Agricultural Credit: Institutions and Issues
Jim Monke
Specialist in Agricultural Policy
July 14, 2010
Congressional Research Service
7-5700
www.crs.gov
RS21977
CRS Report for Congress
P
repared for Members and Committees of Congress
Agricultural Credit: Institutions and Issues
Summary
The federal government has long provided credit assistance to farmers, in response to insufficient
lending in rural areas or a desire for targeted lending to disadvantaged groups. One federal lender
is the Farm Service Agency (FSA) in the U.S. Department of Agriculture (USDA). It issues direct
loans to farmers who cannot qualify for regular credit, and guarantees repayment of loans made
by other lenders. Thus, FSA is called a lender of last resort. Of about $240 billion in total farm
debt, FSA provides about 2% through direct loans, and guarantees about another 4% of loans.
Another federally related lender is the Farm Credit System (FCS), a cooperatively owned,
federally chartered lender with a statutory mandate to serve agriculture-related borrowers. FCS
makes loans to creditworthy farmers, and is not a lender of last resort. FCS accounts for about
39% of farm debt. Commercial banks are the largest farm lender and hold 44% of total farm debt.
While the global financial crisis that escalated in 2008 was slower to affect agricultural balance
sheets than the housing market, it has begun to take its toll. Net farm income fell by 35% in 2009,
reducing some farmers’ ability to repay loans—particularly among dairy, hog, and poultry farms.
Delinquency rates (loans that are more than 30 days past due) on residential mortgages began to
rise in 2005, but delinquency rates for agricultural loans did not begin to rise until mid-2008 and
have not risen as quickly. The delinquency rate on residential mortgages was 11.3% in March
2010; it reached 3.1% for agricultural loans in December 2009, and was 2.89% in March 2010.
Because of the financial turmoil, the USDA farm loan program has seen significantly higher
demand. In FY2009, FSA had its highest loan authority since 1985, issuing $4.5 billion of loans
and guarantees. Two supplemental appropriations added more than $1.1 billion to $3.4 billion of
regularly appropriated loan authority. The regular FY2010 appropriation provided even more,
$5.1 billion. A pending FY2010 supplemental appropriation (H.R. 4899) would add $950 million
of additional loan authority, for a possible total loan authority of $6 billion.
Term limits have been part of the USDA farm loan program since the financial crisis of the 1980s.
They encourage farmers to graduate to commercial loans by placing a maximum number of years
that farmers are eligible. However, Congress has suspended application of the guaranteed
operating loan term limit to prevent some farmers from being denied credit. USDA says that
3,800 current borrowers have reached the limit and would not qualify if the term limit was not
suspended. The 2008 farm bill renewed the suspension of this term limit, but only through 2010.
In the Senate, S. 3221 would extend the suspension of term limits for two more years, until
December 31, 2012. This would allow the issue to wait to be addressed in the next farm bill.
Also because of the financial crisis and debt repayment problems, farmers’ use of mediation
services has increased. USDA has a grant program that provides matching funds through the
states to mediators. The $4 million program is authorized through FY2010. House-passed H.R.
3509 would reauthorize the program through FY2015, as would Senate-introduced S. 1375.
Finally, FCS is seeking to expand its authority through a broader list of permissible investments.
The 2008 farm bill did not expand FCS’s lending authority, but a proposed rule would allow FCS
to “invest” through bonds or other assets to finance certain rural infrastructure, housing facilities,
and rural business investment companies. Under statute, FCS cannot be a lender to these non-
farm entities. Disposition of the proposed rule awaits action by the Farm Credit Administration
(FCA), the federal regulator. FCA’s 2010 regulatory agenda listed the rule as “undetermined” and
did not anticipate a decision. Congress does not have a role in this regulatory approval process.
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Agricultural Credit: Institutions and Issues
Contents
Current Situation......................................................................................................................... 1
Major Players and Market Shares .......................................................................................... 1
The Farm Balance Sheet ....................................................................................................... 3
Agricultural Lending in the Global Financial Crisis............................................................... 5
Delinquencies and Nonperforming Loans........................................................................ 5
Challenges Facing Agricultural Lenders .......................................................................... 7
Review of Farm Loan Restructuring................................................................................ 8
Description of Government-Related Farm Lenders ...................................................................... 9
USDA’s Farm Service Agency (FSA) .................................................................................... 9
Farm Credit System (FCS) .................................................................................................... 9
Farmer Mac ........................................................................................................................ 10
2008 Farm Bill Provisions................................................................................................... 10
Farm Service Agency .................................................................................................... 10
Farm Credit System ...................................................................................................... 11
Issues for Congress ................................................................................................................... 11
Supplemental Appropriations for USDA Farm Loans .......................................................... 11
Term Limits on USDA Farm Loans ..................................................................................... 13
Farm Operating Loans................................................................................................... 13
Farm Ownership Loans ................................................................................................. 14
Agricultural Mediation Grants............................................................................................. 14
Farm Credit Administration Proposed Rule on Investments ................................................. 14
Background on FCS Proposals for Expansion................................................................ 15
Mission-Related Investments ........................................................................................ 15
Figures
Figure 1. Market Shares by Lender of Total Farm Debt, 1960-2008 ............................................. 2
Figure 2. Market Shares of Real Estate Farm Debt, 1960-2008 .................................................... 2
Figure 3. Market Shares of Non-Real Estate Farm Debt, 1960-2008 ............................................ 2
Figure 4. Farm Assets, 1960-2010 ............................................................................................... 4
Figure 5. Farm Debt, 1960-2010 ................................................................................................. 4
Figure 6. Debt-to-Asset Ratio, 1960-2010 ................................................................................... 4
Figure 7. Net Farm Income, 1960-2010 ....................................................................................... 4
Figure 8. Net Farm Income and Government Payments, 1960-2010............................................. 4
Figure 9. Debt-to-Net Farm Income Ratio, 1960-2010................................................................. 4
Figure 10. Delinquency Rates on Loans at Commercial Banks, 1990-2010.................................. 6
Figure 11. Nonperforming Farm Loans, 1990-2010 ..................................................................... 6
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Tables
Table 1. USDA Farm Loans in Enacted FY2009-FY2010 Appropriations and Proposed
FY2010 Supplemental Appropriations.................................................................................... 12
Contacts
Author Contact Information ...................................................................................................... 17
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Agricultural Credit: Institutions and Issues
Current Situation
Major Players and Market Shares
The federal government has a long history of providing credit assistance to farmers. This
intervention has been justified at one time or another by many factors, including the presence of
asymmetric information among lenders, asymmetric information between lenders and farmers,
lack of competition in some rural lending markets, insufficient lending resources in rural areas
compared to more populated areas, and the desire for targeted lending to disadvantaged groups
(such as small farms or socially disadvantaged farmers).1
The lender with the greatest connection to the federal government is the Farm Service Agency
(FSA), in the U.S. Department of Agriculture (USDA). It 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. Because FSA also has targets or funds reserved for
disadvantaged groups, it sometimes also is called a lender of first opportunity.
The lender with the next-largest amount of government intervention is the Farm Credit System
(FCS). It is a cooperatively owned, but federally chartered, private lender with a statutory
mandate to serve agriculture-related borrowers only. FCS makes loans to creditworthy farmers,
and is not a lender of last resort, but is a government-sponsored enterprise (GSE). Third is Farmer
Mac, another GSE that is privately held, and provides a secondary market for agricultural loans.
FSA, FCS, and Farmer Mac are described in more detail later in this report.
Other lenders do not have a government connection. These 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 (44%), followed
by FCS (39%), individuals and others (9%), and life insurance companies (6%). FSA provides
about just over 2% of the debt through direct loans. FSA also guarantees about another 4% of the
market through loans that are made by commercial bank and the FCS.
Total farm debt is split nearly evenly between real estate debt (54%) and non-real estate debt
(46%). FCS is the largest lender for real estate loans, although commercial banks’ share is
growing, and as of recently they hold nearly as much farm real estate debt as FCS (Figure 2).
Commercial banks are the largest lender for non-real estate loans, and have been for nearly five
decades (Figure 3).
As the three figures show, market shares among these lenders have changed over time, with
commercial banks holding relatively little farm real estate debt through 1985, but nearly as much
as the FCS in 2008 (Figure 2). The share of real estate loans from “individuals and others” has
steadily decreased over time, primarily from declining use of private contract for deed
arrangements between farmland sellers and buyers. FSA held a much larger share of both the real
estate and particularly non-real estate debt during the farm financial crisis of the 1980s; that ratio
declined as the farm economy improved after the early 1990s (Figure 3).
1 USDA-FSA, Evaluating the Relative Cost Effectiveness of the Farm Service Agency’s Farm Loan Programs, report to
Congress, August 2006, pp. 11-17, at http://www.fsa.usda.gov/Internet/FSA_File/farm_loan_study_august_06.pdf.
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Agricultural Credit: Institutions and Issues
Figure 1. Market Shares by Lender of Total Farm Debt, 1960-2008
100%
9%
Individuals and
90%
others
6%
2%
80%
Life ins. co.
70%
USDA-FSA
44%
60%
50%
Commercial banks
40%
30%
20%
39%
Farm Credit System
10%
0%
1960
1970
1980
1990
2000
Source: CRS using USDA-ERS data at http://www.ers.usda.gov/Data/FarmBalanceSheet/fbsdmu.htm.
Notes: In the graph, amounts for USDA-FSA are for direct loans only. FSA also issues loan guarantees covering
about 4% of the market on debt issued by commercial banks and the Farm Credit System.
Figure 2. Market Shares of
Figure 3. Market Shares of
Real Estate Farm Debt,
Non-Real Estate Farm Debt,
1960-2008
1960-2008
(54% of total farm debt in 2008)
(46% of total farm debt in 2008)
100%
100%
Individuals
Individuals
90%
90%
and others
and others
80%
80%
Life ins. co.
70%
USDA-FSA
70%
USDA-FSA
60%
60%
50%
50%
Commercial
Commercial
40%
banks
40%
banks
30%
30%
Farm Credit
20%
20%
System
10%
10%
Farm Credit
System
0%
0%
1960
1970
1980
1990
2000
1960
1970
1980
1990
2000
Source: CRS using USDA-ERS data at http://www.
Source: CRS using USDA-ERS data at http://www.
ers.usda.gov/Data/FarmBalanceSheet/fbsdmu.htm.
ers.usda.gov/Data/FarmBalanceSheet/fbsdmu.htm.
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Agricultural Credit: Institutions and Issues
The Farm Balance Sheet
As a whole, the farm sector recorded a historically high level of farm assets in 2007, a total of
$2.05 trillion. In the two years from then to the end of 2009, farm asset levels fell 5.4%, totaling
$1.94 trillion at the end of 2009 (Figure 4). In 2010, USDA expects farm assets to fall another
3.5% to $1.88 trillion. Real estate is about 84% of the total amount of farm assets; machinery and
vehicles are the next-largest category at about 6% of the total.2
Farm debt reached a historic high of $249 billion at the end of 2009, up 4.4% from $239 billion in
2008 (Figure 5). In inflation-adjusted terms, however, this level of debt is still well below the
levels at the peak of the 1980s. In 2010, USDA expects farm debt to fall 6.8% to $233 billion.
Debts and assets can be compared in a single measure by dividing debts by assets—the debt-to-
asset ratio. A lower debt-to-asset ratio generally implies less financial risk to the sector than a
higher ratio. Farm debt-to-asset ratio levels have declined fairly steadily since the late 1980’s
after the farm financial crisis, and reached a historic low of 10.4% in 2007. However, as farm
assets began to fall and debt continued to rise in recent years, the debt-to-asset ratio also began to
rise, albeit to still comparatively low levels of 12%-13% (Figure 6). This indicates that farms, as
a whole, are not as highly leveraged as they were going into the farm financial crisis of the 1980s.
Net farm income has become more variable, especially since 2000. After reaching historic highs
in 2004, net farm income fell by a third in two years, through 2006 (Figure 7). After peaking
again in 2008 at $87 billion, net farm income fell by 35% in one year to $56 billion in 2009.
USDA expects net farm income to rise by almost 12% in 2010 to $63 billion.3 Despite the severe
declines in farm income in 2006 and 2009, the low net farm income years in the past decade are
still higher than the inflation-adjusted lows experienced during the farm financial crisis of the
1980s.
Government payments to farmers also have risen, but do not always offset the variability in net
farm income (Figure 8). Fixed direct payments that are not tied to prices or revenue are a large
component of government payments; these payments support farm income but do not necessarily
help farmers manage risks. Figure 8 shows that more of net farm income is coming from the
market rather than the government, compared to the 1980s.
Another indicator of farmers’ leverage compares debt to net farm income. A lower debt-to-income
ratio (with the ratio expressing the number of years of current income that debt represents)
implies less financial leverage and risk. The farm debt-to-net farm income ratio is more variable
than the debt-to-asset ratio because of the variability of net farm income. It reached a 35-year low
of 2.1 in 2004 and rose to 4.4 in 2009 (Figure 9). The forecast for 2010 suggests it will fall to 3.7.
These levels, while more variable than in the 1990s, are roughly within historical levels, and
certainly less than from 1976 to1986.
2 USDA, Economic Research Service. “Farm Sector Income Forecast,” February 11, 2010, at http://www.ers.usda.gov/
Briefing/FarmIncome/Data/Bs_t5.htm.
3 For more information on farm income expectations, see CRS Report R40152, U.S. Farm Income, by Randy Schnepf.
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Agricultural Credit: Institutions and Issues
Figure 4. Farm Assets, 1960-2010
Figure 5. Farm Debt, 1960-2010
Billion dollars
Billion dollars
2,500
400
Farm assets
Farm debt
350
2,000
in 2010 dollars
in 2010 dollars
300
1,500
250
200
1,000
150
500
100
50
0
0
1960
1970
1980
1990
2000
2010
1960
1970
1980
1990
2000
2010
Source: CRS, using USDA-ERS data at http://www.
Source: CRS, using USDA-ERS data at http://www.
ers.usda.gov/Briefing/FarmIncome/Data/Constant-
dol ar-table.xls. 2009 prelim.; 2010 forecast.
ers.usda.gov/Briefing/FarmIncome/Data/Constant-
dol ar-table.xls. 2009 prelim.; 2010 forecast.
Figure 6. Debt-to-Asset Ratio, 1960-2010
Figure 7. Net Farm Income, 1960-2010
25%
Billion dollars
140
Net farm income
20%
120
in 2010 dollars
100
15%
80
10%
60
40
5%
20
0%
0
1960
1970
1980
1990
2000
2010
1960
1970
1980
1990
2000
2010
Source: CRS, using USDA-ERS data at http://www.
Source: CRS, using USDA-ERS data at http://www.
ers.usda.gov/Briefing/FarmIncome/Data/Constant-
ers.usda.gov/Briefing/FarmIncome/Data/Constant-
dol ar-table.xls. 2009 prelim.; 2010 forecast.
dol ar-table.xls. 2009 prelim.; 2010 forecast.
Figure 8. Net Farm Income and
Figure 9. Debt-to-Net Farm Income
Government Payments, 1960-2010
Ratio, 1960-2010
Billion dollars
14
100
Net farm income
90
12
Government payments
80
10
70
60
8
50
6
40
30
4
20
2
10
0
0
1960
1970
1980
1990
2000
2010
1960
1970
1980
1990
2000
2010
Source: CRS, using USDA-ERS data at http://www.
Source: CRS, using USDA-ERS data at http://www.
ers.usda.gov/Briefing/FarmIncome/Data/Constant-
ers.usda.gov/Briefing/FarmIncome/Data/Constant-
dol ar-table.xls. 2009 prelim.; 2010 forecast.
dol ar-table.xls. 2009 prelim.; 2010 forecast.
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Agricultural Credit: Institutions and Issues
Agricultural Lending in the Global Financial Crisis
While the global financial crisis was slower to affect the balance sheets of farmers and
agricultural lenders than the housing market, it has begun to take its toll.
In 2007 and 2008, farm commodity prices were particularly high, supporting farm income at
above-average levels. But since the historic high prices in the summer of 2008, farm commodity
prices have fallen and reduced farm income in 2009 and 2010. Net farm income fell by 35% in
2009 to $56 billion, reducing some farmers’ ability to repay loans, particularly in some farm
sectors such as dairy, hogs, and poultry. But USDA expects net farm income to rebound by almost
12% in 2010 to $63 billion (Figure 7).
Delinquencies and Nonperforming Loans
Delinquency rates on residential mortgages began to rise in 2005, and for all loans particularly in
2007. Delinquencies include loans that are 30 days or more past due and still accruing interest, as
well as those in nonaccrual status. The delinquency rate on residential mortgages and all loans has
continued to rise without yet reaching a peak (11.3% for residential mortgages and 7.4% for all
commercial bank loans as of March 31, 2010, Figure 10). But the delinquency rates for
agricultural loans did not begin to rise until mid-2008, after continuing to fall to historic lows
while delinquencies were rising in residential mortgages and other loans. Moreover, the rate of
increase in delinquencies on farm production loans at commercial banks has not been as sharp as
in non-farm sectors, reaching a peak of 3.1% in December 2009, before falling to 2.89% in March
2010.4
A more severe measure of loan performance is nonperforming loans. Nonperforming loans
include nonaccrual loans and accruing loans 90 days or more past due. These loans are more in
jeopardy than delinquent loans, and represent a smaller subset of loans. Within the agricultural
loan portfolio, FCS nonperforming loans rose from 0.43% at the beginning of 2008 to a near-term
peak of 2.78% on September 30, 2009, before moderating to 2.44% as of March 31, 2010 (Figure
11). The FCS nonperforming loan rate is at a level not seen since the mid-1990s, when the system
had finally recovered from the farm financial crisis of the 1980s.5
Nonperforming farm loans at commercial banks also have risen. Nonperforming farm real estate
loans at commercial banks rose from a low of 0.66% in December 2006 to 2.6% in March 2010.
Nonperforming farm production loans rose from a low of 0.64% in December 2006 to 2.37% in
March 2010 (Figure 11).6
4 Federal Reserve Bank, “Delinquency Rates on Loans at Commercial Banks” (seasonally adjusted), at
http://www.federalreserve.gov/releases/chargeoff.
5 Federal Farm Credit Banks Funding Corporation, “First Quarter 2010 Quarterly Information Statement of the Farm
Credit System,” p. 9, May 10, 2010, at http://www.farmcredit-ffcb.com/farmcredit/serve/public/finin/quarin/report.pdf?
assetId=155241.
6 Federal Reserve Bank, Agricultural Finance Data Book, Tables B.2 and B.4, at http://www.federalreserve.gov/
releases/e15/default.htm.
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Agricultural Credit: Institutions and Issues
Figure 10. Delinquency Rates on Loans at Commercial Banks, 1990-2010
12%
Single-family
11%
residential
10%
9%
8%
All loans
7%
6%
5%
4%
3%
2%
Farm production
1%
loans
0%
1990
1995
2000
2005
2010
Source: Compiled by CRS. Data are through March 31, 2010,using Federal Reserve Bank, “Delinquency Rates
on Loans at Commercial Banks” (seasonally adjusted), at http://www.federalreserve.gov/releases/chargeoff.
Notes: Delinquencies include loans that are 30 days or more past due and still accruing interest, as well as those
in nonaccrual status. The amounts are percentages of end-of-period loans.
Figure 11. Nonperforming Farm Loans, 1990-2010
5%
4%
Farm Credit
System
3%
Commercial bank
farm real estate
2%
1%
Commercial bank
farm production
0%
1990
1995
2000
2005
2010
Source: Compiled by CRS. Data are through March 31, 2010. FCS data from Federal Farm Credit Banks
Funding Corp. at http://www.farmcredit-ffcb.com. Commercial bank data from Federal Reserve Bank, Agricultural
Finance Data Book, Tables B.2 and B.4, at http://www.federalreserve.gov/releases/e15/default.htm.
Notes: Nonperforming loans include nonaccrual loans and accruing loans 90 days or more past due. The
amounts are percentages of total loans.
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Agricultural Credit: Institutions and Issues
Challenges Facing Agricultural Lenders
Agricultural lenders face challenges like other banks in accessing capital. While some
independent rural banks may be less affected than urban money center banks, the rural banks are
not immune to the crisis. For example, the Farm Credit System—a private entity but still a
government-sponsored enterprise—is very dependent on the bond market and has felt the shock
of the financial crisis in its ability to sell bonds to fund its loans. Although its bonds are still
creditworthy and able to be sold, the terms of FCS’s bond sales reflect the change and turmoil in
the financial markets. Rural community banks, most of which are not directly involved with the
failing entities and investments of the money-center banks, can end up with less funding available
for loans when regulators increase capital holding requirements as a result of macro-level risks.
The financial crisis and stock market losses have affected agricultural lenders in unexpected
ways, as illustrated by two examples. In the fall of 2008, Farmer Mac—the secondary market for
agricultural loans and another GSE—lost $106 million on investments in Fannie Mae stock and
Lehman Brothers securities. These losses reduced Farmer Mac’s capital and jeopardized its
ability to meet statutory capital requirements. Farmer Mac raised $124 million in capital in 2008
by issuing the same amounts of preferred stock. Management issues also were addressed by
replacing the chief executive officer. In 2009, Farmer Mac successfully rebuilt its capital position.
In April 2009, the 11th-largest farm lender among commercial banks7—New Frontier Bank in
Greeley, Colorado, with a $780 million agricultural loan portfolio—failed, leaving many farmers
in northeastern Colorado scrambling to find new lenders for their operating loans. While this has
not been the only bank failure, it was particularly noteworthy given the concentration and size of
the bank’s agricultural loans, and its impact on other lenders such as FCS and FSA that were
solicited to take over some of the loans.
As a consequence of the global financial crisis, agricultural lenders tightened credit standards in
2009 and 2010—at a minimum requiring more documentation and oversight of loans, and
possibly making or having less credit available to producers.
Thus, because of this turmoil and as the lender of last resort, the USDA Farm Service Agency has
experienced significantly higher demand for its direct loans and guarantees. By May 2009, the
demand for direct farm operating loans (the loans farmers use to buy seed, fertilizer, and fuel to
plant a crop) was up 81% over a year earlier, demand for direct ownership loans (loans for real
estate) was up 132%, and demand for guaranteed operating loans was up 31%.8 Two
supplemental appropriations during FY2009 added more than $1.1 billion of loan authority to
$3.4 billion of loan authority in the regular appropriation (Table 1), making a total of $4.5 billion
of FSA loans or guarantees available in FY2009—the highest since 1985. The regular FY2010
agriculture appropriation provided even more, $5.1 billion of loan authority and guarantees.
Additional loan authority for FY2010 is contemplated in a pending supplemental appropriation
(H.R. 4899, discussed later) that could add $950 million for a possible total loan authority in
FY2010 of $6 billion.
7 American Bankers Association, “Top 100 Farm Bank Lenders by Dollar Volume in 2008,” at http://www.aba.com/
NR/rdonlyres/05858407-284E-46CD-9443-38EB9601A25A/58849/Top100FarmBanksbyDollarVolumein2009.pdf.
8 Doug Caruso, FSA Administrator, in testimony before the House Agriculture Subcommittee on Conservation, Credit,
Energy, and Research, June 11, 2009, at http://agriculture.house.gov/testimony/111/h061109sc/Caruso.doc.
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Agricultural Credit: Institutions and Issues
Review of Farm Loan Restructuring
Section 501 of the Helping Families Save Their Homes Act (P.L. 111-22) required the
Congressional Oversight Panel (COP) to write a report that analyzed the extent to which
commercial banks receiving Troubled Asset Relief Program (TARP) funds could or should be
required to use loan restructuring rather than foreclosure to address problem farm loans. The
analysis was to include comparisons to FSA’s direct loan restructuring program (7 U.S.C. 2001),
FCS’s loan restructuring options, and the Treasury’s Making Home Affordable Program.
The impetus to write the report came from an amendment (S.Amdt. 1032) by Senators Feingold
and Gillibrand that, as initially proposed, would have compelled TARP recipients to offer farm
loan borrowers “a restructuring program comparable to the terms and conditions of the program
established … [for the USDA farm loan program] (7 U.S.C. 2001).”9 The original amendment
also had provisions for the terms of shared appreciation agreements, future borrower eligibility,
and protections for the farmer’s principal residence. However, the amendment was revised and
the adopted version did not compel farm loan restructuring, but instead required only the COP
report mentioned above.
The Congressional Oversight Panel report10 found that the effects of a restructuring mandate for
TARP recipient banks would have limited reach and impact for the farm sector. The report found
that TARP-recipient banks hold only about 10% of total farm real estate debt. The COP suggested
that Congress could help struggling farmers by creating a more encompassing, voluntary
restructuring program funded through TARP, or creating a TARP-funded loan guarantee program
for restructured farm loans, since the demand for FSA loan guarantees nearly always exceeds the
supply. The report also noted that farm credit data—especially for farm foreclosures—are
inadequate compared to other parts of the banking sector, and that the existing data (e.g., on
delinquencies and nonperforming loans, as in Figure 10 and Figure 11) should be monitored
closely to track the direction of trends in problem farm loans.
The benchmark in the Feingold/Gillibrand amendment was the USDA loan restructuring program
that is required in statute. The farm loan restructuring provisions for the USDA farm loan
program are largely a result of the farm loan crisis of the 1980s, and are designed to provide
borrower rights and keep family farmers on their farms if at all financially possible. As a
government lender, USDA generally does not want to foreclose on farms, especially considering
the visibility of the government being the entity to take away a sometimes generations-old family
farm and homestead. Applying government-lending provisions directly to commercial lenders
may not necessarily be appropriate, given the differing business goals of their respective lending
programs.
9 Congressional Record, p. S5028, May 1, 2009.
10 Congressional Oversight Panel, Special Report on Farm Loan Restructuring, July 21, 2009, at http://cop.senate.gov/
documents/cop-072109-report.pdf.
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Agricultural Credit: Institutions and Issues
Description of Government-Related Farm Lenders
USDA’s Farm Service Agency (FSA)
USDA’s Farm Service Agency is a lender of last resort because it makes direct farm ownership
and operating loans to family-sized farms that are unable to obtain credit elsewhere. FSA also
guarantees timely payment of principal and interest on qualified loans made by commercial
lenders such as commercial banks and FCS. Permanent authority exists in the Consolidated Farm
and Rural Development Act (CONACT, 7 U.S.C. 1921 et seq.). FSA usually makes and
guarantees about $3.5 billion of farm loans annually. However, because of the heavier demand for
FSA loans during the financial crisis, FSA has received supplemental appropriations and a higher
regular FY2010 appropriation. Its regular FY2010 appropriation is $141 million to support $5.1
billion of loans. FSA also received $321 million in salaries and expenses to administer the loan
program.
Direct loans are limited to $300,000 per borrower, guaranteed loans to $1,094,000 per borrower
(adjusted annually for inflation). Direct emergency loans are available for natural or other
disasters. Some guaranteed loans have a subsidized interest rate.
Part of the FSA loan program is reserved for beginning farmers and ranchers (7 U.S.C. 1994
(b)(2)). For direct loans, 75% of the funding for farm ownership loans and 50% of operating loans
are reserved for the first 11 months of the fiscal year. For guaranteed loans, 40% is reserved for
ownership loans and farm operating loans for the first half of the fiscal year. Funds are also
targeted to “socially disadvantaged” farmers by race, gender, and ethnicity (7 U.S.C. 2003).
Because of these provisions, FSA also is known as lender of first opportunity for borrowers who
are not yet creditworthy for regular commercial business loans.
Farm Credit System (FCS)
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
neither a government agency nor guaranteed by the U.S. government, but is a network of
borrower-owned lending institutions operating as a government-sponsored enterprise (GSE). 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
95 credit associations that, in turn, make loans to eligible creditworthy borrowers. FCS is unique
among the GSEs because it is a retail lender making loans directly to farmers, and thus is in direct
competition with commercial banks.
Statutes and oversight by the agriculture committees determine the scope of FCS activity.
Benefits such as tax exemptions are also provided. Eligibility is limited to farmers, farm input
suppliers, rural homeowners in towns under 2,500 population, and cooperatives. The federal
regulator is the Farm Credit Administration (FCA). For more background, see CRS Report
RS21278, Farm Credit System, by Jim Monke.
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Agricultural Credit: Institutions and Issues
Farmer Mac
Farmer Mac is a separate GSE that is a secondary market for agricultural loans. It is related to the
FCS in that FCA is its regulator and it was created by the same legislation, but it is a financially
separate entity. Farmer Mac purchases mortgages from lenders and guarantees mortgage-backed
securities that are bought by investors. Permanent authority rests in the Farm Credit Act of 1971
(12 U.S.C. 2001 et seq.).
2008 Farm Bill Provisions
Statutory authority for FSA and FCS is permanent, but periodic farm bills—such as the 2008 farm
bill (P.L. 110-246)—often make adjustments to eligibility criteria and the scope of operations.
The most recent farm bill adjustments are summarized below, and a more detailed side-by-side
comparison of provisions is available in CRS Report RL34696, The 2008 Farm Bill: Major
Provisions and Legislative Action, coordinated by Renée Johnson.
Farm Service Agency
The 2008 farm bill authorizes the FSA farm loan program at $4.226 billion for each of FY2008-
FY2012, including $1.2 billion for direct loans. Actual funding is determined in annual
appropriations acts. In addition, the 2008 farm bill makes several changes:
• It increases lending limits per farmer to $300,000 for direct farm ownership loans
and $300,000 for direct operating loans, up from $200,000 each.
• It further prioritizes lending for beginning and socially disadvantaged farmers by
increasing the amounts reserved for these groups (see earlier description of FSA).
• It extends the term of the beginning farmer down-payment loan program, raises
the lending limit, and lowers the interest rate. It adds eligibility for socially
disadvantaged farmers.
• It makes permanent and nationwide the guarantee program for seller-financed
land loans to beginning and socially disadvantaged farmers.
• It extends eligibility for emergency loans to equine farmers; conferees noted that
horses for racing, showing, and recreation should not be eligible.
• It creates a beginning farmer “Individual Development Account” pilot program.
Farmers receive up to a 2:1 match, up to $6,000/year.
• It creates direct loans and loan guarantees for conservation projects.
• It extends the right of first refusal to reacquire a homestead property to the family
of a socially disadvantaged borrower-owner.
• It adds socially disadvantaged farmers to beginning farmers as preferred groups
when the USDA sells or leases property.
• It suspends until December 31, 2010, the enforcement of the 15-year “term limit”
on guaranteed operating loans that requires farmers to graduate to commercial
lenders. A further extension is discussed in the section on “Issues for Congress.”
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Farm Credit System
The enacted 2008 farm bill does not allow any expansion of FCS lending authority. Although an
initial House draft of the farm bill included some expanded lending authorities, those provisions
were removed by a floor amendment from leaders of the House Financial Services Committee
(H.Amdt. 702).
For the FCS, the enacted 2008 farm bill makes the following provisions:
• It allows rural utility (electric or telephone facility) loans to qualify for the
agricultural mortgage secondary market (Farmer Mac). It provides for separate
consideration of rural utility loans when determining credit risk.
• It makes technical changes in the payment of insurance premiums by FCS banks
to the FCS Insurance Corporation.
• It makes more borrowers able to own Bank for Cooperatives voting stock.
• It equalizes lending authorities for associations in Alabama, Mississippi, and
Louisiana by allowing Federal Land Bank Associations to make shorter-term
loans, and Production Credit Associations to make longer-term loans. It requires
board and shareholder votes. These provisions are effective as of January 1,
2010.
Issues for Congress
Supplemental Appropriations for USDA Farm Loans
An FY2010 supplemental appropriation is proposed for farm loans to respond to the continued
heavy demand for loans and a projected shortage of appropriated loan authority. Both the House-
and Senate-passed versions of H.R. 4899 (a war and disaster supplemental appropriations bill)
would provide identical funding for USDA’s Farm Service Agency to issue an additional $950
million in loans and guarantees (on top of a nearly exhausted FY2010 base of $5.1 billion, Table
1). This additional loan authority would cost $32 million in budget authority ($31 million for loan
subsidy plus $1 million for administrative expenses, on the FY2010 loan subsidy base of $141
million). The House and Senate are trading amendments on the bill to resolve differences on other
provisions (rather than using a conference committee).11
As the lender of last resort, FSA experienced significantly higher demand for its loans beginning
in FY2009 during the banking crisis. In 2009, an unusually high number of direct operating loan
applications were from new customers: 45% in 2009, compared with about 20% usually.12
11 For more information on the supplemental appropriation, see CRS Report R41255, FY2010 Supplemental
Appropriations for Agriculture, by Jim Monke. Other agricultural programs also would receive supplemental
appropriations in the bills.
12 Doug Caruso, FSA Administrator, in testimony before the House Agriculture Subcommittee on Conservation, Credit,
Energy and Research, June 11, 2009, at http://agriculture.house.gov/testimony/111/h061109sc/Caruso.doc.
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Table 1. USDA Farm Loans in Enacted FY2009-FY2010 Appropriations and Proposed FY2010 Supplemental Appropriations
(dollars in millions)
FY2009
FY2010
Change
Supplemental (P.L.
Supplemental
111-5, and P.L. 111-
(House-passed and
32) and USDA
Senate-passed bill
FY2010 Total minus
Regular (P.L. 111-8)
internal transfer
Regular (P.L. 111-80)
H.R. 4899)
FY2009 Total
Budget
Loan
Budget
Loan
Budget
Loan
Budget
Loan
Budget
Loan
FSA Farm Loan Program
Authority Authority Authority Authority Authority Authority Authority Authority Authority Authority
Farm
ownership
loans
Direct
13 222 23 360 27 650
-9 68
Guaranteed
4 1,239
6 1,500
1 300
3 561
Farm
operating
loans
Direct
68 575 81 683 47
1,000 17 350 -84 92
Guaranteed
(unsubsidized)
25 1,017
5 193 35 1,500
6 250 11 539
Guaranteed (interest assistance)
37
270
-17
-120
24
170
7
50
10
70
Indian tribe land acquisition
0.2
4
0
4
0
0
Indian highly fractured land loans
0.8
10
0.8
10
Bol weevil eradication loans
0
100
0
100
0
0
Conservation
loans
Direct
1.1
75
1.1
75
Guaranteed
0.3
75
0.3
75
Subtotal, FSA Farm Loan Program
147
3,428
92
1,117
141
5,084
31
950
-68
1,490
Salaries and expenses
309
—
313
—
4
—
Administrative expenses
8
—
8
—
1
—
1
—
Total, FSA Farm Loan Program
465
3,428
92
1,117
462
5,084
32
950
-63.2
1,490
Source: Compiled by CRS from P.L. 111-5; P.L. 111-8; P.L. 111-32; P.L. 111-80; H.R. 4899; H.Res. 1500; and USDA Farm Service Agency, ”Funding,” at
http://www.fsa.usda.gov/FSA/webapp?area=home&subject=fmlp&topic=fun. Does not include $75 million of budget authority proposed for emergency loans for poultry
producers in H.R. 4213.
Notes: Budget authority reflects the cost of making loans, such as interest subsidies and default. Loan authority reflects the amount of loans that FSA may make or guarantee.
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Agricultural Credit: Institutions and Issues
In FY2010, USDA continues to experience higher loan demand, since some commercial lenders
continue to constrain their own lending practices and some farmer families are losing off-farm
jobs. Some USDA farm loan offices in the states have begun to deplete their FY2010 allocation to
make loans. Nationally, some loan programs have used over 90% of the their fiscal year
allocation in eight months.13
Regular appropriated loan authority for USDA increased 48% from FY2009 to FY2010, and
supplemental appropriations are increasing these amounts each year. The regular FY2009 level
for farm loans included $3.4 billion of loan authority (direct loans and guarantees), typical of
recent years. Two supplemental appropriations in FY2009 added over $1.1 billion in loan
authority, for a total of $4.5 billion of loans in FY2009 (Table 1).
Term Limits on USDA Farm Loans
Following the farm credit crisis of the 1980s, Congress added “term limits” to the USDA farm
loan program to restrict eligibility for government farm loans and encourage farmers to
“graduate” to commercial loans. The term limits place a maximum number of years that farmers
are eligible for certain types of FSA loans or guarantees. However, Congress has suspended
application of one of the term limits to prevent some farmers from being denied credit.
Farm Operating Loans
• Direct operating loans are limited to a seven-year period. In certain cases,
borrowers may qualify for a one-time, two-year extension (7 U.S.C.
1941(c)(1)(C) and (c)(4)). In June 2009, USDA said that about 4,800 FSA
borrowers are limited to one more year of direct operating loans, and another
7,800 borrowers are limited to two more years. USDA does not expect many of
these borrowers to graduate to commercial credit in the current financial
environment.14
• Guaranteed operating loans are limited to a 15-year period (7 U.S.C. 1949(b)(1)),
but that limit is suspended until December 31, 2010, by Section 5103 of the 2008
farm bill (P.L. 110-246). Receiving direct operating loans counts toward the
guaranteed loan term limit. That is, when either the first direct or guaranteed
operating loan is issued, the clock starts on the 15-year eligibility for guaranteed
operating loans. USDA said in June 2009 that 3,800 current borrowers have
reached the guaranteed term limit and would not qualify for additional loan
guarantees if the term limits were not suspended.15
Suspension of term limits on guaranteed operating loans is not new. The 2002 farm bill made a
similar suspension of term limits for nearly the life of the 2002 farm bill. However, because the
current suspension does not last for the entire life of the 2008 farm bill, it may receive
congressional attention by the end of the 111th Congress, and a bill is proposed in to extend it.
13 USDA posts updated data on available funds remaining in the farm loan program at http://www.fsa.usda.gov/FSA/
webapp?area=home&subject=fmlp&topic=fun.
14 Doug Caruso, FSA Administrator, in testimony before the House Agriculture Subcommittee on Conservation, Credit,
Energy and Research, June 11, 2009, at http://agriculture.house.gov/testimony/111/h061109sc/Caruso.doc.
15 Ibid.
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In the Senate, S. 3221 would extend the suspension of term limits on guaranteed operating loans
for two more year until December 31, 2012. This would allow the issue to wait to be addressed
again until the next farm bill. The bill has not received committee or floor action. A similar bill in
2006 passed the Senate by unanimous consent and the House by voice vote (P.L. 109-467).
Farm Ownership Loans
• A borrower is eligible for direct farm ownership (real estate) loans for a
maximum of 10 years after the first loan is made (7 U.S.C. 1922(b)(1)(C)).
• There is no time limit on eligibility for guaranteed farm ownership loans.16
Agricultural Mediation Grants
Farmers’ use of mediation services has increased because of the financial crisis and debt
repayment problems. The USDA Farm Service Agency has a state mediation grant program that
provides matching grants to organizations in the states (for example, cooperative extension
services). The program provides mediation services not only for credit disputes (between farmers
and USDA or other lenders), but also for other farm- and conservation-related disputes.
Mediation through an impartial third party is a voluntary alternative to litigation, arbitration, or
formal appeals. The program was begun in 1988 as one response to the 1980s farm financial
crisis. FSA has approved 32 participating states17 for the Certified State Agricultural Mediation
Program.18
The program has received funds annually through the Agriculture appropriations bill. In FY2010,
it received $4.4 million. It is authorized through the end of FY2010, and has been reauthorized on
a five-year cycle since its inception. To reauthorize the program, the House passed H.R. 3509 on
March 18, 2010. The bill would reauthorize the program for five years through FY2015. An
identical bill, S. 1375, was introduced in the Senate in June 2009, but has not received action.
Farm Credit Administration Proposed Rule on Investments
Although the 2008 farm bill did not change FCS’s scope of lending authority, the FCS is seeking
through regulatory action to expand its list of permissible investments (currently a proposed rule,
but not yet finalized). The expansion of investment opportunities would allow FCS to assist rural
communities to expand infrastructure and housing facilities, as well as allowing other rural
activities such as with rural business investment companies.
16 USDA-FSA, Evaluating the Relative Cost Effectiveness of the Farm Service Agency’s Farm Loan Programs, Report
to Congress, August 2006, p. 76, at http://www.fsa.usda.gov/Internet/FSA_File/farm_loan_study_august_06.pdf.
17 Alabama, Arizona, Arkansas, California, Colorado, Florida, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine,
Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York,
North Dakota, Oklahoma, South Dakota, Texas, Utah, Virginia, Washington, Wisconsin, and Wyoming.
18 For more information, see http://www.fsa.usda.gov/FSA/webapp?area=home&subject=oued&topic=ops-am.
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Background on FCS Proposals for Expansion
The Farm Credit System is authorized by statute to lend to farmers and ranchers. Loans may also
be made for the processing and marketing activities of these borrowers, home loans in rural areas,
certain farm-related businesses, and cooperatives. Loans to other borrowers are prohibited.
In recent years, FCS has sought to expand its lending authority beyond traditional farm loans. In
2006, an FCS report titled Horizons19 highlighted perceived needs for greater lending authority,
including rural housing in towns with up to 50,000 population (the population limit is currently
2,500) and broader eligibility for agribusinesses. Commercial banks oppose any expansion of
FCS lending authority, saying that credit in rural areas is not constrained given financial
deregulation and integration, and that FCS’s GSE status provides an unfair advantage.20 They say
that federal tax benefits for FCS are no longer necessary.21
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.
Unlike the housing GSEs (Fannie Mae, Freddie Mac) that do not lend directly to homeowners,
FCS is a retail lender that competes for farm loans against commercial banks. FCS asserts its
statutory mandate to serve agriculture (and by extension, rural areas) through good and bad times.
In Congress, committee jurisdiction has been questioned. During debate over the 2008 farm bill,
the House Financial Services Committee and the Senate Banking Committee asserted jurisdiction
for nonfarm lending and opposition to Horizons.22 The Bush Administration opposed FCS
expansion,23 and a past chairman of the FCA, Michael Reyna, also voiced opposition.24 In the
end, the 2008 farm bill did not change FCS’s scope of lending authority.
Mission-Related Investments
On June 16, 2008, the FCA published a proposed rule to allow “mission related investments” (73
Federal Register 33931-33940).25 These investments include (1) debt securities in projects that
benefit rural communities and (2) equity investments in venture capital funds. The proposed rule
would define rural areas to include up to 50,000 residents. Targeted projects include community
facilities, transportation, rural business investment companies, and venture capital funds. As
19 The Horizons report is available at http://www.fchorizons.com.
20 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/horizons2006elyfinal.pdf.
21 The tax benefits for FCS include an exemption from federal, state, municipal, and local taxation on the profits earned
by the real estate side of FCS. For investors who buy FCS bonds to finance the system, the interest earned is exempt
from state, municipal, and local taxes.
22 Letter on House-Senate Farm Bill Conference, January 15, 2008 http://www.house.gov/apps/list/press/
financialsvcs_dem/press011607.shtml, and letter to House Agriculture Committee, May 18, 2007
http://www.house.gov/apps/list/press/financialsvcs_dem/press052207.shtml.
23 Statement of Administration Policy on H.R. 2419, July 25, 2007, p. 3, at http://www.whitehouse.gov/omb/legislative/
sap/110-1/hr2419sap-r.pdf.
24 Congressional Record, July 26, 2007, p. H8728.
25 FCA, proposed rule on Rural Community Investments, http://www.fca.gov/handbook.nsf/
ff16b393f6bb3aa0852563ce006665bb/ea4c5c5dfb4c60058525746b0044e5b1?OpenDocument.
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discussed below, a final rule as not yet been adopted and FCA’s projected date for a decision
remains “undetermined.”26
FCA promoted the program “to allow greater flexibility” and “to better serve the changing needs
of agriculture and rural areas.” The proposed rule states that “many rural areas are struggling to
retain economic viability and vitality,” and that “essential facilities, infrastructure, and services ...
often lag behind those in metropolitan areas ... obstacles to rural economic development and
revitalization [that] are further compounded by funding challenges.” FCA designed the rule “to
enable FCS to collaborate and partner in rural development ... as a financial intermediary
promoting the flow of money into rural areas.”
The scope of mission-related investments and the statutory restrictions governing to whom FCS
may lend cause some to raise the following question: Do investments in bonds and venture capital
effectively result in loans by another name to borrowers who otherwise are ineligible for FCS
loans? Like banks, FCS institutions may use their assets to make loans or buy investments.
Investments offer an alternative form of diversification to loans, and some types of investments
can be appropriate for capital reserves. However, some question whether investments in the types
of projects mentioned in the rule are safe and/or mission-related. Critics say that the rule’s
definition of rural as 50,000 population is at odds with the FCS statutory limit of 2,500
population for rural home loans.
Since 2004, an FCA pilot program has been allowing similar investments in what sometimes are
called “Rural America Bonds.”27 The proposed rule basically would make the pilot program—
with revisions and the addition of the venture capital funds—a permanent part of FCS regulations
and available to all FCS institutions.
The proposed rule was open for public comment until August 15, 2008, and over 10,000
comments were submitted.28 Among the comment letters are two bipartisan letters from the
House Financial Services Committee29 and the Senate Banking Committee30 opposing the rule.
These letters note that the 2008 farm bill rejected legislation to expand FCS lending authorities,
request the proposed rule be withdrawn, and ask that decisions about the scope of FCS activities
be left to Congress. Also, Representatives Herger, Buyer, and Manzullo, and Senators Byrd,
Lugar, and Bingaman submitted letters from constituents who oppose the rule. The chairmen of
the House and Senate agriculture committees have not taken a position publicly. USDA’s Rural
Development Agency submitted a comment letter in support of the rule,31 which somewhat
contradicts the Administration’s opposition to FCS expansion in the farm bill in 2007 (see
footnote 23).
26 FCA, “Spring 2010 Regulatory Performance Plan,” February 19, 2010, at http://www.fca.gov/law/perf_plan.html.
27 FCA, Informational Memorandum on “Investments in Rural America,” January 11, 2005.
28 Comment letters are available at http://www.fca.gov/apps/regproj.nsf/e211b6dc2a9fbbba85256e5100541454/
9dcc7754de2e51bb852572dd00526b3f?OpenDocument.
29 Reps. Frank, Bachus, Maloney, and Biggert, House Financial Services Committee, letter to FCA on July 10, 2008, at
http://www.aba.com/aba/documents/press/LettertoFCA7_10_08.pdf.
30 Senators Dodd and Shelby, Senate Banking Committee, letter to FCA on August 8, 2008, at http://www.fca.gov/
apps/regproj.nsf/9646a6b403d8272d85256e5100541453/c2d1d0197290ead2852574a2004a1021?OpenDocument.
31 James Alsop and Joseph Ben-Israel, USDA Rural Development, letter to FCA on August 14, 2008, at
http://www.fca.gov/apps/regproj.nsf/9646a6b403d8272d85256e5100541453/8fed246b2b6da162852574a500617f65?
OpenDocument.
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The disposition of the proposed rule now awaits action by the FCA. FCA’s 2010 regulatory
agenda does not project a date for a final rule, but rather categorizes the rule as “undetermined”
(see footnote 26). The FCA is authorized to implement rules that it believes are in accord with the
statutes. Congress has no official role in the approval process for this proposed rule unless it
exercises its legislative power, which could include disapproving the rule under the Congressional
Review Act.
Author Contact Information
Jim Monke
Specialist in Agricultural Policy
jmonke@crs.loc.gov, 7-9664
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