Farm Credit Watch: Congress must determine if FCS consolidation has impaired the system’s mission while increasing taxpayer risk

By Bert Ely

Since the 1987 taxpayer bailout of the Farm Credit System, the FCS has shrunk from over 400 independent entities—farm credit banks and direct-lending associations—to just four banks and 50 associations. As of June 30, 2022, the six largest associations, each with total assets exceeding $10 billion, held 40.6% of total association assets of $272 billion. At the other end of the scale the smallest 10 associations held $4.17 billion in assets, or .24% of total association assets. If those 10 associations were merged into a single association, they would only be the ninth-largest association.

Consolidation is accelerating within the FCS, with some larger associations getting even bigger while most of the smallest associations seem inclined to remain independent, at least for the time being. This table lists all 74 FCS associations as of June 30, 2022.  At the top of the list are the 14 associations in pending or recently completed mergers, which together account for over one-third of total FCS association assets. The remaining 50 associations are then listed, ranked by asset size.

It is interesting to note that of seven associations shown at the top of the list as being acquired, only one has less than $1 billion in assets. The data illustrate an especially disturbing trend with the FCS—the big are getting bigger while some of the smaller associations may be losing their economic viability because they serve a relatively small market area that lacks sufficient agricultural diversity.

Both the very largest as well as the smallest associations pose solvency risks to the Farm Credit System Insurance Corporation (FCSIC), the element of the FCS that insures the time payment and principal on the $377 billion of FCS debt outstanding at Sept. 30, 2022. On that date, the FCSIC had a net worth of $6.48 billion (1.72% of guaranteed debt) plus a $10 billion line of credit at the U.S. Treasury. The sudden failure of a large FCS association and/or the failure of several smaller associations could materially impair the ability of the FCSIC to ensure the timely payment of principal and interest on the FCS’s debt. The Federal Farm Credit Banks Funding Corporation, which issues FCS debt, relends those borrowings to FCS banks and associations.  Hence, financial difficulties in one or more FCS banks and associations could ripple through the Funding Corporation into the financial markets, impairing the FCS’s creditworthiness.

Given the challenges facing American agriculture today, the Farm Credit Administration (FCA), which regulates FCS institutions while managing the FCSIC, should put a hold on, or at least slow down, mergers among large and midsize associations until it can assess the capacity of the FCSIC to resolve a large, troubled association should such a situation arise.

In line with the FCA’s mission to emphasize FCS lending to young, beginning and small (YBS) farmers, the FCA also needs to assess the extent to which the larger associations are adequately meeting the financing needs of YBS farmers and ranchers. Given the financial capacity and high loan-to-one-borrower lending limits the larger associations have to meet the credit needs of larger farmers and ranchers as well as agribusinesses, it is quite easy for those associations to give short shrift to the financing needs of YBS borrowers. Continued consolidation among FCS associations almost certainly will undermine the FCS’s YBS lending activities.

Another consequence of the continuing consolidation among associations is the closure of FCS offices, and not just the headquarters of an association that has been acquired. While technology has greatly enhanced the remote provision of many financial services, ag lenders who are too far away from their farm customers can easily lose touch with individual borrowers, especially smaller ones, as well as local agricultural conditions. As such, the FCA must ensure that continued consolidation within the FCS does further distance lending officers from FCS borrowers, and especially YBS borrowers.

Editor’s note: If you have questions for Bert, feel free to email him at [email protected].


About Author

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