Order Code RS21977
Updated November 23, 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 rural lending institutions. 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 help family farmers reorganize debts
and continue farming (P.L. 109-8 made Chapter 12 permanent and expanded eligibility).
S. 238 and H.R. 399 (the Rural Economic Investment Act) would exempt
commercial banks from paying taxes on profits from farm real estate loans, thus
providing similar benefits as to the Farm Credit System. This report will be updated.
Lending Institutions
Five types of lenders make credit available to agriculture, the first two of which are
more or less affiliated with the federal government: the Farm Credit System (FCS),
USDA Farm Service Agency (FSA), commercial banks, life insurance companies, and
individuals and others. Creditworthy farmers generally have adequate access to loans,
mostly from the largest suppliers — commercial banks, FCS, and merchants and dealers.
Figure 1 shows that commercial banks lend the largest portion of the farm sector’s
total debt (40%), followed by the Farm Credit System (31%), individuals and others
(21%), life insurance companies (6%), and the Farm Service Agency (3%). Ranked by
type of loan, the FCS has the largest share of real estate loans (38%), and commercial
banks have the largest share of non-real estate loans (49%). Although FSA has a 3%
share of the market through its direct lending program, it guarantees loans made by other
(commercial) lenders accounting for approximately another 4%-5% of the market.
Congressional Research Service ˜ The Library of Congress

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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 banks provide funds to
96 credit associations that, in turn, make loans to eligible creditworthy borrowers. FCS
funds its loans with bonds sold in capital markets. For more about FCS, see CRS Report
RS21278, Farm Credit System, by Jim Monke.
Figure 1. Market Shares of Farm
Debt, by Lender, 2005
Source: CRS, using USDA Economic Research Service data at
[http://www.ers.usda.gov/Briefing/FarmIncome/Data/Bs_t6.htm].
USDA’s Farm Service Agency (FSA)2 As a government agency, 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.
FSA Loan Changes in the 2002 Farm Bill. FSA loan programs have
permanent authority under the Consolidated Farm and Rural Development Act (7 U.S.C.
1921 et seq.). Title V of the 2002 farm bill (P.L. 107-171) authorized amounts for the
programs through 2007, subject to annual appropriations. Changes allow FSA to lend
more to beginning farmers for down payments. A new pilot program guarantees seller-
financed land contracts, available to five contracts per state per year in Indiana, Iowa,
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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North Dakota, Oregon, Pennsylvania, and Wisconsin. Losses due to USDA-imposed
quarantines qualify for emergency loans. Shared appreciation agreements — contracts
under which USDA forgave part of a loan in return for sharing any price appreciation
over a future period — that have become delinquent may be reamortized for up to 25
years.3
FSA Appropriation for Farm Loans. FSA receives an annual appropriation
(loan subsidy) to cover interest rate discounts and anticipated loan defaults. The amount
of loans that can be made (loan authority) is larger. The enacted FY2006 loan subsidy
is $151.3 million to support loans totaling $3.785 billion (see Table 1). The loan subsidy
is 3.4% below FY2005, while the loan authority rises by 1.8%. Loan authority can rise
while the loan subsidy falls because (1) guaranteed loans grow more than direct loans,
and (2) the multiplier (loan authority divided by loan subsidy) rises for most programs as
a result of USDA factoring in low interest rates and a history of fewer defaults.
Most of the growth in loan authority over FY2005 levels is a $59 million (5.4%)
increase in unsubsidized guaranteed farm operating loans. Changes in unsubsidized
guaranteed loans can be made with smaller changes in appropriations compared to
subsidized or direct loans. In recent years, the subsidized guaranteed operating loan
program has not been able to meet demand, and qualified farmers have been placed on
waiting lists when funds are depleted. In FY2006, the subsidized guaranteed operating
loan program will be 3% smaller than in FY2005. In both FY2005 and FY2006, the
Administration requested new funds for emergency loans, but Congressional committee
reports said carryover funding should be sufficient.
3 For a side-by-side 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 guaranteed
seller-financed contracts, see FSA at [http://www.fsa.usda.gov/dafl/pilot%20program.htm]. For
shared appreciation agreements, see CRS Report RS21145, Shared Appreciation Agreements on
USDA Loans, by Jerry Heykoop.

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Table 1. FSA Loan Appropriations, FY2006
Loan subsidy
Loan authority
Implicit
FSA loan program
(million $)
(million $)
multiplier
Farm Ownership Loans (FO)
Direct
10.7
208
20
Guaranteed 6.7
1,400
208
Farm Operating Loans (OL)
Direct
64.7
650
10
Unsubsidized Guaranteed
34.8
1,150
33
Subsidized Guaranteed
34.3
275
8
Indian Tribe Land Acquisition
0.1
2
25
Emergency Loans (EM)
0
0
—
Boll Weevil Eradication
0
100
—
Total
151.3
3,785
25
Subtotal: Direct FO+OL
75.3
858
11
Subtotal: Guaranteed FO+OL
75.9
2,825
37
Source: CRS, based on H.Rept. 109-255 to accompany H.R. 2744 (P.L. 109-97).
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
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 2005, reaching a record $213 billion.5 Total farm assets are expected to rise by
6.1% in 2005, reaching $1.6 trillion and resulting in a 13.3% debt-to-asset ratio. Debt-to-
asset ratios for the sector have been stable to falling for the past decade. Thus, farm
equity has been rising because increases in debt have been offset by larger gains in farm
land. Economists attribute much of the continued growth in land values to government
payments, although land prices near urban areas also rise from development potential.
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
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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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
Chapter 12 was enacted with an initial sunset provision of October 1, 1993.
Congress renewed the law 11 times with temporary extensions, and in 2005, made it
permanent under Title X of the Bankruptcy Abuse Prevention and Consumer Protection
Act, P.L. 109-8 (April 20, 2005). The act also expands eligibility by raising the debt limit
and lowering the percentage of debt that must come from farming. It also extends
Chapter 12 benefits to family fisherman.
For these purposes, a “family farmer” includes an individual and spouse, or a
family-owned partnership or corporation, with debts of less than $3,237,000, 50% of
which arises from the farming operation. The debtor must derive at least 50% of gross
annual income from farming. A “family fisherman” is an individual and spouse, or a
family-owned partnership or corporation, engaged in a commercial fishing operation
whose debts are less than $1,500,000, 80% of which arises from the fishing operation.
The debtor must derive at least 50% of gross annual income from fishing.
Policy Issues for Congress
Exempting Taxes on Agricultural Loans for Commercial Banks. In the
109th Congress, S. 238 and H.R. 399 (the Rural Economic Investment Act) would exempt
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, by Robin Jeweler.

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commercial banks from paying taxes on profits from agricultural real estate loans. The
definition of agricultural real estate would include residential loans in rural areas with
fewer than 2,500 people.
Proponents, including the American Bankers Association, say the bill would boost
rural development and give commercial banks equal treatment for tax exemptions long
available to the Farm Credit System (12 U.S.C. 2098). Critics say such exemptions are
not warranted since agriculture no longer faces a credit constraint and other industries do
not receive such preferential treatment.
Farm Credit System. In recent years, the FCS has sought to expand its lending
authorities beyond traditional farm loans and into rural housing and business loans. FCS
also generally desires to update the Farm Credit Act of 1971, which last was amended
comprehensively in 1987. Commercial banks, which are FCS’s primary competitors,
oppose expanding FCS lending authority. Bankers say that commercial credit in rural
areas is not constrained, and that FCS’s government-sponsored enterprise (GSE) status
provides an unfair competitive advantage vis-a-vis commercial banks. FCS responds to
debates over its GSE status by asserting its statutory mandate to serve agriculture through
good times and bad, unlike commercial lenders without such a mandate.
This controversy was highlighted in 2004 when a private bank, Netherlands-based
Rabobank, tried to purchase an FCS association. The board of directors of the FCS
association (Omaha-based Farm Credit Services of America) initially voted for the sale,
indicating to some observers that FCS may no longer need government sponsorship.
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.
In 2004, FCS asked Congress to eliminate provisions of the law (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 allowed under the
current Farm Credit Act. It is not clear whether Congress, in 1987, intended the provision
to be used by outside companies to purchase parts of the System. Although the buyout
attempt was aborted, the initial agreement has affected the agricultural and banking
industry’s view of FCS. For more information, see CRS Report RS21919, Farm Credit
Services of America Ends Attempt to Leave the Farm Credit System, by Jim Monke.
7 The hearing transcript is available at [http://agriculture.house.gov/hearings/108/10838.pdf].

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