By Bert ElyIn this edition of Farm Credit Watch, Bert Ely highlights the potential risks of having lame-duck members of the Farm Credit Administration’s current board of directors, the continued consolidation of the Farm Credit System and recent moves by lawmakers to curtail FCS from financing foreign purchases of U.S. farmland.
Two lame ducks on FCA’s board is very troubling
The Farm Credit Administration, the Farm Credit System’s regulator, is administered by a three-member board of directors. They are appointed by the president and confirmed by the Senate in the same manner as cabinet secretaries, other administration officials and board members of other independent regulatory agencies, such as the FDIC. While Vincent Logan is the FCA’s newly confirmed board chairman and chief executive officer, the FCA’s other two directors have continued to serve on the FCA board even though their terms expired some time ago. Former FCA Chairman Glen Smith’s term as an FCA director expired over a year ago, on May 21, 2022, while the term of the FCA’s third director, Jeffery Hall, expired almost five years ago in October 2018.
Neither Smith nor Hall is eligible under the Farm Credit Act for appointment to serve another term on the FCA board, but they can continue to serve as an FCA director until their successor is confirmed by the Senate or they resign from the board. Neither one has publicly indicated how long they are willing to continue serving as an FCA director, but if both were to leave the board before their successors were confirmed, the board would be left with just one director, Chairman Logan.
While Logan could continue to administer the FCA as its CEO, the FCA board, with just one director, could not take any official action, such as adopting changes in the FCA’s regulations, approving the merger of FCS institutions, or taking any regulatory enforcement action as such actions require that the board must have a quorum of at least two members before it can take an official action. Lacking a quorum would be a very dangerous situation for any financial regulator managed by a board of directors instead of a single regulator.
Under the Farm Credit Act, and as is the case at the other independent federal regulatory agencies with a board of directors, not all the directors can be members of the same political party. Consequently, one of the replacements for Smith or Hall cannot be a Democrat; instead, that person must be a Republican or an Independent. To minimize the political hurdles in confirming two new FCA directors, the Biden administration could “pair” its nominees for the FCA board—one a Democrat and the other a Republican or an independent. No matter how the administration proceeds in filling the two expired board seats, until it does so the FCA will be skating on thin ice with two of its three directors serving expired terms. For more info, check out the Congressional Research Service description of the FCA board.
Should the FCS finance foreign purchasers of U.S. farmland?
Although not widely known, since 1997 the FCS has been authorized to lend to foreign businesses and individuals to finance purchases of U.S. agricultural assets, notably farmland. Because of the FCS’s very favorable tax advantages—profits from its real estate lending are exempt from federal income taxation—U.S. taxpayers, including banks, effectively subsidize foreign ownership of domestic farmland financed by the FCS. While foreign persons and business entities should not be barred from purchasing U.S. farmland or financing those purchases with monies borrowed from taxpaying financial institutions, there is absolutely no reason why American taxpayers should empower the FCS to finance farmland purchases or any subsequent farming or ranching activities by foreign citizens or business entities.
Recognizing the inherent unfairness of American taxpayers subsidizing foreign purchases of U.S. agricultural assets and the financing of foreign-owned agricultural businesses, Sens. Sherrod Brown (D-Ohio) and Chuck Grassley (R-Iowa) have introduced legislation (S. 4954) that would bar FCS financing of such investments and activities. Brown is chairman of the Senate Banking Committee and a member of the Senate Agriculture Committee, while Grassley is a long-time member of that committee. It will be interesting to see how this legislation proceeds. At a minimum it should send a strong message to the FCS to curtail such lending.
Never-ending FCS consolidation
As previous issues of the Farm Credit Watch have reported, there has been substantial consolidation within the FCS at the association level, the FCS entities actually lending to farmers and ranchers. From 82 associations at the beginning of 2013, the number of associations declined to 69 at the beginning of 2018 and to 61 at the beginning of this year, with the association nose-count dropping by four last year. Two more association mergers are scheduled to occur later this year. Undoubtedly other association mergers are in the works, often with nice retirement packages for the senior management of the acquired association.
The time has come for the House and Senate Agriculture Committees to assess the long-term consequences of this merger wave, not only for the FCS, but more importantly for agriculture, rural America and U.S. taxpayers. The pending Farm Bill would be an excellent legislative vehicle for initiating such an assessment. Among other topics, it should consider the extent to which association mergers, and the subsequent closing of association offices, has impaired the ability—and willingness—of ever-larger associations to lend to young, beginning and small farmers and ranchers, an important statutory mission of the FCS.
Editor’s note: If you have questions for Bert, feel free to email him at [email protected].