Some things are more reliable than even death and taxes.

Take the Farm Credit System (FCS, the 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.

The request, like the System, isn’t new. FCS 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, FSC 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. (FCS 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 FCS’s share of total ag lending sagged from 30 percent in the mid-80s to nearly 20 percent five years later.

Congress then rewrote FCS’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, FCS’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 market share 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, FCS operates under a federal umbrella. Since it is chartered by the government, money raised through bond sales on Wall Street to then re-lend to rural America carries an implied guarantee that Congress will not allow the System to fail. Witness the 1987 bailout. That implication allows FCS to acquire loanable funds cheaper than commercial banks.

The cheaper money is passed on to FCS 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.
Second, accounting tricks in the government charter effectively lower FCS members’ tax rate to, incredibly, less than five percent, says Mark Scanlon, a Washington, D.C.-based staffer of the Independent Community Bankers of America.

Despite these enormous advantages already, FCS 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 FCS is restricted to towns of 2,500 or less) and not require new housing borrowers to buy FCS stock, a bedrock cooperative principle. An even bigger change would allow System banks to lend to agribusiness connected even by a seemingly invisible thread to the renewable fuel industry.

In short, complain commercial banks, the draft Farm Bill language would open the barn door for FCS to loan money to any and all commercial enterprises in agriculture, from the local gas station to Tyson Foods, says Scanlon.

“It would turn the Bank for Cooperatives into the Bank for Corporations,” he predicts.

The point is well-made: If FSC 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 FCS in its traditional ag lending role or strip it of its marketplace advantages.

The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. Readers with questions or comments for Alan Guebert may write to him in care of this publication.

This farm news was published in the June 13, 2007 issue of Farm World, serving Indiana, Ohio, Illinois, Kentucky, Michigan and Tennessee.