Order Code RS21977
Updated March 8, 2007
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 Service Agency (FSA) of the U.S. Department of
Agriculture (USDA), which makes or guarantees loans to farmers who cannot qualify
at other lenders, and the Farm Credit System (FCS), which is a network of borrower-
owned lending institutions operating as a government-sponsored enterprise.
The 110th Congress is expected to address agricultural credit through both
appropriations and authorizations bills. Appropriators will consider funding for FSA’s
farm loan programs, and the agriculture committees may consider changes to FSA and
FCS lending programs. The 2007 farm bill is expected to be the venue for many of the
authorizing issues, although stand-alone legislation may be used for extensive reforms.
This report will be updated.
Background
The federal government has a long history of providing credit assistance to farmers.
USDA’s Farm Service Agency (FSA) issues direct loans and offers guarantees on loans
made by commercial lenders. The direct and guaranteed loans are intended to assist
farmer borrowers who do not qualify for regular commercial loans. Therefore, FSA is
called a lender of last resort. The Farm Credit System (FCS), second only to commercial
banks as a holder of farm debt, is chartered by the federal government as a cooperatively
owned commercial lender to serve only agriculture-related borrowers. FCS makes loans
to creditworthy farmers much like commercial banks, and is not a lender of last resort.
Statutory authority for both the FSA and FCS lending programs is permanent, but
omnibus farm bills, such as the expected 2007 farm bill, often make adjustments to the
eligibility criteria and operations of the loan programs.
Other sources of credit for agriculture include commercial banks, life insurance
companies, and individuals, merchants, and dealers. Figure 1 shows that commercial
banks lend the largest portion of the farm sector’s total debt (37%), followed by the Farm
Credit System (30%), individuals and others (21%), and life insurance companies (5%).
The Farm Service Agency provides 3% of the debt through direct loans, and guarantees

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another 4% of the market (through loans issued by commercial banks and FCS). 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%).
Figure 1. Market Shares of Farm Debt, by Lender
Total: $214 billion in 2005
Farm Credit System
30%
Commercial banks
37%
Farm Service
Agency
Direct
3%
Guaranteed
4%
Life insurers
5%
Individuals and others
21%
Source: CRS, using USDA-ERS and FSA data at
[http://www.ers.usda.gov/Briefing/FarmIncome/Data/Bs_t6.htm]
Credit is an important input to agriculture, with all lenders holding about $214
billion in outstanding farm loans in 2005. Yet only about 66% of farmers have any debt
(farm or nonfarm), and only 38% have farm debt. The types of farms holding the most
debt include the larger commercial farms that produce most of the output, and medium-
sized family farms.
Creditworthy farmers generally have adequate access to loans, mostly from the
largest suppliers — commercial banks, FCS, and merchants and dealers. According to
reports from lenders, credit conditions are good, and default rates have been trending
lower to levels not seen since before the credit crisis of the 1980s. Overall, USDA data
show that debt-to-asset ratios for the farm sector have been stable or slightly declining
over the past decade, indicating that the sector is not highly leveraged with debt. Recent
strength in farm income has given farmers more capacity to repay their loans or borrow
new funds. Farm equity has been rising because increases in debt typically have been
more than offset by larger gains in land values.
Nonetheless, despite the relatively strong farm economy in recent years, some
farmers continue to experience financial stress due to individual circumstances, and may
be unable to qualify for loans. Agriculture is also prone to business cycles that may pose
financial difficulties. Thus, many interests in production agriculture continue to see some
need for federal intervention in agricultural credit markets.

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Farm Lending Institutions
Commercial Banks, Life Insurers, and Individuals. Together, commercial
banks, life insurance companies, and individuals and others provide 63% of total farm
debt without federal support or mandate. Commercial banks provide most of the loans
to farmers through both small community banks and large multi-bank institutions.1 Life
insurance companies historically also have looked to farm real estate mortgages for
diversification. Another important 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).
Farm Credit System (FCS).2 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. 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. FCS 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
FCS bonds and notes on Wall Street. Five large banks allocate these funds to 96 credit
associations that, in turn, make loans to eligible creditworthy borrowers.
Statute and oversight by the agriculture committees determine the scope of FCS
activity, and provide benefits such as tax exemptions. The system is regulated by the
Farm Credit Administration (FCA). The program has permanent authority under the Farm
Credit Act of 1971, as amended (12 U.S.C. 2001 et seq.). Major amendments generally
have been enacted as stand-alone legislation, but Congress has used omnibus farm bills
to make minor adjustments to the law.
FCS does not receive an annual appropriation, but is privately funded. Appropriators
in recent years, however, have placed a limit on the size of the FCA’s budget, which is
funded by assessments on FCS institutions. For more background about FCS, see CRS
Report RS21278, Farm Credit System, by Jim Monke.
USDA’s Farm Service Agency (FSA).3 The USDA Farm Service Agency
(FSA) is a lender of last resort because it makes direct loans to family-sized farms that are
unable to obtain commercial credit.4 FSA also guarantees timely payment of principal
and interest on qualified loans made by commercial lenders such as banks and the Farm
Credit System. The programs have permanent authority under the Consolidated Farm and
Rural Development Act (CONACT, 7 U.S.C. 1921 et seq.). However, Congress uses
omnibus farm bills to make changes to the terms, conditions, and eligibility requirements.
1 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.icba.org].
2 Farm Credit System institutions are described at [http://www.fca.gov/FCS-Institutions.htm].
3 USDA Farm Service Agency loan programs are described at [http://www.fsa.usda.gov/dafl].
4 Historically, the USDA’s lending agency was the Farmers’ Home Administration (FmHA),
created in 1945. A reorganization in 1995 moved the farm lending programs into FSA.

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FSA makes farm ownership and operating loans to operators of family-sized farms.
The maximum direct loans are $200,000 per borrower, while the maximum guaranteed
loans are $852,000 per borrower (adjusted annually for inflation). Emergency loans are
available for qualifying natural or other disasters. Some guaranteed loans have a
subsidized (below-market) interest rate. To qualify for an FSA guaranteed or direct loan,
farmers must demonstrate enough cash flow to make payments.
Since the 1980s, the emphasis within the FSA farm loan program has gradually
shifted toward making relatively fewer direct loans and issuing more in guarantees. This
lessens farmers’ reliance on direct federal lending, and helps leverage federal dollars since
guaranteed loans are cheaper to subsidize. In the late 1990s, about 30% of USDA farm
loan authority was for direct loans. That ratio dropped to about 21% in FY2003, before
rising again to about 25% in FY2004-FY2006.
Certain portions of the FSA farm loan program are reserved for beginning farmers
and ranchers (7 U.S.C. 1994 (b)(2)). For direct loans, 70% of the amount for farm
ownership loans and 35% of direct operating loans are reserved for beginning farmers for
the first 11 months of the fiscal year (until September 1). For guaranteed loans, 25% is
reserved for such farmers for ownership loans and 40% for farm operating loans for the
first six months of the fiscal year (until April 1). Funds are also targeted to “socially
disadvantaged” farmers based on race, gender, and ethnicity (7 U.S.C. 2003).5

As an example of the type of statutory changes made in a farm bill, Title V of the
2002 farm bill (P.L. 107-171) authorized funding levels for FSA loans for FY2003-
FY2007 and expanded access to loans for beginning farmers. The 2002 law also increased
the percentage that USDA may lend for real estate loan down-payments and extended the
duration of eligible loans. It created a pilot program to guarantee seller-financed land
contracts, available to five contracts per year in each eligible state (originally implemented
in Indiana, Iowa, North Dakota, Oregon, Pennsylvania, and Wisconsin; in 2005, the
program expanded to include California, Minnesota, and Nebraska).
Authorizations and Appropriations for Farm Loans. The 2002 farm bill
authorized a maximum loan authority of $3.796 billion for direct and guaranteed loans
for each of fiscal years 2003-2007 (7 U.S.C. 1994(b)(1)). Also, the law specified how this
would be divided between direct and guaranteed loans, and within each of these
categories how much could be used for ownership loans versus operating loans. The farm
bill further instructed that not more than $750 million of the guaranteed operating loan
amount may be used for the interest assistance (subsidized) guaranteed loan program (7
U.S.C. 1999), which reduces the interest rate on the loan by 4%.
Although the agriculture committee authorizes the farm bill with the multi-year “loan
authority,” the appropriations committee controls the annual discretionary appropriation
to FSA to cover the actual cost of making loans (the “loan subsidy”). This loan subsidy
is directly related to any interest rate subsidy provided by the government, as well as a
5 Further background on FSA programs and delivery mechanisms are available in a USDA report
to Congress, “Evaluating the Relative Cost Effectiveness of the Farm Service Agency’s Farm
Loan Programs,” by Charles Dodson and Steven Koenig, at [http://www.fsa.usda.gov/
Internet/FSA_File/farm_loan_study_august_06.pdf]

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projection of anticipated loan losses. The actual amount of lending that can be made (the
appropriated loan authority) is several times larger than the appropriated loan subsidy.
For FY2007, the farm loan program is unchanged from FY2006 under the year-long
continuing resolution (P.L. 110-5). $150 million in total loan subsidy is supporting the
$3.52 billion in loan authority. This results in an effective “multiplier” of 23 ($23 dollars
of loan authority for each $1 of loan subsidy). Guaranteed loans have higher multipliers
than direct loans, and farm ownership loans have higher multipliers than operating loans.
The highest multiplier in FY2006 is 208, for guaranteed farm ownership loans. The
lowest is eight, for subsidized guaranteed operating loans, which have a 4% interest rate
subsidy. Appropriations for the salaries and expenses of FSA personnel administering the
loan program are $309 million in FY2007.
For FY2008, the Administration requests $3.37 billion in loan authority (-4.3%) to
be supported by $152 million of loan subsidy (+1.7%). Guaranteed loan levels would
decline less than 1% overall, although subsidized operating loans would decrease 8%.
Greater reductions impact the direct farm loan program, which would decline 12%,
including a decrease of 18% for direct ownership loans and 6% for direct farm operating
loans. Despite the reduction in direct loan authority, subsidies for the direct loan
programs would rise by over 10%. Administrative expenses would increase by 3.3%. As
in recent years, nothing is requested for emergency loans due to carryover funds.
Policy Issues for Congress
Farm Service Agency. Authority for the size of FSA’s farm loan program is
specified in the 2002 farm bill and expires at the end of FY2007. The 2007 farm bill is
seen as a vehicle to set new loan authorization levels for FSA, although actual funding
would continue to be set by annual appropriations acts.
Some have expressed a desire to increase the $200,000 limit per farmer on direct
farm ownership and operating loans.6 These limits were set in 1984 for direct farm
ownership loans, and in 1986 for direct operating loans, and have not kept pace with
inflation. (Limits for guaranteed loans were raised in 1998 and indexed for inflation.)
Another potential issue is the “term limits” set in statute for farmer eligibility.
Currently farmers are limited to receiving direct operating loan eligibility for seven years,
and guaranteed operating loans for 15 years (7 U.S.C. 1949). A provision in the 2002 farm
bill (Sec. 5102 of P.L. 107-171) suspended application of the 15-year limit through the
end of 2006, and P.L. 109-467 extends the suspension provision until September 30,
2007. An increasing number of farmers are reaching their term limits, and may face
financial collapse if they are not able to “graduate” to commercial credit. Term limits are
intended to prevent chronically inefficient farms from continuing to receive federally
subsidized credit, but the political and social consequences of letting these family farms
fail are sometimes unpleasant. Thus, there will be pressures to again extend the eligibility
allowance or revisit the purpose of the term limits requirement.
6 Glenn Keppy (Associate Administrator, USDA-FSA), testimony before Senate Agriculture
Committee hearing, “Review USDA Farm Loan Programs,” June 13, 2006, at
[http://agriculture.senate.gov/Hearings/hearings.cfm?hearingId=1940].

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Farm Credit System. In recent years, FCS has expanded its lending, to a limited
degree, beyond traditional farm loans and into more rural housing and non-farm
businesses. FCS also generally desires to update the Farm Credit Act of 1971, which last
was amended comprehensively in 1987. In early 2006, FCS released a report titled
Horizons, which highlights perceived needs for greater lending authority to serve a
changing rural America.7 Some see Horizons as a precursor to legislative action to
expand lending authorities, possibly in the 2007 farm bill, or to more regulatory changes
expanding the allowed scope of lending.8
The scope of lending authority could grow under an October 2006 proposed rule to
expand eligibility for farm processing and marketing loans (71 FR 60678, October 16,
2006). The intent appears to be to allow financing for larger value-added farm processing
firms that are being built with more outside capital and involvement than in previous
decades. Opponents fear that the regulation could allow more non-agriculture financing.
Selected FCS institutions also have begun investing in “agricultural and rural
community bonds” as a pilot project, with the approval of FCA. The bonds, issued by
private or public enterprises, are assets to the FCS institution with structured payment
terms. The bonds effectively result in loans to businesses and communities, some of
which may not otherwise qualify for FCS loans. For the FCS institution, the bonds are
treated as an investment and thus not subject to loan eligibility regulations.
Commercial banks oppose expanding FCS lending authority, saying that commercial
credit in rural areas is not constrained and that FCS’s government-sponsored enterprise
(GSE) status provides an unfair competitive advantage. Commercial banks assert that,
with financial deregulation and integration, there is no credit shortage for agriculture and
the federal benefits for FCS are no longer necessary. FCS counters this by asserting its
statutory mandate to serve agriculture (and by extension, rural areas) through good times
and bad, unlike commercial lenders without such a mandate.
The controversy over GSE status and lending authority was highlighted in 2004
when a private bank, Netherlands-based Rabobank, tried to purchase an FCS association.
The board of directors of Omaha-based Farm Credit Services of America (FCSA) initially
voted for the sale, indicating to some that FCS may no longer need government
sponsorship. A general outcry led FCSA to withdraw from the deal.9 Commercial bankers
say that institutions should be allowed to leave FCS if they want more lending authorities.
In 2004, FCS asked Congress to eliminate the provision allowing institutions to leave the
system (12 U.S.C. 2279d). It is not clear whether Congress, in 1987, intended the
provision to be used by outside companies to purchase parts of FCS. In 2006, the Farm
Credit Administration amended the rules governing how an FCS institution may terminate
its charter (71 FR 44409, August 4, 2006). The changes allow more time for FCA to
review the request, more communication, and more shareholder involvement.
7 The Horizons report is available at [http://www.fchorizons.com].
8 Bert Ely, “The Farm Credit System: Lending Anywhere but on the Farm,” at [http://
www.aba.com/NR/rdonlyres/E1577452-246C-11D5-AB7C-00508B95258D/45256/Horizons
2006ELYFINAL.pdf].
9 For further background, see CRS Report RS21919, Farm Credit Services of America Ends
Attempt to Leave the Farm Credit System, by Jim Monke.

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