As this column has reported over the years, most recently in the July 30 edition, there has been a steady pace of consolidation among Farm Credit System associations, with no indication that this merger trend will slow any time soon. Although rarely, if ever, discussed, continued consolidation among FCS associations should be ringing alarm bells within the agriculture committees in Congress about the capacity of the Farm Credit System Insurance Corporation (the system’s equivalent of the FDIC) to fully insure the funds lent to any FCS institution by the Federal Farm Credit Banks Funding Corporation. Given that the FCS required a taxpayer bailout following the ag crisis in the 1980s, the possibility that a future crisis could bankrupt the FCSIC, triggering another taxpayer bailout, is not an idle concern.
The Funding Corporation, the entity through which the FCS taps the world’s capital markets, is the principal source of funding for the FCS’ banks and associations. Specifically, the Funding Corporation lends to the four regional FCS banks the funds it has borrowed through bonds it sells in the capital markets. The banks then relend some of those funds to the FCS associations each bank serves; the balance of the monies the banks raise is used to fund the banks’ substantial lending activities. The Farm Credit Administration’s three directors also serve as the directors of the FCSIC. Therefore, the activities and finances of the FCSIC are integrated with the overall regulation of the FCS.
As of June 30, 2024, the Funding Corporation had outstanding debt of $420.2 billion, of which $150.2 billion was due within one year. On that date, the FCSIC had total capital of $7.64 billion, equal to 1.82% of the FCSIC’s insured obligations. That ratio exceeds the ratio of the FDIC’s fund balance to FDIC-insured deposits, which was 1.17% on March 31, 2024. The FDIC’s insurance risk, though, is spread over more than 4,500 banks that collectively have a much more diverse set of financial risks than is the case with FCS institutions.
Worsening the FCSIC’s risk profile in recent years has been the continued shrinkage in the number of associations the FCSIC insures. From 69 associations at the beginning of 2019, mergers shrank the FCS to 56 associations as of June 2024. These associations ranged in size from total assets of $42.9 billion (FCS of America) down to just $177 million. The five largest associations accounted for 51.9% of total association assets as of June 30 while the 10 smallest associations collectively accounted for just 1.78% of total association assets on that date; the combined total assets of the 35 smallest associations were slightly less than FCS of America’s total assets. That is just one measure of the extent to which association mergers have concentrated the insolvency risk the FCSIC insures against.
Given economies of scale and the greater crop and livestock diversity of the larger associations, due in part to their geographic spread, there is good reason to believe that association consolidation will continue. Not only will smaller associations continue to be merged into larger, multi-state associations, but even some midsize associations will likely be swept up in this merger wave. Consolidation down to 20 or even fewer associations over the next few years is quite conceivable. Association consolidation may even trigger a merger or two among the FCS’s four regional banks, which are the primary funding source for FCS associations.
Association consolidation has reached the point, though, that Congress, and specifically the agriculture committees, need to assess the capacity, or more importantly, the FCSIC’s insufficient financial capacity, to protect investors in FCS bonds and notes against any loss arising from the insolvency or financial impairment of one or more of the FCS’ banks or larger associations. Until Congress makes that determination, it should bar the Farm Credit Administration, the FCS’ regulator, from approving any association merger that would increase the size of any of the larger associations.
Given the increased risk larger associations pose to the FCSIC, the FCA also should consider imposing higher capital requirements on the larger associations while also increasing the FCSIC’s insurance premium rate.
Editor’s note: If you have questions for Bert, feel free to email him at [email protected].
