In May of 1998 we held a conference dedicated to two Government-sponsored Enterprises (GSEs) – Fannie Mae and Freddie Mac. In my statement to that assembly, I noted that both corporations had been enjoying good times, but cautioned that one of the unintended consequences of fat profits over a long period is the tendency of both government and private corporations to start believing in the fantasy of ever-rising profits. GSEs often escape the accountability that Congress or regulatory agencies should impose.
Recent hearings in the U.S. House and Senate have provided some much needed oversight on another GSE―the Farm Credit System (FCS).
The Farm Credit System was the first GSE to be established by the United States in 1916. Unlike Fannie and Freddie, the Farm Credit System can make direct loans to farmers, ranchers and others involved in agriculture. However, as The Wall Street Journal reported back in 1985: “the Farm Credit System would lend money to anyone. Herbert Ashton, an Indiana fruit farmer, recalls being wined and dined at a local country club by bankers from his local [farm credit] system bank who extolled the virtues of inflation and offered to lend him $1 million on the spot. ‘I turned it down,’ he recalls. ‘But they sounded like a soap testimonial. They were giving money to whoever passed their way, and they didn’t ask too many questions.’”
Not surprisingly, The Farm Credit System was also the first GSE to be bailed out by taxpayers at a cost of $4 billion when the farm economy collapsed in 1987.
The Farm Credit System reported a net income of $4.7 billion and assets of $283 billion in 2014. It gets its huge funding capital from the Federal Farm Credit Banks Funding Corporation which sells bonds on securities markets. It receives exemptions from Dodd-Frank Wall Street reform and pays only a small percentage of state and local taxes. With these facts in mind, the FCS has veered off course from the mission Congress originally intended for it to do―“…to make loans for the production and marketing of agricultural products.” The FCS’s lending practices are less focused on serving the credit needs of new farmers and ranchers, but instead lending today focuses on large farmers, agribusinesses, utilities and even businesses having nothing to do with farming!
For example, in 2004 twenty-five percent of new FCS loans went to owners of small farms and ranches while seventy-five percent went to owners of large farms. In 2014, less than 14 percent of new FCS loans went to owners of small farms and ranches, while over 86 percent went to owners of large farms. On their website, FCS addresses the open question of whether or not they exist to just serve farmers and ranchers by elaborating: “The System’s mission is to serve all types of agricultural producers who have a basis for rural credit, as well as others who help ensure that agriculture and rural America are economically successful. This includes farm-related businesses, rural homeowners, rural infrastructure providers, including electric, telecommunications, water and waste, as well as other rural service providers.” This open-ended description leaves a lot of wiggle room about who FCS chooses to lend to―which is problematic.
Providing loans to large corporations, to non-farm enterprises and to wealthy individuals and families for a variety of non-farm investments goes well beyond what the Farm Credit System was set up to do. Some eye-opening examples follow:
- In October 2013 – CoBank, a $93 billion Farm Credit System bank, loaned $725 million to Verizon to help finance its acquisition of Vodafone -a London-based telecom giant. At a June 25, 2014 hearing, Rep. Mike Rogers (R-MI) told Jill Long Thompson, Chairman and CEO of the Farm Credit Administration, “I have been a supporter of the Farm Credit System. But, it is pretty hard for me to explain—I can’t explain why you are financing a merger deal with Verizon, or the Farm Credit System is.”
- In April 2015 – CoBank participated in a $300 million unsecured term loan to Black Hills Corp., a vertically integrated energy company with natural gas and electric utility operations in Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota and Wyoming.
- In January 2015, Greenstone Farm Credit Services ACA/FLCA joined with several large commercial banks in providing “a five-year $750 million revolving line of credit” to Cracker Barrel Old Country Store, Inc., a national restaurant chain.
- In 2007, Farm Credit of the Virginias loaned the Kluge Estate Winery and Vineyard $34 million to increase the winery’s output and construct luxury homes on the estate.
Former Farm Credit Administration Chairman and CEO Leland A. Strom pointed out that Farm Credit System associations “have developed very efficient marketing programs for farmers and ranchers involved in commodity-type agriculture (from corn and soybean production to livestock, for example) in addition to an “ongoing and impressive” effort at “education and outreach to these farmers and their children.” But he warned, the Farm Credit System was not providing the same level of service to those who “farm and market their products directly to consumers, local restaurants, schools, hospitals, etc., in what many call the Local Foods System.”
The Farm Credit System needs congressional oversight of its operations and lending. In addition to regular congressional oversight―the recent hearings were the first in over a decade―Congress should also consider new legislation that would make the FCS subject to Dodd-Frank, require FCS to increase lending to young, beginning and small farmers and ranchers and limit lending to non-farm corporations and non-farm activities.
Small farmers, let your member of Congress know what you think.