Farm Credit Watch: Clarity Is the Order of the Day

According to former longtime Starbucks CEO Howard Schultz, “the currency of leadership is transparency.” If one word seemed to sum up this quarter’s Farm Credit Watch, it might be “transparency.”  ABA’s agriculture columnist Bert Ely examines multiple issues, including government sponsored enterprises spending big money on marketing and branding, the accuracy of bank ranking definitions and levels of Farm Credit System lending. With each of these topics, there’s a case to be made for seeking greater clarity, and perhaps parity, from various regulatory bodies.

CoBank spends $5 million for stadium naming rights

On Jan. 10, CoBank announced that it will spend $5 million to purchase the naming rights for two facilities being built at Denver’s National Western Center that will house the CoBank Livestock Arena and the CoBank Livestock Auction Arena. Because of CoBank’s preferential tax status as a government sponsored enterprise, its effective tax rate in 2020 was just 9.3%. That means American taxpayers will have pitched in for this marketing move. But for what purpose, other than to burnish CoBank’s reputation in the Denver area and perhaps that of its senior executives?

While it is fine for private, fully-taxed businesses to slap their names on public facilities, it is highly inappropriate for a federally chartered GSE to do the same. The agriculture committees in the House and Senate should consider the appropriateness of the expenditure.

Global Finance magazine calls the four FCS banks “commercial banks”

One of the features of Global Finance magazine is to periodically rank the world’s largest banks by region and other categories. The November 2021 issue included the publication’s annual presentation of what it deems the world’s 50 safest banks. The list includes AgriBank (#35), CoBank (#44), AgFirst (#46) and Farm Credit Bank of Texas (#47). Given that the four banks are jointly and severally liable for the debt securities issued on their behalf by the Federal Farm Credit Banks Funding Corporation and otherwise are quite similar in their financial structure and credit risks (with the slight exception of CoBank), it is puzzling as to how the magazine differentiated them so sharply in their rankings.

Much more troubling is a companion listing of the world’s 50 safest commercial banks for 2021, which includes AgriBank (#19), CoBank (#26), AgFirst (#28), and Farm Credit Bank of Texas (#29). For at least the last five years, the FCS banks have been included in the magazine’s list of the 50 safest commercial banks, with little variance in their rankings over that period. They run in the middle of the pack, but they are ranked higher than any U.S. bank that actually is a commercial bank. Unfortunately, the magazine does not explain that the Farm Credit System banks in fact are not commercial banks—far from it. In fact, the magazine states that banks are excluded from the commercial bank list if they “receive sponsorship from their governments” or “benefit from government backing.” That certainly is true of the FCS banks.

In years past, I have reached out to Global Finance to discuss its inclusion of the FCS banks in their listings of the safest banks, but to no avail. What’s worse, despite having written about Global Finance’s mischaracterization of the FCS banks, neither the Farm Credit Administration nor the banks themselves appeared to have asked the magazine to drop them from lists of the safest commercial banks. CoBank has even highlighted being included, stating in its 2020 Corporate Social Responsibility Report that “for the 10th consecutive year, Global Finance named CoBank one of the 50 safest banks in the world.”  The apparent failure of the Farm Credit Administration to ask the magazine to stop labeling the FCS banks as commercial banks suggests that the FCA is comfortable with that designation, but if the FCA and the FCS banks are fine with the commercial bank characterization, then the Senate Banking and House Financial Services Committees should ask why the FCS banks are not regulated as commercial banks.

FCS should disclose more about its largest borrowers

As bankers know, the FCS was created more than 100 years ago during World War I to provide financing for farmers and ranchers who could not obtain sufficient credit from commercial banks, especially to finance real estate purchases. At that time, though, many banks were barred from making loans secured by real estate or were too small to make loans of sufficient size to finance a family’s purchase of enough acreage for a viable farming operation.

Today, the picture is much different. While the FCS still lends to small, and often part-time, farmers and ranchers, it has focused increasingly on financing extremely large farming and ranching operations as well as agribusinesses, as a few numbers will illustrate. At the end of 2020 (year-end 2021 data is not yet available), the FCS had nearly 440,000 borrowers, each borrowing less than $250,000, with total outstanding loans $32.6 billion, for an average loan of $74,080. At the other end of that scale, the FCS had 92 borrowers who collectively had borrowed $38.4 billion—more than the total amount lent to all the farmers and ranchers with loans under $250,000. The average size of the loans was $418 million, which is more than 5,600 times the average size of loans to borrowers with loans under $250,000.

The FCS’s tilt toward large borrowers is quite evident from another perspective: the maximum amount of credit (amount borrowed plus undrawn line of credit) the FCS is willing to provide to any one borrower. As of Sept. 30 of last year, the FCS was willing to extend up to $1.25 billion to any one customer and in “certain limited circumstances” up to $1.5 billion. At Sept. 30 and Dec. 31 last year no individual credit exposure exceeded $1.25 billion, but at the Sept. 30 date, 10 credit-risk exposures exceeded $937.5 billion, up from nine such exposures at the end of 2020.

The FCS does not disclose any information about its largest borrowers, neither names nor specific lines of business. Most likely, few or perhaps none of its largest borrowers are true farming or ranching operations. They probably function downstream as agricultural processors or farmer-owned cooperatives or they are large utilities that may have relatively few rural customers. The FCS should disclose more information about who they are, at least to the two agriculture committees in Congress or to the general public. Ideally, these borrowers would be named. If publicly owned, that information might be disclosed in SEC filings. If they are not named, the FCS should provide in its annual financial report some insight as to their business characteristics and type of ownership—public, cooperative, etc.

Editor’s note: If you have questions for Bert, feel free to email him at Bert@ely-co.com.

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About Author

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