Order Code RS21977
November 18, 2004
CRS Report for Congress
Received through the CRS Web
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 institutions to fill gaps in rural
markets. These institutions include the Farm Credit System (FCS), which is a network
of borrower-owned 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 (Chapter 12) help family farmers
work through debt problems and continue farming, sometimes avoiding foreclosure.
In 2004, congressional interest in agricultural credit focused on the attempted exit
from the Farm Credit System by one association (S. 2851, and hearings in the House);
the renewal of Chapter 12 (S. 2864, H.R. 975); oversight of Farmer Mac (hearings in the
House); reducing taxation on commercial agricultural lenders (S. 1263); and annual
appropriations bills for USDA. This report will be updated as events warrant.
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 (39%), followed by the Farm Credit System (30%), individuals and others
(21%), life insurance companies (6%), and the Farm Service Agency (4%). Separating
real estate and non-real estate loans, the FCS has the largest share of real estate loans
(36%), and commercial banks have the largest share of non-real estate loans (48%).
Although FSA has a 4% share of the market through its direct lending program, it
guarantees loans made by other (commercial) lenders accounting for approximately
another 4% of the market.
Congressional Research Service ˜ The Library of Congress

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Figure 1. Market Shares of Farm Debt, by Lender
Total ($204 billion)
Commercial banks
39%
FCS
FSA
30%
4%
Life ins.
Others
6%
21%
Real estate (55%)
Non-real estate (45%)
FCS
Banks
36%
48%
Banks
FSA
FSA
32%
3%
Others
4%
Life
25%
FCS
Others 11%
23%
17%
Source: CRS, using USDA Economic Research Service data.
Farm Credit System (FCS).1 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. However, Congress established the system in
1916 to provide a dependable and affordable source of credit to rural areas at a time when
many lenders avoided farm loans. Statute and oversight determine the scope of FCS
activity, and provide benefits such as tax incentives.
Five large FCS banks provide funds to 97 credit associations that, in turn, make
loans to eligible borrowers who must meet standard creditworthiness requirements. FCS
funds its loans with bonds sold in capital markets. For more about FCS, see CRS Report
RS21278, Farm Credit System.
USDA’s Farm Service Agency (FSA).2 FSA is referred to as a lender of last
resort because it makes direct loans to family farms unable to obtain credit from other
lenders. FSA also guarantees timely payment of principal and interest on some loans
made by commercial lenders. FSA loans finance farm land purchases, annual operating
expenses, and recovery from emergencies or natural disasters. Some loans are made at
a subsidized interest rate. To qualify for an FSA guaranteed or direct loan, farmers must
have enough cash flow to make payments.
1 Farm Credit System institutions are described at [http://www.fca.gov/FCS-Institutions.htm].
2 USDA Farm Service Agency loan programs are described at [http://www.fsa.usda.gov/dafl].

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FSA Lending Changes in the 2002 Farm Bill. The 2002 farm bill (P.L. 107-
171) authorizes USDA lending programs through 2007 (Title V), subject to annual
appropriations. The new law allows FSA to lend more to beginning farmers for down
payments. It creates a pilot program to guarantee seller-financed land contracts; the pilot
is available to five contracts per state per year in Indiana, Iowa, North Dakota, Oregon,
Pennsylvania, and Wisconsin. Losses due to USDA-imposed quarantines qualify for
emergency loans. Shared appreciation agreements — contracts under which USDA
forgives part of a real estate loan in return for sharing any price appreciation over a
specified period — that have become delinquent may be reamortized for up to 25 years.3
FSA Appropriation for Farm Loans. FSA receives an annual federal
appropriation (loan subsidy) to cover interest rate discounts and anticipated loan defaults.
The amount of loans that can be made (loan authority) is larger. The enacted FY2004
loan subsidy was $195 million to support loans totaling $3.25 billion (Figure 2). For
FY2005, USDA requested $557 million more in loan authority but $34 million less in
loan subsidy. The ability to propose greater loan authority with a smaller appropriation
is possible due to two factors: USDA adjustments in historical performance ratios, and
bigger increases in the lower-cost unsubsidized guaranteed loan programs.
Both the Senate-reported FY2005 agriculture appropriations bill (S. 2803) and the
House-passed FY2005 bill (H.R. 4766) provide smaller appropriations and loan
authorities than requested. S. 2803 would provide $155 million to cover $3.36 billion in
loans. H.R. 4766 would provide $158 million to subsidize $3.82 billion in loans. For
more on FY2005 appropriations, see CRS Report RL32301, Appropriations for FY2005:
U.S. Department of Agriculture and Related Agencies.
Figure 2. USDA Farm Service Agency Appropriations:
Loan Subsidy and Loan Authorizations, FY2004
Loan subsidy ($195 mil ion)
Loan authorization ($3.25 billion)
Bol weevil & Indian tribe 3%
Operating-subsidized 8%
Operating-guaranteed 37%
17%
20%
45%
3%
Operating-direct 19%
15%
Ownership-guaranteed 29%
Source: CRS.
Ownership-direct 4%
3 For a side-by-side comparison of credit provisions in the 2002 farm bill, see the Economic
Research Service, [http://www.ers.usda.gov/Features/FarmBill/Titles/TitleVCredit.htm#Service].
For more on the pilot program to guarantee seller-financed contracts, see FSA at [http://www.
fsa.usda.gov/dafl/pilot%20program.htm]. For more on shared appreciation agreements, see CRS
Report RS21145, Shared Appreciation Agreements on USDA Farm Loans.

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Other, Nongovernmental Lenders. Commercial banks lend to farmers through
both small community banks and large multi-bank institutions.4 Another 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.
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
2.9% in 2004, reaching a record $204 billion.5 Total farm assets are expected to rise by
3.1% in 2004, reaching $1.4 trillion and resulting in a 14.7% debt-to-asset ratio. Debt-to-
asset ratios for the sector have been relatively stable for the past decade. Thus, farm
equity has been rising because increases in debt typically have been offset by larger gains
in farm land. Economists attribute much of the continued growth in land values to
government payments.
Recent strength in farm income generally has given farmers more capacity to repay
their loans or borrow new funds. However, in the past year, the sector’s use of its debt
repayment capacity (measured as the actual debt relative to the maximum feasible debt)
rose to 60% in 2004 from 54% in 2003. Although credit conditions are good overall,
some farmers may experience financial stress due to individual circumstances.
Farm Bankruptcy: Chapter 12
In response to the farm financial downturn 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 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
4 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].
5 Economic Research Service, at [http://www.ers.usda.gov/Briefing/FarmIncome/wealth.htm].

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debts. Bankruptcy costs include legal fees and the efficiency costs from continuing to use
labor and capital in otherwise inefficient enterprises.6
Policy Issues for Congress
Chapter 12 Extension. Congress retroactively extended Chapter 12 of the U.S.
Bankruptcy Code for another 18 months through July 1, 2005, under S. 2864 (P.L. 108-
369, October 25, 2004). Chapter 12 had expired on January 1, 2004, and its renewal was
captured in the larger debate over comprehensive bankruptcy reform, even though the
Chapter 12 provisions are not viewed as controversial. Given the impending sunset on
July 1, 2005, renewal of Chapter 12 will be an issue for the 109th Congress.
When Chapter 12 was enacted, it contained a sunset provision of October 1, 1993.
Congress subsequently has renewed the law ten times with temporary extensions.
Although such extensions usually have been enacted with little opposition, frequent
sunset dates create uncertainty for lenders and producers, especially when the provision
expires without action to extend the law.
Congress has been considering comprehensive bankruptcy reform for several years.
H.R. 975 passed the House on March 19, 2003, and addresses consumer bankruptcy,
small business bankruptcy, and Chapter 12 (see CRS Report RL31783, Bankruptcy
Reform in the 108th Congress). But the Senate has not considered the bill during the
108th Congress. H.R. 975 would make Chapter 12 permanent, expand eligibility by
raising the debt limit from $1.5 million to $3.237 million, require only 50% (instead 80%)
of debt to come from the farming operation, allow the requirement for 50% of income to
be from farming to apply to one of three years preceding filing instead of just the
immediately preceding year, and extend benefits to family fishermen. H.R. 975 is very
similar to bills passed by both the House and Senate during the 107th Congress (H.R. 333),
but omits the Schumer amendment, which prevents discharge of liability for willful
violation of protective orders and violent protests, including those against reproductive
health services.
Facing the January 1, 2004, sunset and attempting to keep Chapter 12 active, the
Senate passed S. 1920 by unanimous consent on November 25, 2003, for a six-month
extension (until July 1, 2004). Two House bills (H.R. 3540 and H.R. 3542) were
introduced, but no action was taken before the first session ended. On January 28, 2004,
the House took up S. 1920 with an amendment in the nature of a substitute consisting of
the text of H.R. 975, including an amendment to make Chapter 12 retroactive to January
1, 2004. This version passed the House by a vote of 265-99, but the Senate did not take
action for a conference committee. Action on S. 2864 (P.L. 108-369) temporarily
resolved this impasse.
Allowing FCS Institutions to Leave the System. Statutory language allowing
institutions of the Farm Credit System to terminate their membership was enacted in 1987
6 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.

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(12 U.S.C. 2279d). It is not clear whether Congress intended the provision to be used by
outside companies to purchase parts of the System.
In an unprecedented move, an institution of the government-sponsored Farm Credit
System, Omaha-based Farm Credit Services of America (FCSA), initiated procedures on
July 30, 2004, to leave the FCS and be purchased by a private foreign bank (Rabobank).
After much public controversy, the FCSA board of directors voted on October 19, 2004,
to terminate its agreement with Rabobank before seeking approval from the System’s
federal regulator. Although Congress had no direct statutory role in the approval process,
the House held hearings on the implications of the deal,7 and Senators Daschle and
Johnson introduced S. 2851 to require public hearings and a longer approval process.
Although the current attempt was aborted, FCSA’s initial decision to be bought by
a private firm has affected the agricultural and banking industry’s view of the Farm Credit
System. The controversy highlighted provisions in the Farm Credit Act that both
proponents and opponents of FCS have been raising regarding the System’s desire to
expand its scope of lending practices. Future legislative efforts to address these issues
may be affected by how these recent events unfolded. For more information, see CRS
Report RS21919, Farm Credit Services of America Ends Attempt to Leave the Farm
Credit System.
Farmer Mac Mission and Governance. Farmer Mac is the secondary market
for agricultural loans and is part of the Farm Credit System. An October 2003 report by
the Government Accountability Office (GAO) recommended that Congress consider
legislation that would establish clearer goals for Farmer Mac. GAO also found concerns
with risk management practices (including geographic concentration), lack of secondary
market development, and lack of independence in Farmer Mac’s board of directors.8
Since the GAO report, questions have arisen about whether new financial
instruments created by Farmer Mac (a certain type of swap) are reducing insurance
premiums paid to the Farm Credit System’s insurance fund without any corresponding
reduction in risk exposure. On June 2, 2004, the House Agriculture Committee held a
hearing on Farmer Mac and the GAO report.9
Commercial Bank Taxes on Agricultural Loans. On June 13, 2003, Senator
Hagel introduced S. 1263, the Rural Economic Investment Act. The bill would exempt
commercial banks from paying taxes on income from loans secured by agricultural real
estate, including residential loans in rural areas with fewer than 2,500 people. Proponents
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 since agriculture no longer faces a credit constraint
and other industries do not receive such preferential treatment.
7 The hearing transcript is available at [http://agriculture.house.gov/hearings/108/10838.pdf].
8 Government Accountability Office, “Farmer Mac: Some Progress Made, but Greater Attention
to Risk Management, Mission, and Corporate Governance Is Needed,” GAO-04-116, October
2003, [http://www.gao.gov/new.items/d04116.pdf].
9 The hearing transcript is available at [http://agriculture.house.gov/hearings/108/10831.pdf].

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