Pub. 5 2016 Issue 9

December 2016 19 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s FCS, by virtue of its GSE status, is able to fund long-term, fixed-rate loans with long-term, fixed-rate debt. The FCS has much less of a competitive advantage in its production and intermediate-term lending, which is not secured by real estate, and consequently holds a smaller share of that type of lending compared to commercial bank ag lenders. Specifically, FCS profits on non-real-estate-secured lending are exempt only from state income taxes and the FCS has much less of an interest-rate advantage for the shorter-term funding used to finance non-real-estate-secured loans. FCA Inspector General ignores key flaw in FCS YBS numbers Last month, Elizabeth Dean, the Inspector General (IG) for the Farm Credit Administration (FCA), issued a report on the FCA’s oversight of the FCS’s programs for lending to young, beginning, and small (YBS) farmers. The 18-page report can be found at: https://www.fca.gov/Download/ InspectorGeneral/Auditrpts/OversightofYBSPrograms.pdf. IGs at federal agencies are supposed to provide independent oversight and review of the agency’s activities. Despite all its verbiage and the auditing Dean and her staff did, the report fails to address, or even identify, the fundamental flaw in how the FCS tallies its YBS loan data – the double- and triple-counting of YBS loans which severely overstates the amount of the FCS’s YBS lending. That overstatement, in turn, leads to an understatement of the extent to which the FCS lends to larger farmers, ranchers, and agribusinesses, borrowers hardly in need of taxpayer-subsidized FCS loans. The FCA candidly admits to this double- and triple- counting, yet elsewhere, it has demonstrated the ability to eliminate it. A young (Y) farmer is defined by the FCS as being 35 or younger, a beginning (B) farmer as someone with 10 or fewer years of farming or ranching experience, and small (S) as a farmer, rancher, or producer of aquatic products who normally generates less than $250,000 in gross annual sales. As the FCS routinely notes when reporting YBS data, “farmers/ranchers may be included in multiple categories since they are included in each category in which the definition is met.” That means a loan to a 32-year-old farmer with seven years of experience who generates $220,000 a year in farm sales is counted three times in the YBS data. Worse, each loan to that farmer is counted separately, so if the farmer in this example has three FCS loans, he or she will be counted nine times in the YBS data. IG Dean apparently sees no problem with this multiple counting. Interestingly, in its 2015 Annual Information Statement, the FCS implicitly acknowledged that it does aggregate individual loans by borrower when, for the first time, it published data showing the number of borrowers by dollar size range. Previously, the FCS had reported individual loans by size range. The FCS’s acknowledged ability to aggregate loans by borrower means that the FCS could report its YBS lending by borrowers who are a Y, B, and S; some combination of two of those characteristics; or just one of those characteristics. Such groupings would provide a much more accurate picture of the scope of the FCS’s YBS lending. Further, the FCS should exclude from its YBS lending data all loans to YBS farmers that are guaranteed by third parties, such as a wealthy farmer who guarantees the loans of a 27-year-old son or daughter who has his or her own farm. In the interest of ensuring that the FCS publishes accurate, meaningful information about the FCS’s YBS lending, surely IG Dean could make that recommendation. Cooperative Finance Association and CoBank A banker recently sent me the 2015 annual report of the Kansas City-based Cooperative Finance Association (CFA). CFA, which is largely financed by CoBank, lends to agricultural cooperatives and to farmers “sponsored” by a cooperative that belongs to CFA. On August 31, 2015, CFA had outstanding loans of $28.7 million to cooperatives and almost $289 million to farmers. Those loans were largely funded with $265.2 million borrowed from CoBank. CFA is profitable and well-capitalized (equity equaled 16.5% of assets) so it poses no apparent credit risk to CoBank. However, CFA loans to farmers essentially represent loans that otherwise would be made by a commercial bank or by the FCS association serving the territory where the farmer is located, possibly even an FCS association that is funded by CoBank. CFA also has arrangements with several FCS associations to buy and sell loan participations. One can reasonably ask whether CFA in fact is a “shadow” FCS association since it is funded by CoBank and lends to cooperatives who otherwise would borrow directly from CoBank as well as lending to farmers who otherwise would be borrowing from an FCS association or a commercial bank. Do other “shadow” FCS associations exist? Let me know. Report FCS lending abuses to: green-acres@ely-co.com Bankers are continuing to send FCW reports of FCS lending abuses, such as FCS loans for rural estates, weekend getaways, and hunting preserves. Email reports of similar lending abuses in your market to: green-acres@ely-co.com