the financial crisis raised FSA loan activity to
about $6.0 billion in FY2010.
In FY2012, appropriations supported about $4.8 billion of FSA direct loans and guarantees.9 In FY2015, an appropriation of $79 million in budget authority
(plus $315 million for salaries and expenses) supports the issuance of $6.4 billion of new direct
loans and guarantees.8
Direct loans are limited to $300,000 per borrower, ($35,000 for microloans), and guaranteed loans
to $1,302392,000 per borrower
(adjusted annually for inflation). Direct emergency loans are
available for disasters.9
Part of the FSA loan program is reserved for beginning farmers and ranchers (7 U.S.C. 1994
(b)(2)). For direct loans, 75% of the funding for farm ownership loans and 50% of operating loans
are reserved for the first 11 months of the fiscal year. For guaranteed loans, 40% is reserved for
ownership loans and farm operating loans for the first half of the fiscal year. Funds are also
targeted to “socially disadvantaged” farmers by race, gender, and ethnicity (7 U.S.C. 2003).
Because of these provisions, FSA also is known as lender of first opportunity for borrowers who
aremay not yet be creditworthy forenough to obtain regular commercial business loans.
Farm Credit System (FCS)
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. FCS is
neither a government agency nor guaranteed by the U.S. government, but is a network of
borrower-owned lending institutions operating as a government-sponsored enterprise (GSE). It is
not a lender of last resort; it is a for-profit lender with a statutory mandate to serve agriculture.
Funds are raised through the sale of bonds on Wall Street.10 Four large banks allocate these funds
to 86 credit associations11 to
76 credit associations that, in turn, make loans to eligible creditworthy borrowers. FCS is
unique among the GSEs because it is a retail lender making loans directly to farmers, and thus is
in direct competition with commercial banks.
Statutes and oversight by the House and Senate Agriculture Committees determine the scope of
FCS activity. Benefits such as tax exemptions also are provided. Eligibility is limited to farmers,
farm input suppliers, rural homeowners in towns under 2,500 population, and cooperatives. The
federal regulator is the Farm Credit Administration (FCA). For more background, see CRS
Report RS21278, Farm Credit System.
8
U.S. Department of Agriculture, Farm Service Agency, Farm Loan Program, at http://www.fsa.usda.gov/dafl.
CRS Report R42596, Agriculture and Related Agencies: FY2013 Appropriations.
10
Federal Farm Credit Banks Funding Corporation, “Overview,” http://www.farmcreditfunding.com/ffcb_live/
overview.html.
11
Farm Credit Administration, “Number of FCS Banks and Associations,” at http://www.fca.gov/info/
number_of_fcs_institutions.html.
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Statutes and oversight by the House and Senate Agriculture Committees determine the scope of
FCS activity (Farm Credit Act of 1971, as amended; 12 U.S.C. 2001 et seq). Benefits such as tax
exemptions also are provided. Eligibility is limited to farmers, certain farm-related
8
CRS Report R43669, Agriculture and Related Agencies: FY2015 Appropriations.
USDA Farm Service Agency, Farm Loan Program, at http://www.fsa.usda.gov/dafl.
10
Farm Credit System, at http://www.farmcreditnetwork.com.
9
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agribusinesses, rural homeowners in towns under 2,500 population, and cooperatives.11 The
federal regulator is the Farm Credit Administration (FCA).12
Farmer Mac
Farmer Mac is a separate GSE that is a secondary market for agricultural loans.12 It is13 Some consider
it related to
the FCS in that FCA is its regulator and that it was created by the same legislation,
but it is a
financiallyfinancially and organizationally a separate entity. Farmer Mac purchases mortgages from
lenders and guarantees
mortgage-backed securities that are bought by investors. Permanent
authority rests in the Farm
Credit Act of 1971 (12 U.S.C. 2001 et seq.).
Issues for Congress
Credit Title in the Next Farm Bill
Statutory authority for FSA and FCS is permanent, but periodic farm bills often make adjustments
to eligibility criteria and the scope of operations. A new farm bill is expected in 2013, and
provisions may be modeled on proposals included in proposals in the House and Senate during
2012, as summarized below.13
In the 112th Congress, both the Senate-passed farm bill (S. 3240) and the House-reported farm bill
(H.R. 6083) would have made relatively small policy changes to USDA’s credit programs in
Title V. Both bills would have given USDA discretion to recognize (1) alternative legal entities to
qualify for farm loans and (2) alternatives to meet a three-year farming experience requirement;
and both bills would have increased the maximum size of down-payment loans (from 45% of
$500,000 to 45% of $667,000).
The Senate farm bill would have updated and modernized the ConAct’s statutory language and
organized the various programs into separate subtitles. It also would have extended the number of
years that farmers could remain eligible for direct farm operating loans, and eliminated term
limits on guaranteed operating loans (discussed in the next section).
The House bill’s credit title would not have restructured the ConAct nor changed any term limits
provisions. However, the House bill would have created a new microloan program, increased the
percentage of a conservation loan that can be guaranteed, and added another lending priority for
beginning farmers.
Neither H.R. 6083 nor S. 3240 made any changes to Farm Credit System statutes.
Term Limits on USDA Farm Loans
Congress added “term limits” to the USDA farm loan program in 1992 and 1996 to restrict
eligibility for government farm loans and encourage farmers to “graduate” to commercial loans.
The term limits place a maximum number of years that farmers are eligible for certain types of
FSA loans or guarantees. However, until the end of 2010, Congress had suspended application of
one of the term limits to prevent some farmers from being denied credit (Table 1).
12
Federal Farm Credit Banks Funding Corporation, “FarmerMac,” at http://www.farmcredit-ffcb.com/farmcredit/
fcsystem/overview_farmer_mac.jsp
13
For more background and comparison of proposals, see CRS Report R42552, The 2012 Farm Bill: A Comparison of
Senate-Passed S. 3240 and the House Agriculture Committee’s H.R. 6083 with Current Law.
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Agricultural Credit: Institutions and Issues
Farm Operating Loans
•
Direct operating loans are limited to a six-year period. In certain cases, borrowers
may qualify for a one-time, two-year extension (7 U.S.C. 1941(c)(1)(C) and
(c)(4)).14
•
Guaranteed operating loans are limited to a 15-year period (7 U.S.C. 1949(b)(1)).
Receiving direct operating loans counts toward the guaranteed loan term limit.
That is, when either the first direct or guaranteed operating loan is issued, the
clock starts on the 15-year eligibility for guaranteed operating loans. However,
until December 31, 2010, the term limit had been suspended by the 2008 farm
bill (P.L. 110-246, Section 5103). But following the expiration of the suspension,
the 15-year term limit on guaranteed operating loans now applies.15
In the 112th Congress, the Senate-passed farm bill proposal (S. 3240) would have extended to 7
years the time that farmers could remain eligible for direct farm operating loans, and eliminated
the 15-year term limit on guaranteed operating loans. The House-reported farm bill proposal
(H.R. 6083) would not have changed the term limit statutes.
Farm Ownership Loans
•
A borrower is eligible for direct farm ownership (real estate) loans for a
maximum of 10 years after the first loan is made (7 U.S.C. 1922(b)(1)(C)).
•
There is no time limit on eligibility for guaranteed farm ownership loans.16
Table 1. Term Limits on Farm Service Agency Loans
Maximum number of years that farmers are eligible for loans
Type of FSA Loan
Farm Operating (OL) Loans
Farm Ownership (FO) Loans
Direct loans term limits
Guaranteed loans term limits
6 years, plus possible 2-yr.
extension
15 years
10 years
No term limit
Was suspended (term limit not
enforced) through 12/31/10. About
1,600 borrowers needed suspension to
remain eligible.
Source: CRS, based on statute and unpublished USDA data.
Note: Term limits are separate from the maximum maturity or duration of an individual loan, which may be as
long as 40 years for a farm ownership loan or as short as 1 year for a farm operating loan.
14
In June 2009, USDA said that about 4,800 FSA borrowers were limited to one more year of direct operating loans,
and another 7,800 borrowers were limited to two more years. USDA did not expect many of these borrowers to
graduate to commercial credit (Doug Caruso, FSA Administrator, in testimony before the House Agriculture
Subcommittee on Conservation, Credit, Energy and Research, June 11, 2009, at http://agriculture.house.gov/testimony/
111/h061109sc/Caruso.doc).
15
In December 2010, USDA said that about 1,600 current borrowers had reached the guaranteed term limit and would
not qualify for additional operating loan guarantees (personal communication with House Agriculture Committee and
USDA farm loan staff, December 2010).
16
USDA-FSA, Evaluating the Relative Cost Effectiveness of the Farm Service Agency’s Farm Loan Programs, Report
to Congress, August 2006, p. 76, at http://www.fsa.usda.gov/Internet/FSA_File/farm_loan_study_august_06.pdf.
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Agricultural Credit: Institutions and Issues
Loans to Small and Local and Regional Food Producers
Access to sufficient credit has been raised as one factor in the growth and expansion of local and
regional food production systems.17 Because some of these farms are small and may produce in
nontraditional settings, or the farmers do not have much farming experience, they may find it
hard to qualify for regular production credit and may be ineligible for existing government loan
programs. Several bills were introduced in the 112th Congress to expand the availability of credit
for small and local and regional food producers.18
•
H.R. 3286 and S. 1773 (the Local Farms, Food, and Jobs Act) would have
explicitly recognized local and regional food producers as eligible borrowers at
both USDA-Farm Service Agency and the Farm Credit System. Eligibility for
FSA loans would have included local and regional food producers engaged in
direct-to-consumer marketing, direct-to-institution marketing, direct-to-store
marketing, and certain value-added agricultural products. Separately, the bill
would have clarified that the mission of the FCS includes local and regional food
production and distribution, especially by young, beginning, and small farmers.
•
H.R. 3236 (the Beginning Farmer and Rancher Opportunity Act) would have
created a microloan program for smaller, nontraditional, and niche-type farms,
such as specialty crop producers and community-supported agriculture
operations. A microloan provision was included in the House-reported farm bill
proposal, H.R. 6083. (The bill also included other general agricultural credit
provisions, many of which were included in the House farm bill.)
•
H.R. 4351 (the Let’s Grow Act) would have created a loan program for local
farm businesses and garden projects, with focuses on small and socially
disadvantaged farms, food deserts, sustainable agriculture, nutrition education,
and community development. Private lending entities would apply for program
funding and relend funds to eligible borrowers using government-guaranteed
loans.
In January 2013, USDA created a microloan program within the existing direct farm operating
loan program, using its regulatory prerogative.19 A proposed rule had been issued in May 2012.
The new microloan program bears many similarities to the microloan program that was proposed
in H.R. 3236. FSA had found that small farm operations—including nontraditional farms,
specialty crop producers, and operators of community-supported agriculture—had unique needs
and limited financing options. FSA found these farms could face unintended barriers when
applying for USDA operating loans, often because of experience requirements and pledging
collateral. The microloan program simplifies and expedites the application process, and adds
flexibility for meeting loan eligibility and security requirements. The maximum microloan size is
$35,000.20
17
CRS Report R42155, The Role of Local Food Systems in U.S. Farm Policy.
This report discusses credit for farm producers. Credit for farmers markets and distribution systems are outside the
scope of this report, but are mentioned in CRS Report R42155, The Role of Local Food Systems in U.S. Farm Policy.
19
Federal Register, Vol. 78, No. 12, pp. 3828-3836, Thursday, January 17, 2013, at http://fsa.usda.gov/Internet/
FSA_Federal_Notices/ml_01_17_2013.pdf.
20
USDA Farm Service Agency, “Microloan Fact Sheet,” January 2013, at http://fsa.usda.gov/Internet/FSA_File/
microloans_eng_jan2013.pdf
18
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Agricultural Credit: Institutions and Issues
Farm Credit Administration Proposed Rule on Investments
The Farm Credit System has proposed to expand its permissible activities through regulatory
action. An expansion of investment opportunities would allow FCS to assist rural communities to
expand infrastructure and housing facilities, as well as some rural business investment companies.
Background on FCS Proposals for Expansion
The Farm Credit System is authorized by statute to lend to farmers and ranchers. Loans may also
be made for the processing and marketing activities of these borrowers, home loans in rural areas,
certain farm-related businesses, and cooperatives. Loans to other borrowers are prohibited.
In recent years, FCS has sought to expand its lending authority beyond traditional farm loans. In
2006, an FCS report titled Horizons highlighted perceived needs for greater lending authority,
including rural housing in towns with up to 50,000 population (the population limit is currently
2,500) and broader eligibility for agribusinesses. Commercial banks oppose any expansion of
FCS lending authority, saying that credit in rural areas is not constrained given financial
deregulation and integration, and that FCS’s GSE status provides an unfair advantage.21 They say
that federal tax benefits for FCS are no longer necessary.22
The policy decision of whether to expand FCS lending authority has become less about “farm
credit” and more about the ideological role of a retail GSE lender competing with private lenders.
Unlike the housing GSEs (Fannie Mae, Freddie Mac) that do not lend directly to homeowners,
FCS is a retail lender that competes for farm loans against commercial banks. FCS asserts its
statutory mandate to serve agriculture (and by extension, rural areas) through good and bad times.
In Congress, committee jurisdiction has been questioned. During debate over the 2008 farm bill,
the House Financial Services Committee and the Senate Banking Committee asserted jurisdiction
for nonfarm lending and opposition to Horizons.23 The Bush Administration opposed FCS
expansion,24 and a past chairman of the FCA, Michael Reyna, also voiced opposition.25 In the
end, the 2008 farm bill did not change FCS’s scope of lending authority.
Mission-Related Investments
On June 16, 2008, the FCA published a proposed rule to allow “Rural Community Investments”
(73 Federal Register 33931-33940).26 These investments include (1) debt securities in projects
that benefit rural communities and (2) equity investments in venture capital funds. The proposed
21
Bert Ely, “The Farm Credit System: Lending Anywhere but on the Farm,” at http://www.aba.com/Solutions/
Documents/693d7e51f08c48b6a208ff59db9c0a41Horizons2006ELYFINAL.pdf.
22
The tax benefits for FCS include an exemption from federal, state, municipal, and local taxation on the profits earned
by the real estate side of FCS. For investors who buy FCS bonds to finance the system, the interest earned is exempt
from state, municipal, and local taxes.
23
Letter on House-Senate Farm Bill Conference, January 15, 2008, and letter to House Agriculture Committee, May
18, 2007.
24
Statement of Administration Policy on H.R. 2419, July 25, 2007, p. 3.
25
Congressional Record, July 26, 2007, p. H8728.
26
FCA, proposed rule on Rural Community Investments, http://www.fca.gov/handbook.nsf/
ff16b393f6bb3aa0852563ce006665bb/ea4c5c5dfb4c60058525746b0044e5b1?OpenDocument.
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Agricultural Credit: Institutions and Issues
rule would define rural areas to include up to 50,000 residents. Targeted projects include
community facilities, transportation, rural business investment companies, and venture capital
funds. As discussed below, a final rule has not yet been adopted, and FCA plans to replace the
2008 proposal with a new proposed rule by March 2013.27
FCA promoted the program “to allow greater flexibility” and “to better serve the changing needs
of agriculture and rural areas.” The proposed rule states that “many rural areas are struggling to
retain economic viability and vitality,” and that “essential facilities, infrastructure, and services ...
often lag behind those in metropolitan areas ... obstacles to rural economic development and
revitalization [that] are further compounded by funding challenges.” FCA designed the rule “to
enable FCS to collaborate and partner in rural development ... as a financial intermediary
promoting the flow of money into rural areas.”
The scope of mission-related investments and the statutory restrictions governing to whom FCS
may lend cause some to raise the following question: Do investments in bonds and venture capital
effectively result in loans by another name to borrowers who otherwise are ineligible for FCS
loans? Like banks, FCS institutions may use their assets to make loans or buy investments.
Investments offer an alternative form of diversification to loans, and some types of investments
can be appropriate for capital reserves. However, some question whether investments in the types
of projects mentioned in the rule are safe and/or mission-related. Critics say that the rule’s
definition of rural as 50,000 population is at odds with the FCS statutory limit of 2,500
population for rural home loans.
Since 2004, an FCA pilot program (“Investments in Rural America”) has been allowing similar
investments in what sometimes are called “Rural America Bonds.”28 The proposed rule basically
would make the pilot program—with revisions and the addition of the venture capital funds—a
permanent part of FCS regulations and available to all FCS institutions. FCA’s fall 2012
regulatory agenda anticipates that the review of the pilot program will be completed by March
2013 (see footnote 27).
The 2008 proposed rule was open for public comment until August 15, 2008, and over 10,000
comments were submitted.29 Among the comment letters are two bipartisan letters from the
House Financial Services Committee30 and the Senate Banking Committee31 opposing the rule.
These letters note that the 2008 farm bill rejected legislation to expand FCS lending authorities,
request the proposed rule be withdrawn, and ask that decisions about the scope of FCS activities
be left to Congress. Three Members of the House and three Senators submitted letters from
constituents who opposed the rule. The chairmen of the House and Senate agriculture committees
did not take a position publicly. USDA’s Rural Development Agency submitted a comment letter
27
FCA, “Fall 2012 Regulatory Performance Plan,” at http://www.fca.gov/law/perf_plan.html.
FCA, Informational Memorandum on “Investments in Rural America,” January 11, 2005.
29
Comment letters are available at http://www.fca.gov/apps/regproj.nsf/e211b6dc2a9fbbba85256e5100541454/
9dcc7754de2e51bb852572dd00526b3f?OpenDocument.
30
Reps. Frank, Bachus, Maloney, and Biggert, House Financial Services Committee, letter to FCA on July 10, 2008, at
http://www.fca.gov/apps/regproj.nsf/16b7ef8d45864c4685256e6100636419/b43f49f44d1c739b852574a90071f06b?
OpenDocument..
31
Senators Dodd and Shelby, Senate Banking Committee, letter to FCA on August 8, 2008, at http://www.fca.gov/
apps/regproj.nsf/9646a6b403d8272d85256e5100541453/c2d1d0197290ead2852574a2004a1021?OpenDocument.
28
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Agricultural Credit: Institutions and Issues
in support of the rule,32 which somewhat contradicted the Bush Administration’s opposition to
FCS expansion in the farm bill in 2007 (see footnote 24).
The disposition of the proposed rule now awaits action by the FCA. FCA’s fall 2012 regulatory
agenda suggests that FCA plans to replace the 2008 proposal with a new proposed rule and end
evaluation of the pilot program by March 2013 (see footnote 27). The FCA is authorized to
implement rules that it believes are in accord with the statutes. Congress has no official role in the
approval process for this proposed rule unless it exercises its legislative power, which could
include disapproving the rule under the Congressional Review Act.
Author Contact Information
Jim Monke
Specialist in Agricultural Policy
jmonke@crs.loc.gov, 7-9664
32
James Alsop and Joseph Ben-Israel, USDA Rural Development, letter to FCA on August 14, 2008, at
http://www.fca.gov/apps/regproj.nsf/9646a6b403d8272d85256e5100541453/8fed246b2b6da162852574a500617f65?
OpenDocument.
Congressional Research Service
13 Credit Act of 1971 (12 U.S.C. 2001 et seq.).
Recent Congressional Issues
Competition Between Farm Credit System and Commercial Banks
The Farm Credit System is unique among the GSEs because it is a retail lender making loans
directly to farmers and thus is in direct competition with commercial banks. Because of this direct
competition for creditworthy borrowers, the FCS and commercial banks often have an adversarial
relationship in the policy realm. Commercial banks assert unfair competition from the FCS for
borrowers because of tax advantages that can lower the relative cost of funds for the FCS.14 They
often call for increased congressional oversight. The FCS counters by citing its statutory mandate
(and limitations) to serve agricultural borrowers in good times and bad times.15
In contrast, the Farm Service Agency’s loan programs are supported by both the FCS and
commercial banks. FSA is not regarded as a competitor since it serves farmers who otherwise
may not be able to obtain credit. Commercial banks and the Farm Credit System particularly
support the FSA loan guarantee program because it allows them to make and service loans that
otherwise might not be possible or at reduced risk.
Credit Title in the 2014 Farm Bill
The enacted 2014 farm bill (P.L. 113-79) made relatively small policy changes to USDA’s
permanently authorized farm loan programs.
It gave USDA discretion to recognize alternative legal entities to qualify for farm loans and
allowed alternatives to meet a three-year farming experience requirement. It increased the
maximum size of down-payment loans and eliminated term limits on guaranteed operating loans
(by removing a maximum number of years that an individual can remain eligible). It increased the
percentage of a conservation loan that can be guaranteed, added another lending priority for
11
CRS Report RS21278, Farm Credit System.
Farm Credit Administration, at http://www.fca.gov/index.html.
13
FarmerMac, at https://www.farmermac.com.
14
For example, American Bankers Association, letter to House and Senate Agriculture Committees, February 2, 2015,
at http://www.aba.com/Advocacy/LetterstoCongress/Documents/LetterSenateAgCommreFCS-Oversight020215.pdf.
15
For example, Farm Credit Council, letter to House and Senate Agriculture Committees, February 5, 2015, at
http://www.fccouncil.com/files/FCC_Letters_in_Response_to_ABA_5Feb2015.pdf.
12
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beginning farmers, and facilitated loans for the purchase of highly fractionated land in Indian
reservations, among other changes.16
Term Limits on USDA Farm Loans
Congress added “term limits” to the USDA farm loan program in 1992 and 1996 to restrict
eligibility for government farm loans and encourage farmers to “graduate” to commercial loans.
The term limits place a maximum number of years that farmers are eligible for certain types of
FSA loans or guarantees. However, until the end of 2010, Congress had suspended enforcement
of term limits on guaranteed operating loans to prevent some farmers from being denied credit,
and the 2014 farm bill eliminated that term limit (Table 1).
Table 1. Term Limits on Farm Service Agency Loans
Maximum number of years that farmers are eligible for loans
Type of FSA Loan
Direct loans term limits
Guaranteed loans term limits
Farm Operating Loans (OL)
6 years, plus possible 2-yr. extensiona
No term limitb
Farm Ownership Loans (FO)
10 yearsc
No term limitd
Source: CRS, based on statute and unpublished USDA data.
Note: Term limits are separate from the maximum maturity or duration of an individual loan, which may be as
long as 40 years for a farm ownership loan or as short as one year for a farm operating loan.
a.
Direct operating loans are limited to a six-year period. In certain cases, borrowers may qualify for a onetime, two-year extension (7 U.S.C. 1941(c)(1)(C) and (c)(4)). In June 2009, USDA said that about 4,800 FSA
borrowers were limited to one more year, and another 7,800 borrowers were limited to two more years.
USDA did not expect many to graduate to commercial credit (USDA-FSA Administrator, testimony to the
House Agriculture Subcommittee on Conservation, Credit, Energy and Research, June 11, 2009).
b.
Prior to the 2014 farm bill, guaranteed operating loans were limited to a 15-year period (former 7 U.S.C.
1949(b)(1)). However, enforcement of that term limit was suspended by statute until December 31, 2010.
Upon expiration of the suspension, the 15-year term limit was enforced from 2011-2013. In December
2010, USDA had said that about 1,600 borrowers had reached the guaranteed term limit. The 2014 farm bill
permanently removed this term limit (P.L. 113-79 sec. 5107).
c.
A borrower is eligible for direct farm ownership (real estate) loans for a maximum of 10 years after the first
loan is made (7 U.S.C. 1922(b)(1)(C)).
d.
USDA-FSA, Evaluating the Relative Cost Effectiveness of the Farm Service Agency’s Farm Loan Programs, report to
Congress, August 2006, p. 76, at http://www.fsa.usda.gov/Internet/FSA_File/farm_loan_study_august_06.pdf.
Author Contact Information
Jim Monke
Specialist in Agricultural Policy
jmonke@crs.loc.gov, 7-9664
16
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For details, see Title V in CRS Report R43076, The 2014 Farm Bill (P.L. 113-79): Summary and Side-by-Side.
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