Pub. 8 2019 Issue 5

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 24 BERT ELY’S FARM CREDITWATCH® RESTRUCTURING THE FARM CREDIT SYSTEM – WHY NOW AND HOW TO DO IT T he Farm Credit System (FCS), America’s least known government sponsored enterprise, or GSE, is both the oldest GSE and the only GSE with an excessively complex and increasingly obsolete organizational structure. This paper will explain what the FCS is, why the FCS structure needs to be simplified, and how that can be accomplished. What is the Farm Credit System? The FCS, one of five federally chartered GSEs, was created by Congress to lend to farmers, ranchers, and agriculturally related businesses. The other currently active GSEs are the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), both of which guarantee mortgage-backed securities; the Federal Home Loan Bank System, a network of eleven regional banks extending loans (called advances) to banks, thrifts, credit unions, and insurance companies that are primarily collateralized by residential mortgages; and the Federal Agriculture Mortgage Corporation (Farmer Mac), which owns and securitizes farm and ranch mortgages. A one- time GSE, the Student Loan Marketing Association, or Sallie Mae, completed a privatization process at the end of 2004. As a GSE, the FCS enjoys certain congressionally bequeathed privileges, and therefore competitive advantages over its private-sector competitors, notably commercial banks engaged in agricultural finance as well as life insurance companies and captive finance companies owned by farm equipment manufacturers and suppliers of seed, fertilizer, and other agricultural inputs. Importantly, the profits FCS banks and associations earn on their real estate loans are exempt from any taxation while profits earned on non-real estate lending are largely exempt from state income taxation. The FCS also can borrow at lower rates of interest than its private-sector competitors by virtue of its implied taxpayer support as a GSE; the FCS’s lower funding costs give it a material funding-cost, and therefore competitive advantage, over its private-sector competitors. That implied support was reinforced by the 1987 taxpayer bailout of the FCS discussed below and more recently by the ongoing federal conservatorship of Fannie Mae and Freddie Mac. The federal taxpayer backing of the FCS was further enhanced when the U.S. Treasury Department, without any congressional authorization, in September 2013 extended a $10 billion line-of-credit from the Federal Financing Bank to the Farm Credit System Insurance Corporation (FCSIC), which guarantees the timely payment of the principal and interest on debt issued on behalf of the FCS by the Federal Farm Credit Banks Funding Corporation. That line-of-credit has since been renewed annually. The history and structure of the FCS The origins of the FCS date to 1916, when Congress established the Federal Land Bank System, which consisted of twelve regional Federal Land Banks (FLBs) that provided real estate financing to farmers and ranchers at a time when commercial banks were barred from making real estate loans or were too small to finance farm real estate. FLB loans were originated by local Federal Land Banks Associations (FLBAs), which were lending cooperatives owned by their borrowers. The Farm Credit Act of 1933 authorized the creation of Production Credit Associations, or PCAs, which were borrower-owned cooperatives extending short-term loans to farmers and ranchers, as well as twelve regional cooperative banks and a Central Bank for Cooperatives to lend to agricultural and rural utility cooperatives. The assigned territories for the PCAs often coincided with FLBA territories but they operated independently of each other. The FLBA/PCA overlap led to the creation of local Agricultural Credit Associations (ACAs), which provided both real estate and non-real estate credit to farmers and ranchers. ACAs then began to restructure themselves as “parent ACAs,” each with a PCA subsidiary as well as a Federal Land Credit Association (FLCA), which not only had the lending powers of an FLBA, but could then own the real estate loans it originated, thereby retaining for each ACA the real-estate tax exemption the FCS has long enjoyed. The FCS functioned reasonably well until the 1971 Farm Credit Act 1 greatly liberalized the collateral requirement for farm real estate loans made by the FLBAs as farmland prices soared. That farmland bubble started to deflate in 1980 when interest rates reached record highs. On an inflation-adjusted