Farm Credit System wants favors

Some things are more reliable than even death and taxes. Take the Farm Credit System for example.
Since it’s farm bill-writing time again, the giant, government-sanctioned, cooperative ag lender is again asking Congress for favors to boost itself in the farm lending marketplace.
Not new. The request, like the system, isn’t new.
Farm Credit System was born in 1916 and, by the grace of Congress, has evolved into the Federal Land Bank for long-term lending; the Federal Intermediate Credit Banks for short-term, or production, lending; and the Bank for Cooperative to fund farmer-run cooperatives.
Every time Congress gave it more rope, however, Farm Credit System snared itself in it. Expanded lending authority in 1971 led to an inglorious, $1.26 billion government bailout after ag’s ugly, mid-1980s collapse. (Farm Credit System repaid the loans, and $440 million in interest, by 2005.)
The near-crackup cost the system dearly. Farmers fled the lender for commercial banks and Farm Credit System’s share of total ag lending sagged from 30 percent in the mid-1980s to nearly 20 percent five years later.
Drawing board. Congress then rewrote Farm Credit System’s charter to both clean the system’s house and remodel it. Mergers were encouraged and the system shrank from over 800 lending institutions in 1985 to just 95 much larger ones by late 2006.
Tighter oversight by the Farm Credit Administration, Farm Credit System’s regulator, kept it on the straight and narrow, also.
The reforms worked.
By late 2005, the system had re-established itself as an ag-lending powerhouse. Its marketshare was back to 30 percent; its lending portfolio soared from $50 billion in 1985 to $113 billion; and profits quadrupled from $660 million in 1990 to $2.5 billion.
Much of the growth, however, came through two government blessings, complain commercial bankers.
First, Farm Credit System operates under a federal umbrella.
Can’t fail. Since it is chartered by the government, money raised through bond sales on Wall Street to then relend to rural America carries an implied guarantee that Congress will not allow the system to fail.
Witness the 1987 bailout. That implication allows Farm Credit System to acquire loanable funds cheaper than commercial banks.
The cheaper money is passed on to Farm Credit System borrowers through lower interest rates.
In turn, grouse the bankers, the system cherry-picks their biggest, best customers because, after all, customer loyalty in banking is either a quarter point cheaper interest rate or a toaster.
Tricks. Second, accounting tricks in the government charter effectively lower Farm Credit System members’ tax rate to, incredibly, less than 5 percent, said Mark Scanlon, a Washington-based staffer of the Independent Community Bankers of America.
Despite these enormous advantages already, Farm Credit System now wants Congress to grant it new lending authority.
One key change in the draft 2007 farm bill would allow system banks to make housing loans in communities of up to 6,000 population (currently Farm Credit System is restricted to towns of 2,500 or less) and not require new housing borrowers to buy Farm Credit System stock, a bedrock cooperative principle.
An even bigger change would allow system banks to lend to agribiz connected – even by a seemingly invisible thread – to the renewable fuel industry.
Open door. In short, complain commercial banks, the draft farm bill language would open the barn door for Farm Credit System to loan money to any and all commercial enterprises in agriculture, from the local gas station to Tyson Foods, said Scanlon.
“It would turn the Bank for Cooperatives into the Bank for Corporations,” he predicted.
The point is well-made: If Farm Credit System wants to compete head-to-head with commercial banks, then it should play by commercial bank rules.
As such, farm bill writers should either keep Farm Credit System in its traditional ag lending role or strip it of its marketplace advantages.
(Alan Guebert’s Farm and Food File is published weekly in more than 75 newspapers in North America. He can be contacted at agcomm@sbcglobal.net.)