FCS Lenders Dominate a Ranking of the Largest Ag Lenders

Farm Credit System institutions dominate the ranking of the nation’s largest ag lenders, as of June 30, 2016. This growing domination reflects the dramatic growth in the FCS’s share of total farm debt as reported in last month’s FCW.  Of the 20 largest ag lenders, 16 are FCS institutions and only four are commercial banks – Wells Fargo, Rabobank, Bank of the West, and Bank of America. Of the 100 largest ag lenders, 58 are FCS institutions and 42 are commercial banks.

At the bottom of the list, only seven FCS direct-lending associations have a lesser amount of ag loans on their books than the 100th largest commercial bank ag lender. Given the pace at which FCS associations are merging, smaller FCS associations will continue to disappear into larger associations. The forthcoming merger of AgStar, 1st Farm Credit, and Badgerland (reported in last month’s FCW) is just the latest example of consolidation within the FCS. Based on June 30, 2016, data, the merged association, to be called Compeer Financial, will be the third-largest FCS association and the third-largest ag lender in the United States.

The right column in the linked table — farm loan concentration — highlights a very unhealthy trend in U.S. ag lending — a larger and larger portion of ag loans are held on the books of FCS institutions that by virtue of their congressional charter are highly concentrated in ag lending. If American agriculture was to again experience financial distress comparable to what it experienced in the 1980s, that distress could easily be reflected in the finances of the FCS. The preventative for avoiding a repeat of the 1980s is not to broaden the lending powers of FCS institutions but instead to level the competitive playing field between commercial banks and the FCS, which will not only lead to a shift of ag lending to commercial banks, but it will give rural banks an opportunity to grow their loan portfolios.

The totals at the bottom of the table are quite informative, too, as they contrast the total amount of ag lending by the FCS institutions with the ag lending by the 100 largest commercial bank ag lenders. The FCS institutions dominate farm real estate lending, with more than three times as much of such lending as the commercial banks. This dominance reflects two key competitive advantages that FCS lenders enjoy – their profits on loans secured by real estate are exempt from federal and state income taxation and the FCS, by virtue of its GSE status, is able to fund long-term, fixed-rate loans with long-term, fixed-rate debt. The FCS has much less of a competitive advantage in its production and intermediate-term lending, which is not secured by real estate, and consequently holds a smaller share of that type of lending compared to commercial bank ag lenders. Specifically, FCS profits on non-real-estate-secured lending are exempt only from state income taxes and the FCS has much less of an interest-rate advantage for the shorter-term funding used to finance non-real-estate-secured loans.

FCA Inspector General ignores key flaw in FCS YBS numbers

Last month, Elizabeth Dean, the Inspector General for the Farm Credit Administration, issued a report on the FCA’s oversight of the FCS’s programs for lending to young, beginning, and small (YBS) farmers.

IGs at federal agencies are supposed to provide independent oversight and review of the agency’s activities. Despite all its verbiage and the auditing Dean and her staff did, the report fails to address, or even identify, the fundamental flaw in how the FCS tallies its YBS loan data – the double- and triple-counting of YBS loans which severely overstates the amount of the FCS’s YBS lending. That overstatement, in turn, leads to an understatement of the extent to which the FCS lends to larger farmers, ranchers, and agribusinesses, borrowers hardly in need of taxpayer-subsidized FCS loans.

The FCA candidly admits to this double- and triple-counting yet elsewhere it has demonstrated the ability to eliminate it. A young (Y) farmer is defined by the FCS as being 35 or younger, a beginning (B) farmer as someone with 10 or fewer years of farming or ranching experience, and small (S) as a farmer, rancher, or producer of aquatic products who normally generates less than $250,000 in gross annual sales. As the FCS routinely notes when reporting YBS data, “farmers/ranchers may be included in multiple categories since they are included in each category in which the definition is met.” That means a loan to a 32-year-old farmer with seven years of experience who generates $220,000 a year in farm sales is counted three times in the YBS data. Worse, each loan to that farmer is counted separately, so if the farmer in this example has three FCS loans, he or she will be counted nine times in the YBS data. IG Dean apparently sees no problem with this multiple counting.

Interestingly, in its 2015 Annual Information Statement, the FCS implicitly acknowledged that it does aggregate individual loans by borrower when, for the first time, it published data showing the number of borrowers by dollar size range. Previously, the FCS had reported individual loans by size range. The FCS’s acknowledged ability to aggregate loans by borrower means that the FCS could report its YBS lending by borrowers who are a Y, B, and S; some combination of two of those characteristics; or just one of those characteristics. Such groupings would provide a much more accurate picture of the scope of the FCS’s YBS lending. Further, the FCS should exclude from its YBS lending data all loans to YBS farmers that are guaranteed by third parties, such as a wealthy farmer who guarantees the loans of a 27-year-old son or daughter who has his or her own farm. In the interest of ensuring that the FCS publishes accurate, meaningful information about the FCS’s YBS lending, surely IG Dean could make that recommendation.

Cooperative Finance Association and CoBank

A banker recently sent me the 2015 annual report of the Kansas City-based Cooperative Finance Association (CFA). CFA, which is largely financed by CoBank, lends to agricultural cooperatives and to farmers “sponsored” by a cooperative that belongs to CFA. At August 31, 2015, CFA had outstanding loans of $28.7 million to cooperatives and almost $289 million to farmers. Those loans were largely funded with $265.2 million borrowed from CoBank. CFA is profitable and well-capitalized (equity equaled 16.5% of assets) so it poses no apparent credit risk to CoBank. However, CFA loans to farmers essentially represent loans that otherwise would be made by a commercial bank or by the FCS association serving the territory where the farmer is located, possibly even an FCS association that is funded by CoBank. CFA also has arrangements with several FCS associations to buy and sell loan participations. One can reasonably ask whether CFA in fact is a “shadow” FCS association since it is funded by CoBank and lends to cooperatives who otherwise would borrow directly from CoBank as well as lending to farmers who otherwise would be borrowing from an FCS association or a commercial bank.

About Bert Ely

Bert Ely
Bert Ely is a consultant specializing in banking issues. He writes ABA's monthly Farm Credit Watch email bulletin.
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