Should Farm Credit Benefits be Shared with Corporate America?
 John K. Sorensen, President and CEO
Iowa Bankers Association
A little noticed subplot to the recent debate over a new Farm Bill was the Farm Credit Systems intense lobbying campaign to expand their non-farm lending authority. Couched as an altruistic effort to expand financing for the burgeoning bio-fuels industry, Congress recognized the so called “Horizons” project for what it was, a management-driven initiative to spur growth and profits at one of our nation’s largest lenders.
The $163 billion Farm Credit System (FCS) is the nation’s only direct lending government sponsored enterprise (GSE). Unlike other GSEs that purchase loans made by private sector lenders, the FCS competes with private sector lenders to make loans. It is largely tax exempt and can obtain funding from the capital markets at favored rates. It was chartered by Congress in 1916, and granted special GSE powers and privileges, for the express purpose of lending to farmers and farm cooperatives, with an emphasis on beginning, young and smaller farmers.
While the FCS was established exclusively to make farm loans, it now offers everything from auto loans to housing loans, and is increasingly providing small business financing in rural areas, as well as providing credit to large corporate entities, such as Krogers and Cracker Barrel. The ranking members of the United States House Financial Services Committee said it well, “Without the discipline of the free market and armed with the special powers and privileges of a government charter, the Farm Credit System presents unique risks to the market and taxpayers who ultimately back Farm Credit bonds.” These risks were evident in the mid-1980s, when taxpayers supplied a billion dollar bailout to an over-extended FCS.
Despite the Farm Credit System’s existing ability to finance farmer-owned bio-energy projects and to participate in large corporate loan syndications, they want to see their farmer-ownership lending requirement lifted. The result, FCS would be financing corporations which compete directly with the very farmer-owned enterprises they were created to serve.
Market data does not support the need for a government sponsored lender in the growing renewable energy market. Large national and regional banks and hundreds of community banks have played a major role in financing ethanol, providing 55 percent of total funding since the beginning of 2004, according to a new study commissioned by the American Bankers Association. According to the study, done by New Energy Finance Ltd (NEF), Farm Credit System institutions have provided less than 10 percent of the total capital for ethanol projects during the same period.
In 2006, Iowa banks made nearly $90 million in financing available to the bio-fuels industry. The NEF report also points out that in addition to financing ethanol facilities themselves, banks have loaned to farmers to purchase equity shares in ethanol projects, facilitating farmer ownership of local assets.
And, thanks to Iowa Sen. Tom Harkin and others, government loan guarantee programs have facilitated additional private investment. The USDA Rural Development Agency offers an energy loan guarantee program which has been widely used by Iowa lenders, combining public and private resources for 125 projects during 2006.
The Farm Credit System has also set its sites on financing suburban housing, at a time when an already competitive mortgage lending environment has resulted in a record rate of homeownership in Iowa (74 percent). Under existing authority, the Farm Credit System can conduct home lending in communities with less than 2,500 in population. That’s 87 percent of the 820 communities in Iowa. Yet, FCS made less than two loans per county in all of 2005. And, their average loan size was nearly double that of private lenders.
These statistics should raise questions about the real intent of the “Horizons” proposals. It has little to do with serving farmers and a lot to do with transforming the FCS into a full service commercial and home mortgage finance company. Rather than respond to the Farm Credit System’s relentless desire to finance corporate agriculture, Congress should conduct a comprehensive review of the System’s role in our rapidly changing rural economy.
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