Can the Farm Credit System Be Saved?
July 30, 2004
One of America’s biggest federal farm credit institutions may be sold to a private Dutch bank. Rabobank, already one of the world’s largest banks and probably its biggest agricultural lender, has made an offer for Farm Credit Services of America in Omaha, Nebraska.
Is privatizing U.S. farm credit a good idea for rural America? The system’s managers are lining up against change-but at least one thinks a broader mandate for the farm credit system is long overdue.
Mike Krutza, head of FCS Financial Services in Wausau, WI, says the old farm credit system is almost gone already. The number of Farm Credit Associations has already dropped more than 90 percent-from 1,100 in the 1980s to 97 today. FCS has already left nearly 5,000 rural communities, and its current focus is on further cost-cutting through consolidation.
“While the Walmarts and Starbucks of the world grow and respond to changing needs, the pattern of the Farm Credit System appears more like a death spiral,” Krutza warns. “The system is in danger of losing its local control and local service facilities”.
In 1916, when the Farm Credit Banks were set up, nearly 33% of the population was farmers. Most farmers could only communicate by horse and wagon on dirt roads. But their local banks were afraid to concentrate much lending risk on nearby farms, where a local drought or pest disaster could literally “break the bank.”
Enter the government-sponsored Farm Credit Banks that could spread their agricultural risk nationwide, and also could get funds at a slight discount-about 10 to 20 basis points, or 0.1 to 0.2 percent.
That minor discount was important 50 years ago. Today, less than 2% of the population is farmers. And the farmers have phones, Interstate highways and the Internet. Farm credit lenders must compete with aggressive regional banks that can also spread their farmers’ risks broadly, agribusiness firms that finance tractors and irrigation systems, and the credit union at the company where the farmer’s wife works. Not to mention on-line lenders.
Krutza says the farm credit associations have the same costs of doing business-offices, staff, equipment-as other local lenders. But the farm credit office can, by law, only serve a few of the local businessmen, i.e., those who happen to grow crops and livestock or qualify as agribusinesses. That means Farm Credit’s real cost of servicing customers is higher than the banks and credit unions.
Mark Drabenstott of the Kansas City Federal Reserve Bank says that getting credit for rural Main Street is a key to reversing the decline of rural communities. He points to such rural successes as Caterpillar, Gateway Computers, and Pella Windows. But the farm credit associations can’t serve most such Main Street businesses.
Moreover, if the Farm Credit lenders jump out of the Federal system they have to pay most of their capital back to the government as “exit fees” and strike out as under-funded new businesses themselves. Or merge with big private lenders like Rabobank.
Financial consultant Bert Ely recommends that the Farm Credit System get rid of its now-punitive exit fees. He’d still let the associations borrow from the Farm Credit Banks, but Ely would let other lenders borrow from the Farm Credit Banks, too-if they were serving the appropriate rural markets.
Federal Reserve Chairman Alan Greenspan wants to privatize all the U.S. government’s credit institutions. He warns that the home mortgage lenders, Fanny Mae and Freddie Mac, have become so big that their federal funds guarantee could endanger the whole government. Farm Credit Associations have the opposite problem, being blocked from most of their potential rural customers.
Krutza, Drabenstott, and Ely all seem to be saying that our real rural credit focus should be not just the farms, but also the rural communities that support them with services, infrastructure and off-farm incomes. The current limits on the Farm Credit system are standing in the way.
Is it time to unshackle the Farm Credit System?
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