Order Code RS21977
Updated August 3, 2007
Agricultural Credit: Farm Bill 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 2007 farm bill offers Congress opportunities to address agricultural credit. The
House-passed farm bill, H.R. 2419, includes several adjustments to the FSA loan
program, but denies expansion of FCS lending authorities as originally proposed in the
Agriculture Committee-reported bill. A floor amendment from leaders in the Financial
Services Committee stripped the FCS expansion provisions, which had become
particularly controversial. FCS is calling for expanded lending authority in their
Horizons project, but commercial bankers have strongly opposed FCS expansion, citing
no lack of credit in rural areas. Senate action is pending. This report will be updated.
Background
The federal government has a long history of providing credit assistance to farmers.
First, USDA’s Farm Service Agency (FSA) issues direct loans and guarantees on loans
made by commercial lenders to farmers who do not qualify for regular credit. Therefore,
FSA is called a lender of last resort. Second, the Farm Credit System (FCS) is a
cooperatively owned commercial lender that is federally chartered to serve only
agriculture-related borrowers. FCS makes loans to creditworthy farmers, and is not a
lender of last resort. Statutory authority for both the FSA and FCS is permanent, but
farm bills often make adjustments to eligibility criteria and the scope of operations.
Other sources of farm credit include commercial banks, life insurance companies,
and individuals, merchants, and dealers. Figure 1 shows that commercial banks lend
most 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 another 4% of the
market (through loans of commercial banks and FCS).

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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]
The farm sector has about $214 billion in debt. Yet only about 66% of farmers have
any debt (farm or nonfarm), and only 38% have farm debt. Most of the debt is owed by
medium-sized family farms and large commercial farms. Creditworthy farmers generally
have adequate access to loans. Credit conditions are generally good, and default rates have
been declining. USDA data show stable or slightly declining debt-to-asset ratios, rising
equity, and strength in farmers’ ability to repay debts.
Nonetheless, some farmers continue to experience financial stress, and agriculture
is prone to business cycles that may pose financial difficulties. Thus, many interests
continue to see some need for federal intervention in agricultural credit markets.
Farm Lending Institutions
Commercial Banks, Life Insurers, and Individuals. 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.
The “individuals and others” category consists of seller-financed loans from private
individuals, and the growing segment of “captive financing” by agribusinesses.
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. FCS is not a government agency nor guaranteed
1 Commercial bank issues are summarized by the American Bankers Association at [http://www.
aba.com/Industry+Issues/issues_ag_menu.htm].
2 Farm Credit System institutions are described at [http://www.fca.gov/FCS-Institutions.htm].

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by the U.S. government, but is a network of borrower-owned lending institutions. 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. 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 as a government-sponsored enterprise (GSE), and provide benefits such as tax
exemptions. Eligibility is limited to farmers and ranchers, farm input suppliers, rural
home owners in towns with less than 2,500 population, and cooperatives. The federal
regulator is the Farm Credit Administration (FCA). Permanent authority exists in the
Farm Credit Act of 1971, as amended (12 U.S.C. 2001 et seq.). Major amendments
generally have been enacted separately, but farm bills are used for smaller amendments.
FCS does not receive an annual appropriation, but is privately funded. In recent
years, appropriators 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. FSA also guarantees timely payment of principal and
interest on qualified loans made by commercial lenders such as banks and the Farm Credit
System. Permanent authority exists in 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.
FSA makes farm ownership and operating loans to operators of family-sized farms
who can demonstrate enough cash flow to make payments. Direct loans are limited to
$200,000 per borrower. Guaranteed loans are limited to $899,000 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.
Since the 1980s, emphasis within the FSA loan program has shifted from making
direct loans toward issuing more guarantees. This lessens farmers’ reliance on direct
federal lending, and leverages federal dollars since guarantees are cheaper to subsidize.
In the late 1990s, 30% of loan authority was for direct loans; that ratio is now about 25%.
Certain portions of the FSA farm loan program are reserved for beginning farmers
and ranchers (7 U.S.C. 1994 (b)(2)).4 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).
3 USDA Farm Service Agency loan programs are described at [http://www.fsa.usda.gov/dafl].
4 For more background on FSA loan programs, see “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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Farm Bill Issues
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. 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)), and specified how this would be divided
among different types of loans. Appropriators have funded between about 81% to 95%
of the total authorization, with more than 100% for some loan types. The House-passed
farm bill, H.R. 2419, does not specify new overall loan authorization levels.
H.R. 2419 includes provisions that would:
! Increase lending limits per farmer to $300,000 for direct farm ownership
loans and $300,000 for direct operating loans, up from $200,000 for each
program. 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.)
! Further prioritize lending for beginning and socially disadvantaged
farmers by increasing the amounts reserved for these groups.
! Create a special loan guarantee program for conservation projects.
! Make the down-payment loan program more beneficial for farmers.
! Extend and expand the guarantee program for seller-financed land loans.
! Extend the right of first refusal to reacquire a homestead property to the
family of a socially disadvantaged borrower-owner who is a socially
disadvantaged farmer or rancher.
! Restore priority given to socially disadvantaged farmers and ranchers
whenever the Secretary of Agriculture sells or leases property.
! Extend, but only until January 1, 2008, the suspension of the enforcement
of “term limits,” which are set in statute to require farmers to graduate
from FSA credit to commercial lenders (see below).
Term limits are intended to prevent chronically inefficient farms from continuing to
receive federally subsidized credit, but the political and social prospects of eliminating
support are sometimes unpleasant. 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 guaranteed limit through the end of 2006, and P.L. 109-467
extended the suspension provision until September 30, 2007. An increasing number of
farmers are reaching their term limits. Thus, there are pressures to again extend the
eligibility allowance or revisit the original purpose of the term limits requirement.
Appropriations for FSA Farm Loans. Although the agriculture committee
authorizes the multi-year “loan authority,” the appropriations committee controls the
annual discretionary appropriation to cover the actual cost of making loans (the “loan
subsidy”). The loan subsidy varies with any interest rate subsidy and the 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.

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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. In early 2006, FCS released a report titled Horizons, which highlights
perceived needs for greater lending authority to serve a changing rural America.5 Some
see Horizons as a guide for legislative action to expand lending authorities, possibly in
the 2007 farm bill.6 The primary objectives in the Horizons project include (1) expanding
lending authorities to include rural housing in towns with up to 50,000 population
(currently 2,500), (2) expanding lending authorities by adding agribusinesses to the list
of eligible borrowers (regardless of farmer ownership or throughput).
Commercial banks oppose any expansion of 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. They say that the federal tax benefits for FCS are no longer necessary, or at
least should not be extended to non-farm, non-agriculture loans. 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 House-passed bill does not contain any expansion of Farm Credit System
lending authority. A floor amendment (H.Amdt. 702) by Financial Services Committee
Chairman Frank and Ranking Member Bachus removed, by voice vote, the Agriculture
Committee’s provisions in the committee-reported version of H.R. 2419 that would have:
! Increased the population cutoff for rural housing loans from 2,500
population to 6,000 population.
! Added a general agribusiness category to the list of eligible borrowers,
except that it would have limited these new types of agribusiness loans
to renewable energy projects only.
! Added eligibility for certain “new generation” farmer cooperatives that
are at least 50% farmer-owned.
! Replaced the borrower stock-holding requirement, which is currently a
numerical target (the lesser of $1,000 or 2% of the loan), with the
discretion of the institution.
H.R. 2419 retains a FCS-related provision that would:
! Change the basis on which the Farm Credit System Insurance
Corporation (FCSIC) collects premiums from FCS banks and
associations by authorizing higher levels of premiums and shifting the
base for premiums from outstanding loans to insured debt.
This insurance premium change is the only provision in the credit title with a budget
score for mandatory spending. Because FCSIC premiums are counted in the federal
budget, even though they are not funded by the government, CBO counts these changes.
It estimates this provision will reduce spending by $378 million over five years.
5 The Horizons report is available at [http://www.fchorizons.com].
6 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].

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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. Committee jurisdiction was called into question by the House
Financial Services Committee. In letters to the Agriculture Committee, and in statements
on the floor, Representatives Frank and Bachus of the Financial Services Committee
asserted their committee’s jurisdiction for nonfarm lending and their specific opposition
to Horizons. The Administration came out against FCS expansion in the Statement of
Administration Policy on H.R. 2419. Finally, the past chairman of the Farm Credit
Administration, the federal regulator, Michael Renya, also voiced opposition in a letter
prepared for the House floor debate.
Beyond the Farm Bill. The scope of FCS lending authority also could grow under
an still-pending October 2006 proposed rule to expand eligibility for farm processing and
marketing loans (71 FR 60678, October 16, 2006). The intent is to allow FCS to finance
larger value-added farm processing firms that are being built with more outside capital
and involvement than in the past. Opponents fear that the regulation could allow more
non-agriculture financing.
Some also have questioned FCA’s recent approval of a pilot program that allows
“mission-related” investments in what sometimes are called “Rural America Bonds.”
Like banks, FCS institutions can make investments in additional to issuing loans, usually
in negotiable instruments like Treasury bonds. However, the pilot program allows
investments in certain private or public bonds (e.g., for rural community facilities). This
effectively results in lending, sometimes for purposes that otherwise may not qualify for
FCS loans. For FCS institutions, the investments are not subject to statutory restrictions
on borrower eligibility.7 FCA promotes the program “to allow greater flexibility” and “to
better serve the changing needs of agriculture and rural areas.” Commercial banks assert
that the investments allow FCS to exceed its statutory lending scope.
Lending authorities and GSE preferences were highlighted again 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.8 At that time,
commercial bankers said that FCS institutions should be allowed to leave if they want
more lending authorities, while 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.
The Farm Credit Administration has since amended the regulations for FCS institutions
terminating their 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 For background, see FCA, “Investments In Rural America,” presentation to the Farm Credit
Council Annual Meeting, Jan. 2006 [http://www.fccouncil.com/uploads/Laurie_Rae_FCA.ppt];
and FCA, Informational Memorandum on Investments in Rural America, June 25, 2004.
8 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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