By Bert Ely
One of the unmistakable trends within the Farm Credit System in recent decades has been the continuing consolidation of FCS associations — the FCS’ direct lender to farmers, ranchers and ag-related businesses — into larger associations encompassing bigger territories. From 87 associations at the beginning of 2010 and 72 associations at the end of 2020 the FCS had shrunk to 55 associations as of Oct. 1 of this year.
Despite that contraction, the total assets of all the FCS associations — $324 billion as of Sept. 30 — has continued to grow, with the average assets of the remaining associations having grown even faster, from $3.6 billion in December 2020 to $5.9 billion by the end of September this year. Given that several smaller associations remain — 13 of the 55 FCS associations at the end of this fiscal year, each had total assets of less than $1 billion — there is every expectation that consolidation will continue among the smaller associations, often as they merge into larger associations.
The FCS largely funds its balance sheet with debt sold by its funding arm, the Federal Farm Credit Banks Funding Corporation. That debt, in turn, is insured by another federal entity, the taxpayer-backed Farm Credit System Insurance Corporation. As a practical matter, the FCSIC is an integral entity of the FCS, in part because the FCA’s three presidentially appointed directors also serve as the FCSIC’s directors. While the FCS has never defaulted on any of the debt it has issued over the years, as a practical matter the FCSIC is not a financially strong insurer of debt issued by the FCS, for two reasons.
First, by virtue of insuring the debt issued by just one entity, the Funding Corporation, the FCSIC has absolutely no risk dispersion — all of its insurance risk is concentrated in just one entity, the Funding Corporation. In sharp contrast, as of the end of this September, the FDIC insured deposits in 4,539 banks of widely varied size. In addition, commercial banks pursue widely varied business strategies reflecting the markets they serve while FCS banks and associations, by virtue of the provisions and limitations imposed on the FCS by the Farm Credit Act, differ very little in their business strategies.
Second, the FCSIC is very thinly capitalized relative to the amount of insurance risk it has assumed and how few insureds it has. In recent years, the FCSIC funds available to protect the owners of bonds issued by the Funding Corporation, called the Secured Base Amount, have averaged just 1.74% of the face value of the bonds issued by the Funding Corporation. While that percentage is higher than the ratio of the balance in the FDIC’s Bank Insurance Fund to the total amount of insured bank deposits (1.21% as of June 30, 2024), the FDIC’s insurance risk is spread over more than 4,500 banks of widely varied sizes, locations and business strategies.
Third, because every FCS entity effectively is mutually owned, no FCS institution can raise capital through the sale of stock to the general public to replace equity capital consumed by lending and investment losses. Instead, the FCA either liquidates a failing association or merges a troubled FCS association into a stronger association, which further concentrates the FCS’ insolvency risk into an even smaller set of relatively undiversified lenders (i.e., lenders focused solely on agriculture and its related industries as well as rural housing).
Although American agriculture is in good shape financially today, in part because of taxpayer-backed federal crop insurance, the FCS could again experience a financial crisis, as it did in the 1970s.
Congress needs to re-examine the FCS mission
The origins of the FCS date to 1916 when Congress authorized the creation of the Federal Land Bank System, the forerunner of today’s FCS. The need for such a system was driven in large part by bank branching prohibitions and restrictions that created a highly fragmented, unstable banking system.
Commercial banking has evolved tremendously since 1916 as the lifting of branching restrictions has enabled the consolidation of small, single-office banks into banking companies of all sizes, from still small banks to large multistate institutions with hundreds of branches. Today, the U.S. commercial banking industry can safely and fully meet all the credit needs of America’s farmers, ranchers and ag-related business.
Whatever rationale there was 108 years ago for creating the FCS evaporated years ago, yet the FCS, with its relatively low-cost, taxpayer-backed funding and its tax and regulatory advantages, continues to distort the pricing and availability of agricultural credit, to the detriment of American agriculture. Hopefully, the FCS will not, through reckless lending, set America up for another ag crisis. That is why strict congressional oversight of the FCS must never waiver nor let the FCS become the dominant lender to agriculture and rural America.
Editor’s note: After more than 25 years of providing information and insight with his Farm Credit Watch, this will be Bert Ely’s final regular FCW column. The editors of the Banking Journal and ABA’s agriculture policy team thank him for his years of market intelligence and for diligently penning this column for so long. Bert will continue to write occasional FCS-focused articles for ABA as events warrant. If you have questions about this installment, feel free to email him at [email protected].
