Order Code RS21977
Updated March 17, 2005
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 the 109th Congress, H.R. 685 and S. 256 would make Chapter 12 permanent.
Other agricultural credit issues remaining from the 108th Congress include the attempted
exit from the Farm Credit System by one association (S. 2851, and hearings in the
House); oversight of Farmer Mac (hearings in the House); and reducing taxation on
commercial agricultural lenders (S. 1263). 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 (40%), followed by the Farm Credit System (31%), individuals and others
(21%), life insurance companies (6%), and the Farm Service Agency (3%). Separating
real estate and non-real estate loans, the FCS has the largest share of real estate loans
(37%), and commercial banks have the largest share of non-real estate loans (48%).
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, 2004
Total ($206 billion)
Commercial banks
40%
FSA
FCS
3%
31%
Life ins.
6%
Others
21%
Real estate (55%)
Non-real estate (45%)
FCS
37%
Banks
FSA
48%
FSA
Banks
2%
Others
4%
33%
Life
FCS
25%
Others 10%
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 FY2005
loan subsidy was $157 million to support loans totaling $3.7 billion (see Figure 2). For
FY2006, USDA requests $85 million more in loan authority but $2.5 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.
Figure 2. USDA Farm Service Agency Appropriations:
Loan Subsidy and Loan Authorizations, FY2005
Loan subsidy ($157 mil ion)
Loan authorization ($3.72 billion)
Boll w eevil & Indian tribe 3%
Operating -subsidized 8%
Operating -guaranteed 29%
24%
23%
Operating -direct 17%
42%
5%
7%
Owner ship- guaranteed 37%
Source: CRS.
Ownership-direct 6%
Commercial and 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
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.
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].
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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
3.6% in 2005, reaching a record $213 billion.5 Total farm assets are expected to rise by
3.6% in 2005, reaching $1.5 trillion and resulting in a 14.2% 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. USDA economists estimate that the farm sector is using
about 48% of its debt repayment capacity (measured as the actual debt relative to the
maximum feasible debt) in 2005, down from a 53% average over 1995-2004. Debt
capacity usage over 60% indicates potential widespread problems, as was the case from
1977-1986. 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 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
debts. Bankruptcy costs include legal fees and the efficiency costs from continuing to use
labor and capital in otherwise inefficient enterprises.6
5 Economic Research Service, at [http://www.ers.usda.gov/Briefing/FarmIncome/wealth.htm].
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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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.
Policy Issues for Congress
Chapter 12 Extension. Renewal of Chapter 12 is an issue for the 109th Congress,
given the impending sunset of Chapter 12 on July 1, 2005. The 108th Congress extended
Chapter 12 for another 18 months (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 were not
viewed as controversial.
Congress has been considering comprehensive bankruptcy reform for several years,
including making Chapter 12 permanent. On March 10, 2005, the Senate passed S. 256,
which addresses consumer bankruptcy, small business bankruptcy, and Chapter 12 (see
CRS Report RL32765, The “Bankruptcy Abuse Prevention and Consumer Protection Act
of 2005” in the 109th Congress). The House is expected to consider the bill.
Both S. 256 and H.R. 685 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 income to come from the farming operation, allow the farm requirement to apply to one
of three years preceding filing instead of just the immediately preceding year, and extend
benefits to family fishermen. Both S. 256 and H.R. 685 are similar to a bill passed by the
House in the 108th Congress (H.R. 975) and bills passed by both the House and Senate
during the 107th Congress (H.R. 333), but omit the Schumer amendment preventing
discharge of liability for willful violation of protective orders and violent protests,
including those against reproductive health services.
Restricting FCS Institutions From Leaving the System. Statutory language
allowing institutions of the Farm Credit System to terminate their membership was
enacted in 1987 (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.
The motivation for this as a current issue comes from an unprecedented move by
Omaha-based Farm Credit Services of America (FCSA) 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 in the 108th Congress to require public hearings and a longer approval process.
Although the buyout 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
7 The hearing transcript is available at [http://agriculture.house.gov/hearings/108/10838.pdf].
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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. In the 108th Congress,
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.
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, at [http://www.gao.gov/new.items/d04116.pdf].
9 The hearing transcript is available at [http://agriculture.house.gov/hearings/108/10831.pdf].