Do You Understand The Farm Credit System?
Most of us have dealt with our local Farm Credit co-ops at some point. We know they function something like a bank that specializes in ag loans, but do we really understand the Farm Credit system?
In an effort to figure out exactly how it works, I recently spoke with Todd Van Hoose, the CEO of the Farm Credit Council.
The Farm Credit Council, headquartered in Washington, D.C., is the national trade association for the Farm Credit System. It represents the system by lobbying before Congress, the executive branch, and various state legislatures. Mr. Van Hoose graciously answered my many questions about the Farm Credit System.
First of all, Farm Credit was established back in 1916 by congress in an effort to provide a reliable source of credit to farmers and ranchers. At the retail level, there are 68 Agriculture Credit Associations (ACAs), which can collectively loan money in any county of the United States. They are technically co-ops owned by the borrowers. That’s why you have to buy stock in an ACA when you establish a borrowing relationship with one of them. Different groups of ACAs own four Farm Credit banks, which provide loan funding for the ACAs that own them. Each bank covers a particular region of the United States, which roughly breakdown as the Southeast, the Midwest, Texas, and the West.
There is even a level above the four regional banks called the Federal Farm Credit Banks Funding Corporation (FFCBFC). The FFCBFC goes out into the financial markets and issues bonds and notes at market interest rates in order to provide funds to the four Farm Credit Banks. That’s the money trail from a funding standpoint.
If a Farm Credit bank shows a profit, it pays out patronage dividends to its ACA owners. If the ACAs show a profit, they pay out patronage dividends to their customers/owners. As a result, when you are an ACA borrower, even though you are paying out interest on your ag loans, you can make a little money back via the patronage dividends.
So, what kinds of loans are the ACAs doing? According to Mr. Van Hoose, their six lines of business currently break out like this: ag business mortgages, 46%; operating finance, 20%; agribusiness loans, 17%; rural infrastructure, 11%; rural home loans, 4%; and ag export finance, 2%. He said, “We hold about 40% of the overall ag loan market.”
Apparently, one advantage they have over local banks is holding loans long-term, which gives them the ability to fix interest rates for 30 years. Local banks tend to limit fixed-rate terms on ag loans to 10 years or less.
I asked Todd how he felt about the state of ag loans today. He responded, “We are seeing stress building on farm balance sheets.” (Not surprising.) I also asked when he felt that farm profits might turn upward. Todd said, “We’re looking at the USDA projections, and we’re seeing this year get a little better for most farmers.”
I asked him if any changes are in the works for the Farm Credit System. He said that they are looking hard at technology and how to be more efficient. This is not unlike what the farmers they serve are doing, as well. There are thousands of Farm Credit loan officers across the country, and they have a vested interest in helping farmers stay in business and find profitability.
When I asked Mr. Van Hoose about the difference between local banks and ACAs, he said, “The fundamental difference is that we’re mission driven. We’re trying to provide space and time for farmers to come to grips with this new reality.”