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Friday, December 10, 2010

Agricultural Credit: Institutions and Issues

Jim Monke
Specialist in Agricultural Policy

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 may have peaked at 11.3% in June 2010; it reached 3.4% for agricultural loans in September 2010.

Because of the financial turmoil, the USDA farm loan program has seen significantly higher demand. In FY2010, FSA had $6 billion of authority for loans and guarantees, up from $3.4 billion a few years ago. A FY2010 supplemental appropriation added over $950 million in loan authority to a $5.1 billion regular loan authority. The pending FY2011 appropriation proposed by the Senate would provide $5.4 billion of loans and guarantees (S. 3606). The increase in the Senate bill may help to forestall as much need for a supplemental if loan demand remains high.

Term limits have been part of the USDA farm loan program since 1992. 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 4,200 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. Two bills in the 111
th Congress (S. 3221 and H.R. 6418) 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. This $4 million program was reauthorized through FY2015 (P.L. 111-233).

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 nonfarm entities. Disposition of the proposed rule awaits action by the Farm Credit Administration (FCA), the federal regulator. FCA’s fall 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.

Date of Report: November 26, 2010
Number of Pages: 20
Order Number: RS21977
Price: $29.95

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