By Bert ElyEvery five years, Congress sets out to enact a new Farm Bill that will govern the federal government’s agricultural and nutrition policies for the next five years.
Prior farm bills have included various provisions dealing with agricultural credit issues, including amendments to the Farm Credit Act, the law governing the operation of the Farm Credit System (FCS). The act also addresses the activities and responsibilities of the Farm Credit Administration (FCA), the FCS’s regulator, and the Farm Credit System Insurance Corporation (FCSIC), which insures investors against any loss on debt issued by the Federal Farm Credit Banks Funding Corporation, which funds the FCS’s banks and associations.
The following five items are key provisions Congress should include in the next Farm Bill:
One: Prohibit the FCS from financing foreign-owned or controlled farms and ranches located in the United States. The below-market interest rates the FCS charges on farm real estate loans have helped to inflate the market value of farmland in recent years, making it harder for farmers, especially young, beginning, and small farmers, to purchase agricultural real estate. Cheap FCS financing of foreign purchasers of U.S. agricultural real estate worsens this situation. The intent of the proposed prohibition is not to bar foreign ownership of U.S. farmland, but to prohibit the taxpayer-subsidized financing of that foreign ownership. Instead, foreign purchasers of agricultural properties located in the United States should have to obtain any related financing from banks and other private-sector, tax-paying lenders.
Two: Require all FCA-regulated entities to comply with the same anti-money-laundering (AML) and Bank Secrecy Act regulations now applicable to banks, thrifts, and credit unions. The extensive anti-money-laundering laws Congress has enacted over the years are intended to prevent banking institutions from being used as vehicles to legitimize, or launder, the proceeds of illicit activities, such as drug-dealing, gambling, corruption, extortion and kidnapping. AML laws have imposed substantial costs and other regulatory burdens as well as reputational risk on the banking industry. Inexplicably, FCS banks and associations have been exempt from AML requirements even though they engage in the same types of financial transaction as banks, notably in financing real estate purchases. Possibly the AML exemption FCS institutions have long enjoyed stems from the fact that the legislation they operate under lies under jurisdiction of the Senate and House Agriculture Committees. That is not a legitimate reason, though, to exempt FCS institutions from full compliance with the AML laws; they are financial institutions.
Three: Bar the FCS from retaining the ownership of any mineral rights when it sells foreclosed farmland because the FCS was chartered by Congress to finance agriculture, not to speculate on the amount of future income earned by retaining the ownership of those rights. Instead, when the FCS sells foreclosed real estate, the sale should include all mineral rights associated with that real estate. Including the mineral rights in the sale of foreclosed real estate also will bring a higher sales price than keeping those rights, thereby reducing whatever loss the FCS might experience in selling the foreclosed real estate. Furthermore, the FCS’s mineral income has fluctuated significantly over the last five years, ranging from $42 million to $107 million, making this income an unreliable source of revenue for the FCS.
Four: Assess the financial capacity of the FCSIC to successfully resolve the insolvency of an FCS bank or a large association or several smaller associations within a short period of time. To this end, the FCA should solicit public comment on the adequacy of the FCSIC’s loss-absorbing capacity. In addition, the actuarial soundness of the insurance premiums the FCSIC charges FCS institutions also should be examined.
Since the agriculture crisis of the 1980s, there has been substantial consolidation within the FCS, from over 400 independent entities in 1987 to five regional banks and 90 direct lending associations in 2009, to four banks and 61 associations in early 2023. Pending mergers will further reduce the number of associations, especially among the smaller ones, while the larger associations will continue to expand, both through mergers as well as internal growth.
It is anyone’s guess as to how much further association consolidation will occur, but as shown in this chart, at the end of 2022, the five largest associations held 47% percent of total association assets, while the next five largest held almost 22% of those assets. Planned and approved mergers will likely boost both percentages even higher by the end of 2023, further concentrating insolvency risk within the universe of FCS associations. Congress should direct the FCA to place a hold on FCS merger activity until it can assess the financial capacity of the FCSIC to protect FCS bondholders from any loss should a large association become insolvent. The FCA also should examine the impact of these mergers on the ability of the FCS to meet its statutory obligation to finance young, beginning and small farmers.
Five: Congress should commission a study, independent of the FCA, of the actuarial soundness of the premiums the FCSIC charges FCS banks and associations to protect the holders of debt issued by the Federal Farm Credit Banks Funding Corporation against the insolvency of FCS banks and associations. Because of the joint-and-several liability feature of the notes and bonds issued by the funding corporation, FCS institutions are jointly liable for debt issued by the funding corporation regardless of where within the FCS insolvency losses arise.
Since its inception, the FCSIC has charged every FCS bank and association the same premium rate, per dollar of debt outstanding, regardless of the likelihood that a bank or association will become insolvent due to loan and investment losses it has incurred or the rate at which it is growing. Today, any variance in the FCSIC premium rate is due solely to changes in the rate of growth of the total amount of debt issued by the funding corporation—that premium rate bears absolutely no relationship to the insolvency risk posed an individual bank or association.
Although the actuarial soundness of the premiums the FDIC charges banks for the deposits it insures is questionable, at least the FDIC attempts to take insolvency risk of a bank into account in determining the premium rate that bank will pay to the FDIC. The FCSIC should make a comparable rate determination for each of its insureds.
Editor’s note: If you have questions for Bert, feel free to email him at [email protected].